The following article describes the basics of managing director remuneration
1.1. Motive situation
The appropriateness of MD remuneration is regularly the subject of a tax audit. The amount of the shareholder management fee (→ shareholder-managing director) is a way of optimizing the »distribution behavior«. Salary payments are - depending on the individual tax burden of the respective shareholders - more favorable overall than the corresponding profit distribution. This can be seen very clearly with a low individual tax rate of the shareholder, since to this extent (operating expenses deduction) a tax reduction in the amount of KSt and trade tax definitive burden in the amount of around 30% (assuming a trade tax rate of 400%) can occur. This effect remains expressly also with increasing income tax rates of the partner, so that with an income tax burden of the partner of 42% still a relief effect (approx. 12%) occurs. The agreements on MD remuneration must withstand the »market test« so that no VGA (→ hidden profit distribution) can be accepted (→ arm's length comparison).
1.2. Civil law foundations
According to civil law, the amount and type of MD remuneration is at the discretion of the shareholders' meeting (Section 46 No. 5 GmbHG). Under company law, it may be appropriate that the MD approves a reduction in remuneration in the event of a significant deterioration in the financial framework (cf. Section 87 (2) AktG). It should be noted that the type and amount of MD remuneration can be determined relatively freely, the body responsible for this is the shareholders' meeting in the GmbH and the supervisory board in the AG. However, the principles of the provision of Section 86 (2) AktG (in particular the prior consideration of losses) must still be observed.
2. Tax consequences
2.1. Examination of the entire equipment
The BMF letter of October 14, 2002 comments on the adequacy of the total remuneration of a managing director (→ managing director) (BMF of October 14, 2002, BStBl I 2002, 972; partially superseded by the BFH rulings of February 27, 2003, IR 46/01, BStBl II 2003, 132 and from 4.6.2003, IR 24/02, BStBl II 2003, 136). The remuneration of the general manager consists of several components, namely
- Fixed salaries (including overtime pay),
- additional fixed annual one-off payments (e.g. vacation pay, Christmas pay),
- variable salary components (e.g. bonus, gratuities),
- Commitments about company pension benefits (e.g. pension commitments, pension expenses (→ Pension expenses / pension expenses)) and
- Benefits in kind (e.g. vehicle rental, private telephone use).
If the general manager of a GmbH is paid an additional fixed remuneration annually in addition to a monthly fixed salary in the event that a certain turnover limit is reached, a vGA (→ hidden profit distribution) is only to be accepted regularly if the total remuneration is inadequate in terms of its amount (BFH Judgment of June 5, 2002, BStBl II 2003, 329). If, in addition to the MD salary, a pension for retirement is paid at the same time, the retirement benefits paid are to be assessed as VGA (→ hidden profit distribution), even if it was agreed in the employment contract from the beginning that both should be paid upon reaching the age limit (cf. FG Munich, judgment of December 16, 2008, 13 K 3118/05). In the opinion of the BFH (judgment of October 23, 2013, IR 60/12, BStBl II 2015, 413) it is not objectionable from a tax law point of view if the commitment of the pension does not depend on the departure of the beneficiary from the employment relationship as managing director upon entry of the Supply is made dependent. In this case, a prudent and conscientious manager would, in order to avoid a hidden profit distribution, demand that the income from the continued activity as manager is offset against the pension benefit, or postpone the agreed upon the pension due date until the beneficiary has finally ended his managerial function. The fact that the partner-managing director reduces his working hours and his salary after the insured event occurs does not fundamentally change anything.
First of all, all agreed remuneration components are to be assessed individually according to whether they are to be viewed as being caused by the corporate relationship. For this purpose, the salary agreements must be checked for their seriousness and customization (→ third-party comparison, BFH judgment of 6.4.2005, I R 27/04, BFH / NV 2005, 1633). In the event of a social occasion, the reduction in assets resulting from the agreement leads to a vGA in full. This profit reduction is to be added outside of the tax balance sheet when determining income. An agreement between a GmbH and its → shareholder manager on the separate remuneration of overtime does not generally correspond to what a proper and conscientious manager of a GmbH would agree with an external manager (BFH decision of 7.2.2007, IB 69/06, BFH / NV 2007, 1192; BFH judgment of 13.12.2006, DStR 2007, 434; BFH judgment of 14.7.2004, BFH / NV 2005, 247; BFH judgment of 27.3.2001, BStBl II 2001, 655). It is therefore a vGA (→ hidden profit distribution). Exceptionally, however, this can be assessed differently if operational reasons invalidate the presumption of a social cause (OFD Frankfurt a.M. of November 8, 2005, DStR 2006, 97 with reference to BFH judgment of July 14, 2004, BStBl II 2005, 307). Doubling the current MD salary within a short time after the start of operations (2 1/2 to 3 1/2 months) basically leads to a vGA (BFH judgment of 6.4.2005, IR 27/04, BFH / NV 2005, 1633). The MD salary must actually be paid out on the usual dates. If, on the other hand, the agreed remuneration is not paid out on the due date, but a corresponding liability is shown on the clearing account after the end of the respective financial year, the salary is to be treated as a vGA (→ hidden profit distribution) (see FG Munich dated 02/10/2009, 7 V 4032/08).
