Federal Fiscal Court ruling: Hidden profit distributions - section 32a of the Corporation Tax Act also covers indirect con-sequences

Hidden profit distribution in a triangular relationship: amendment under section 32a of the Corporation Tax Act

The Annual Tax Act 2007 [Jahressteuergesetz 2007–JStG 2007] (of 13 Dec 2006, Federal Law Gazette [Bundesgesetzblatt–BGBl.] I 2006, p. 2878) introduced section 32a of the Corporation Tax Act in order to secure, in procedural terms, the corresponding taxation of hidden profit distributions and hidden contributions at the level of the corporation and at the level of the shareholder. Insofar as a tax assessment notice addressed to a corporation is issued, revoked or amended with regard to the recognition of a hidden profit distribution, a tax assessment notice or notice of determination [Feststellungsbescheid] addressed to the shareholder to whom the hidden profit distribution is attributable, or to a person related to that shareholder, may be issued, revoked or amended (section 32a(1) sentence 1 of the Corporation Tax Act). To that extent, the limitation period for the assessment does not expire before the end of one year after the corporation’s tax assessment notice has become incontestable (section 32a(1) sentence 2 of the Corporation Tax Act).

In this way, the shareholder obtains the partial tax exemption under section 3 no. 40 sentence 1 (d) of the Income Tax Act irrespective of the finality of the shareholder’s own assessment notice. Unmitigated double taxation is thereby avoided (Bundestag original source [Bundestagsdrucksache–BT-Drucks.] 16/2712, p. 71). The provision, however, links the two levels only formally. Whether, and in what amount, a hidden profit distribution exists must be examined separately at each level (Federal Fiscal Court judgement of 11 Sep 2018, file ref. I R 59/16, Federal Tax Gazette [Bundessteuerblatt–BStBl.] II 2019, p. 368, para. 15; Federal Fiscal Court judgement of 31 Jan 2018, file ref. I R 25/16, para. 23).

It had hitherto remained unresolved whether the power to amend covers only the direct consequence of the hidden profit distribution – the capital income under section 20(1) no. 1 sentence 2 of the Income Tax Act – or also further, indirect consequences. This is of particular significance where the shareholder “consumes” the benefit in a manner relevant to the determination of income, or where the hidden profit distribution at the same time constitutes a hidden contribution to another corporation. The previous case law of the fiscal courts and the prevailing view in the literature affirmed a broad scope of application (e.g. Fiscal Court of Cologne [Finanzgericht Köln–FG Köln] judgement of 16 Feb 2016, file ref. 10 K 2574/15, para. 28, on section 32a(2) of the Corporation Tax Act). The opposing view, on which the tax office relied, requires an inseparable substantive connection with the hidden profit distribution itself.

In the case in dispute, the claimant was the sole shareholder of A-GmbH and held a 50% interest in B-GmbH. A-GmbH had granted B-GmbH loans totalling EUR 485,000, which, apart from EUR 15,000, were not repaid. In objection proceedings following a tax audit, A-GmbH, in agreement with the tax office, retrospectively wrote off the receivable as irrecoverable as at 31 December 2012. The tax office treated the write-off as a hidden profit distribution benefiting B-GmbH, a company related to the claimant, increased A-GmbH’s income by EUR 479,995 and, under section 32a(1) of the Corporation Tax Act, recognised the same amount in the claimant’s hands as income from his shareholding for 2012. B-GmbH had already been struck off the commercial register in December 2015.

The claimant had not declared a liquidation loss under section 17(4) of the Income Tax Act for 2015. The income tax assessment notice became final. The tax office rejected, on procedural grounds, his subsequent application to take into account a loss of EUR 479,995. The Fiscal Court of Saxony-Anhalt [Finanzgericht Sachsen-Anhalt–FG Sachsen-Anhalt] allowed the action (Fiscal Court of Saxony-Anhalt judgement of 6 Aug 2025, file ref. 1 K 645/22): in its view, the hidden profit distribution had at the same time constituted a hidden contribution by the claimant to B-GmbH which, as subsequent acquisition costs, increased the liquidation loss, and such consequential amendments were also covered by section 32a(1) of the Corporation Tax Act. The ninth chamber of the Federal Fiscal Court nevertheless set aside that judgement and referred the case back to the Fiscal Court.

Broad power to amend, strict substantive limits under section 32a of the Corporation Tax Act

In procedural terms, the Federal Fiscal Court follows the lower Fiscal Court. The Fiscal Court’s judgement, however, lacks the findings of fact required under substantive law. The Federal Fiscal Court bases its decision on three key holdings:

