Germany: Fees To A Sole Shareholder Must Leave Company Scope For Profit - Supreme Tax Court

The Supreme Tax Court has confirmed that service fees paid to a sole shareholder must be customary, reasonable, agreed in advance, and must leave the company scope for profit on the relevant business.

The case was brought by a GmbH in scientific project work as an appeal against a tax office "hidden distribution" rejection of professional service fees paid to the (appropriately qualified) sole shareholder. The Supreme Tax Court accepted that such fees could be charged, even in loss years and otherwise confirmed its adherence to the general principles of existing case law. It summarises its own judgement as:

1. Whether or not a corporation would have taken a business opportunity open to it, is to be judged against the yardstick of an orderly and conscientious business manager. It is the business decision of the corporation to assign its own staff and resources to the job, or to appoint a shareholder as sub-contractor.
2. If the company appoints a shareholder as sub-contractor, it must pay him a fee as customary in the market for the service rendered. It cannot base the fee on the (overall) results expected for the year, and reduce it accordingly. However, an orderly and conscientious business manager will generally only accept a fee arrangement that leaves the company potential to make a profit on the transaction.
3. A company may expect a reasonable reward for accepting and completing a project initially offered to the shareholder, when it does so at his behest and with him as a sub-contractor.
4. A daily rate fee arrangement for professional services to be rendered to a GmbH by its sole shareholder/director must, as a rule, be clear and unambiguous. However, if that type of fee arrangement is customary in the professional field concerned, if can also be acceptable for tax.