Judgment of the Federal Fiscal Court on the Requirement of Intention to Bestow Benefits in Hidden Profit Distributions (vGA) – Case No.: I R 9/20
On November 22, 2023, the Federal Fiscal Court (BFH) ruled that an intention to bestow benefits must be present for a hidden profit distribution (vGA) to occur. However, such an intention does not exist in cases of mistaken action (Case No.: I R 9/20).
When shareholders receive benefits from the company for which there is no apparent reason, the responsible tax office quickly becomes attentive and checks whether the transaction might be classified as a hidden profit distribution (vGA). A vGA is a legal remedy intended to prevent shareholders from gaining tax advantages through such transactions. If a vGA is present, it can have tax consequences for both the shareholder and the company, according to the law firm MTR Legal, which advises on tax law, among other areas.
Benefit Due to an Error
In the underlying case, the BFH had to decide on a lawsuit filed by a GmbH. The company’s share capital was contributed by the sole shareholder-managing director, including by bringing in a one-hundred percent stake in another GmbH. This involved a capital increase in the GmbH to be brought in, which ultimately resulted in a benefit to the shareholder-managing director. The tax office saw this as a hidden profit distribution by the plaintiff GmbH to its shareholder-managing director.
The GmbH contested this. It argued that the benefit to the shareholder-managing director occurred mistakenly due to an oversight during notarial certification. After an unsuccessful objection, the company filed a lawsuit before the Schleswig-Holstein Fiscal Court (FG). The lawsuit also failed. The FG dismissed the case, stating that such an error would not have occurred to a diligent and conscientious business manager.
BFH: Hidden Profit Distribution Only with Intention to Bestow Benefits
The GmbH appealed this decision to the Federal Fiscal Court and was successful. The BFH clarified that an asset transfer induced by the company relationship from a corporation to a shareholder requires an intention to bestow benefits. In the case of an error by the shareholder-managing director, such an intention may be lacking. The decision of the Schleswig-Holstein Fiscal Court was therefore overturned by the BFH, and the case was sent back to the FG for a new decision. It is crucial, not whether an error would also have occurred to a diligent and conscientious business manager, but whether the specific shareholder-managing director was subject to such an error, the BFH made clear. This question must now be clarified by the FG.
An asset transfer prompted by the company relationship should be assumed if the corporation grants an economic advantage to a shareholder or a person close to them, which it would not have granted to a non-shareholder if the care of a diligent and conscientious business manager had been applied, the BFH further explained. Generally, there is no need for an intention for a hidden profit distribution to be present. It is also not necessary for the shareholder to know the vGA statute and to be able to classify the transactions correctly. Typically, personally attributable action is sufficient, according to the BFH.
However, there are also restrictions here. Because for a vGA to be assumed, an intention to bestow benefits must be present. If the shift by the corporation in favor of the shareholder did not occur for corporate reasons, there is no vGA, because then there is a lack of specific inducement in the company relationship. This could be the case with subjective justifications such as inexperience, the judges in Munich further clarified. Therefore, it is not decisive whether a diligent and conscientious business manager would also not have recognized the asset transfer due to an error.
The diligent and conscientious business manager is anyway only an ideal-typical figure who knows all the rules and conditions and therefore, by definition, cannot be mistaken, the BFH continued. If there is a complete lack of intention to bestow benefits at the expense of the company and in favor of the shareholder, and it is clear that the advantage shift did not occur for corporate reasons, a vGA can be ruled out, the BFH finally stated.
MTR Legal advises on legal disputes with the tax authorities and other tax law issues.
Feel free to contact us.
