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Taxation of a distribution according to the partial income method

February 16, 2011 | 25,00 EUR | answered by StB Kiehne Katja Kiehne

Dear Sir or Madam,

I am struggling with the following scenario:

Let's assume a small GmbH has made a profit of €20,000, has fully and dutifully taxed this profit with around €5,000 in trade tax, around €4,000 in corporation tax, and around €220 in solidarity surcharge, leaving a net amount of €10,780 in the GmbH.

Now, the small GmbH wants to distribute this fully taxed profit, which is already burdened with a total tax rate of over 46%, to its shareholder-GF.

As I understand it, the GmbH would then distribute the remaining €10,780 to the GF and withhold an additional 25% capital gains tax = €2,695 plus solidarity surcharge = €148. This would leave a net amount of €7,937.

The GF can now declare the distribution amount of €10,780 in his tax return using the partial income method (60% taxable). If he does so and has a personal tax rate of, for example, 35%, he would tax the €10,780 declared for distribution at a rate of 60%, resulting in a tax amount of €6,468, therefore withholding an additional €2,264 in income tax plus €125 in solidarity surcharge and offsetting the capital gains tax withheld by the GmbH of €2,695 plus €148 in solidarity surcharge.

Ultimately, out of the profit of €20,000 initially earned by the GF, the GF would be left with a net amount of only €8,391, i.e. less than 42% of the gross amount.

Am I making a mistake in my thinking, or is it really the case that a profit generated in a GmbH is burdened with a completely absurd (and, in my "tax sense", extremely unevenly treated) total tax rate of over 58% until it finally reaches the "creator" of this profit, namely the GF? Such an effective taxation seems to go against tax justice or the principle that income categories like this should be taxed equally.

Now, my question is: Is my above tax calculation correct, and if so, how could one legally avoid this extreme taxation if a uniform distribution of the profit through higher salaries to the GF is not possible?

Thank you in advance.

StB Kiehne Katja Kiehne

Dear inquirer,

In the context of an initial consultation and considering your fee commitment, I answer your question as follows:

Your presentation is correct. If the shareholder-director holds the shares of the GmbH in his personal assets, the distribution to him is subject to 25% capital gains tax plus solidarity and possibly church tax. The GmbH is required to withhold this tax from the shareholder-director and remit it to the tax office.
The shareholder-director earns income from capital assets. The taxation is finalised by the withheld capital gains tax. Since 2009, the flat-rate withholding tax procedure has been applied here. However, no more advertising costs can be claimed.

An application can be made for the partial income procedure to be applied instead of the flat-rate procedure. Then 60% of the income is taxable, so that 60% of the expenses (e.g. interest expenses related to the acquisition of the shareholding) could be claimed.

In the case you described, the partial income procedure leads to a more favourable taxation than the flat rate of 25%.

Since an adjustment of director's remuneration is not an option, this treatment cannot be circumvented in this case.

Best regards,

Katja Kiehne
Tax consultant
Master of Business Consulting (M.BC.)
Graduate Financial Economist (FH)