The Federal Fiscal Court (BFH) has ruled that an incongruent advance profit distribution decided unanimously without a basis in the articles of association is legally valid and therefore subject to taxation (Judgment of 28.9.2022 – BFH VIII R 20/20).
In the case at hand, the plaintiff, a natural person, held a 50% stake in the distributing GmbH (limited liability company), as did another GmbH, also with a 50% stake, of which the plaintiff was the sole shareholder. The shareholders of the distributing GmbH unanimously resolved to make a preferential advance profit distribution solely in favor of the GmbH shareholder. The articles of association of the distributing GmbH contained no provision regarding profit distribution. They contained neither an opening clause within the meaning of Section 29 Paragraph 3 Sentence 2 of the German Limited Liability Companies Act (GmbHG), which would have allowed for a distribution deviating from the shareholding ratios by means of a separate resolution in individual cases, nor a provision stipulating that withdrawals, advances, and the annual profit were always to be distributed differently from the shareholding ratios.
The tax office subjected half of the distribution amounts to taxation for the plaintiff as income from disguised profit distributions (vGA) pursuant to Section 20 Paragraph 1 No. 1 Sentence 2 of the German Income Tax Act (EStG), because it deemed the distribution resolutions void under civil law due to the incongruent distribution of the advance profits. A lawsuit filed against this decision was successful (Münster Tax Court, judgment of May 6, 2020 – 9 K 3359/18 E, AO, (EFG) 2020, 1603). The tax office appealed this decision.
Court decision
The Eighth Senate of the Federal Fiscal Court (BFH) dismissed the tax office's appeal against the lower court's judgment in favor of the plaintiff as unfounded. The unanimously adopted distribution resolutions, as legally valid resolutions for the appropriation and distribution of profits, must be considered the basis for taxation. Therefore, there were only open profit distributions from the distributing GmbH to the GmbH shareholder, and no distributions to the plaintiff.
Furthermore, attributing half of the distribution amounts to the plaintiff on the grounds of tax avoidance pursuant to Section 42 of the German Fiscal Code (AO) is not possible. Distributive distributions that are validly resolved under civil law must also be recognized for tax purposes.
Thus, each resolution regarding an advance distribution was based on a new decision by the shareholders, and the effect of each resolution was limited to the actual disbursement of the distribution. Consequently, it was not intended to create a new provision in the articles of association for a profit distribution that generally deviated from the shareholding ratios.
Practical tip
Resolutions concerning inconsistent advance profit distributions do indeed contradict the articles of association. However, they are not void, but rather considered valid. Distribution resolutions that selectively violate the statutes Lacking grounds for appeal, it is legally effective and binding under civil law. A distinction must be made here:
Shareholder resolutions that violate the articles of association, which create a legal situation that deviates from the content of the regulations in the statutes with lasting effect (even if only for a limited period) justify (even in the case of a unanimous decision) void, if not all material and formal provisions of an amendment to the articles of association (in particular the notarization and registration of the resolution in the commercial register pursuant to Section 53 Paragraph 2 Sentence 1 Half-Sentence 1, Section 54 Paragraph 1 GmbHG) are complied with when the resolution is passed.
Resolutions that selectively violate the statutes, whose effect is exhausted in the measure in question as a single act, so that the statutes are indeed violated by the resolution, but are not intended to be changed with effect for the future, are not void, but in the case of a GmbH (limited liability company) according to § 243 para. 1 AktG (German Stock Corporation Act) contestable.
If you have any questions regarding this decision, please contact us. Mr. Attorney and Notary Oliver Merleker gladly available.