The GmbH has to pay CIT (corporate identity tax) of 15%, solidarity surcharge of 0,825% and trade tax of about 15,4%, so the tax rate is approx. 32%. Salary payments to shareholders or other payments from the GmbH are tax deductible.
However, this is just the first step of taxation, which is only valid as long as the profits are remaining in the GmbH. Whenever you want to get the money out of the GmbH (dividends) a second taxation is due. The rate depends on your status (parent company or private shareholder – German or foreign shareholder). As a private shareholder it would be around 17% of the profit before taxes, which ends up being a cumulative total tax rate of 49%. As a parent company you usually have the possibility of an exemption from taxes, or a refund of taxes regarding the dividend, so the tax rate stays at 32%.
If the GmbH has any business relations to its shareholders all these must be at arm´s length. Otherwise, you will cause a hidden profit distribution:
1. GmbH – typical cases of hidden profit distributions
One typical case of a hidden profit distribution is to pay the director who is at the same time shareholder of the company too much salary. Another case is to pay him a company car without having agreed on this in the working contract or to make loan agreements outside of a fair value interest rate.
One very dangerous situation occurs in cases of shareholders with a majority of the shares. In this cases every agreement has to be made in written form and before it starts. This means, if you are a 100% shareholder of your GmbH, working every week 40 or more hours and you get paid (only) EUR 50.000 for the whole year, even this would be considered a hidden profit distribution if you had not made a written contract before you started working.
It is also not allowed to make the salary of the shareholder-director too variable. So you should not make an agreement saying the director will get paid x % of the annual profit.
2. GmbH – tax consequences of hidden profit distributions
Once a hidden profit distribution is stated (usually after a tax audit) the expenses (salary, interest etc.) will be considered as non tax deductible. So the income will increase and the GmbH will have to pay more taxes (CIT, Trade Tax, Withholding Tax).
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