• Indirect consequences are covered: according to the wording (“insofar as” [soweit]; “with regard to the recognition of a hidden profit distribution” [hinsichtlich der Berücksichtigung einer verdeckten Gewinnausschüttung]), the power to amend extends to all tax consequences for the shareholder or a related party whose legal basis lies in the recognition of the hidden profit distribution at the level of the corporation. The statutory scheme and the purpose of correspondence confirm this, as does the explanatory memorandum to the bill, which includes the “typical triangular constellation” (Bundestag printed paper 16/2712, p. 72). A transfer of benefits between sister companies is a hidden profit distribution to the common shareholder and may at the same time constitute that shareholder’s hidden contribution to the benefiting company (Federal Fiscal Court order of 26 Oct 1987, file ref. GrS 2/86, Federal Tax Gazette II 1988, p. 348; Federal Fiscal Court order of 9 Jun 1997, file ref. GrS 1/94, Federal Tax Gazette II 1998, p. 307). The ninth chamber coordinated this interpretation with the first and eighth chambers (para. 40).
• Discretion generally reduced to zero: section 32a(1) sentence 1 of the Corporation Tax Act is worded as a discretionary (“may”) provision. Where the shareholder’s tax assessment would be substantively incorrect without an amendment, any decision other than amendment constitutes an error in the exercise of discretion (Federal Fiscal Court judgement of 24 Jun 2014, file ref. VIII R 54/10, para. 36).
• Waiver and going-concern value are decisive: a hidden contribution presupposes that a pecuniary advantage attributable to the shareholder relationship was conferred on B-GmbH. The mere write-off of the receivable on account of its irrecoverability is not sufficient. What is required is an express or tacit waiver which also leads to the derecognition of the liability at the level of B-GmbH. The contribution is to be recognised only at the going-concern value of the receivable at the time of the waiver (GrS 1/94). A worthless receivable does not give rise to acquisition costs, even if the hidden profit distribution was recognised by agreement in the amount of EUR 479,995: the hidden profit distribution and the hidden contribution need not match in value (paras. 22 and 23).

The Fiscal Court must now establish whether there was a waiver, what going-concern value the receivable had and why any liquidation loss is to be allocated to 2015 in particular (para. 24). Missing findings constitute a substantive defect of the judgement, not merely a procedural error that can be waived (para. 25).

The broad interpretation is convincing: section 32a of the Corporation Tax Act is intended to prevent a set of facts constituting a hidden profit distribution, once identified at the level of the corporation, from being reflected only incompletely at the level of the shareholder. It is noteworthy that the hidden profit distribution concerned the 2012 corporation tax assessment notice, whereas the amendment may extend to the 2015 income tax assessment notice. What matters is the set of facts, not the assessment period. The downside lies in substantive law: the hidden profit distribution was recognised at the amount written off, the hidden contribution only at the going-concern value. If the receivable was worthless at the time of the waiver, the shareholder is taxed on the income from the shareholding arising from the hidden profit distribution without any acquisition costs to offset it. This asymmetry results from the different standards applicable to hidden profit distributions and hidden contributions. As a procedural provision, section 32a of the Corporation Tax Act cannot compensate for it.

Indirect consequences of hidden profit distributions: practical implications 

The judgement strengthens the procedural position of shareholders holding several corporations. Where a hidden profit distribution is established at the level of one company, indirect consequences can also be enforced via section 32a(1) of the Corporation Tax Act – besides subsequent acquisition costs arising from a hidden contribution (section 6(6) sentences 2 and 3 of the Income Tax Act; section 17(2a) sentence 3 no. 1 of the Income Tax Act), the reasoning also covers business expenses, income-related expenses or acquisition costs where the shareholder “consumes” the benefit in a manner relevant to the determination of income (para. 38). This also applies to assessment notices for other assessment periods that have already become final. The deadline must be kept in view: for the shareholder, the limitation period for assessment does not expire, to that extent, before the end of one year after the corporation tax assessment notice has become incontestable (section 32a(1) sentence 2 of the Corporation Tax Act).

Success, however, depends on substantive law. Anyone claiming a hidden contribution in connection with a loan to a sister company must substantiate a waiver attributable to the shareholder relationship and the going-concern value of the receivable at that time. The mere write-off is not sufficient. A receivable that is already worthless does not give rise to acquisition costs. In addition, there are the questions of the correct time at which the liquidation loss is realised and of the partial income method [Teileinkünfteverfahren], which limits the effect of the loss (section 3c(2) of the Income Tax Act).

Factual agreements [tatsächliche Verständigungen] on a hidden profit distribution in a triangular relationship should therefore also address the consequences for the sister company and the shareholder, in particular whether there is a waiver and at what value a hidden contribution is to be recognised. The agreement on the amount of the hidden profit distribution is not binding as regards the hidden contribution (para. 23). Applications under section 32a(1) of the Corporation Tax Act should set out and substantiate the substantive requirements – waiver, going-concern value, timing – from the outset.

It remains open how far the facts constituting a hidden profit distribution extend in an individual case. The Federal Fiscal Court’s formula – consequential effects are covered if their legal basis lies in the recognition of the hidden profit distribution – is broad, but not unlimited. Distinguishing such effects from transactions that merely follow in time or in economic terms will occupy practitioners. A corresponding interpretation suggests itself for section 32a(2) of the Corporation Tax Act (hidden contribution). The first chamber had most recently left the question open (Federal Fiscal Court judgement of 31 Jan 2018, file ref. I R 25/16, para. 28).

It should also be borne in mind that not every triangular relationship in which there is a hidden profit distribution to the common parent company also involves a hidden contribution to the benefiting subsidiary. Where the benefits concerned are not capable of being contributed – such as mere benefits of use (H 8.9 of the Explanatory Notes to the Corporation Tax Act [Körperschaftsteuer-Hinweise–KStH], heading “Nutzungsvorteile”) – the adjustment is sought via a hidden profit distribution to the common shareholder and the so-called “consumption of the benefit” [Vorteilsverbrauch] at the level of the parent company (confirmed for the half-income method [Halbeinkünfteverfahren] by Federal Fiscal Court judgement of 4 Feb 2014, file ref. I R 32/12). At the level of the parent company, this consumption constitutes a fully deductible expense resulting from a notional consumption of the benefit received through the hidden profit distribution (Federal Fiscal Court judgement of 27 Nov 2019, file ref. I R 40/19 (I R 14/16), Federal Tax Gazette II 2024, p. 670, para. 45).