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Profitless GmbH and hidden profit distribution

tax flash
Tax Flash - 09 Sep 2022 | 2 minutes read

In the opinion of the Administrative Court, a hidden distribution of profits to the shareholders and a possible associated obligation to pay capital gains tax is also conceivable in the case of a profitless GmbH.

The corporate tax issue of whether a hidden benefit granted by a corporation (e.g. GmbH or AG) to its shareholders is to be qualified as a “hidden distribution” (section 8 (2) KStG) or (alternatively) can be treated as a so-called “repayment of contributions” (section 4 (12) EStG) is of considerable importance because different income tax legal consequences are linked to it. The focus is often on the capital gains tax liability of such contributions.


Occasional case

This core issue was also at stake in an appeal procedure lasting several years, in which the Federal Fiscal Court (BFG) initially came to the conclusion that hidden benefits granted to a profitless limited liability company with correspondingly high contribution levels could still be treated as a capital gains tax-free repayment of contributions. However, this legal opinion has now been corrected by the Administrative Court (VwGH):

VwGH 30.06.2022, Ra 2019/13/0051

According to section 4 (12) of the Austrian Income Tax Act, if there is evidence of a positive level of contributions and positive internal financing, it is possible to choose whether a distribution is to be classified as a taxable profit distribution or as a tax-neutral repayment of contributions. However, the extent to which this is also possible in the case of a hidden distribution – such as the loan in question – was disputed.

In any case, the proof of a tax-neutral repayment of contributions is not deemed to be provided by the mere absence of a taxable profit and sufficiently high contribution levels. According to the Administrative Court, the BFG’s classification of a hidden distribution as a tax-neutral repayment of contributions was not to be followed due to the lack of corresponding evidence in the case under review.


Practical effects

Even if there are no profits, but contributions in the amount of a hidden benefit, a contribution made to the shareholders cannot be qualified as a repayment of capital contributions without deduction of withholding tax.

In the opinion of the Administrative Court, in the case of a hidden benefit, a hidden profit distribution is to be assumed, unless it can be proven that contributions were repaid.

According to the Administrative Court, this also applies in the case of profitlessness of a company that favours its shareholders in a manner that is not customary for third parties, which has a sufficiently high disposable deposit balance in the record account, but no distributable balance sheet profit.


Practical advice

If a capital contribution is to be declared as a repayment of contributions, this must be communicated in writing to the tax office by the company’s representative body before the end of the financial year in question. But it is precisely this that will often encounter difficulties in view of the time circumstances in the case of (subsequently) qualified as hidden contributions.