In a second step, the remaining remuneration components are to be assessed according to whether they are to be regarded as being caused by the corporate relationship.
In the third step, the remaining remuneration not caused by the corporate relationship must be checked to see whether it can be viewed as appropriate in total. If a general manager works for several companies, this must be regularly reduced when determining the appropriate salary (BFH judgment of May 26, 2004, IR 92/03, BFH / NV 2005, 77 and BFH judgment of December 15, 2004, IR 79/04, BFH / NV 2005, 1147).
2.2. The check of the basic salary
In practice, opinions differ widely as to the appropriate level of the basic management salary (so-called fixed salary). Ranges between € 500,000 (still) adequate annual salary and an (already) inadequate € 150,000 annual salary are not uncommon in the practice of German tax auditors.
2.2.1. Procedural principles
According to constant → BFH case law, the tax authorities bear the burden of proof for the allegation of the inappropriateness of the fixed salary (Section 88 AO). In this context, it is also important to state that the VGA is an indefinite legal term that is therefore open to revision.
If the tax court has judged the overall equipment of a general manager to be adequate, this assessment is binding for the BFH if it does not violate the laws of thought or general empirical principles (BFH judgment of May 26, 2004, IR 92/03, BFH / NV 2005, 75) .
Internal and external comparisons of salaries is recognized as suitable verification methods. This is always a case-by-case examination, in which the previous professional experience of the MD is to be taken into account as well as the industry-typical »customary«.
Even if some federal states repeatedly set “sound” limits, there is an agreement that there is no absolute upper limit, but rather “margins” for the review.
2.2.2. The individual methods
22.214.171.124. The internal company comparison
This is initially to be understood as the comparison of all managing directors with one another, but also the evaluative comparison of the managing director with the external managing director as well as the comparison of the managing director (→ managing partner) with a manager. For the latter comparison, the ratio 1: 2 is given as a rule of thumb.
If incomparable areas of activity in a company the annual salary of a managerial employee is € 100,000, the fixed salary of the general manager can be up to € 200,000 without the VGA accusation due to the amount of the fixed salary being raised.
When checking individual cases, objective factors (such as the earnings prospects) play just as important a role as subjective elements (previous education, etc.).
While the older BFH-Rspr. based on the relation between MD salary and total profit of the GmbH and accepted a vGA if the 1/3 ratio was exceeded (of the total profit of the GmbH up to 2/3 MD salaries are appropriate with the remaining 1/3 residual profit of the GmbH), the current case is based on a flexible evaluation standard:
Thereafter, after deduction of the MD salaries, the GmbH still has a return on capital of 15% of the capital employed over a longer period (of approx. Five years) before a vGA is accepted. In this context, it is important that the capital employed in this formula means both the share capital and the → fixed assets. It is disputed whether the hidden reserves are also included in the fixed assets or whether only the book values are meant. If the salary is above this limit, the VGA-indexing word of »profit extraction« is used.
126.96.36.199. The external company comparison
This includes the figures due to the extensive "on-site inquiries" at the management of the various GmbHs, which are either commissioned by the BStB Chamber and published annually in the DStR or the results of the so-called "Kienbaum" studies.
What is most astonishing are the enormous range of the annual salaries determined and the obvious practice that even in years of loss of a GmbH, annual salaries in the almost six-digit euro range are mainly paid.
Furthermore, it is not surprising that the salaries correlate with the annual surplus or sales of the GmbH (the amount is directly related) and that a clear spread can be seen between the sole manager and the co-manager. The majority of fixed salaries with annual sales of € 12.5 million include an amount of € 150 thousand and approx. € 250 thousand for total salaries.
In its judgment of December 13, 2006, the BFH determined that the agreement of overtime payments, even if overtime payments are paid to all MDs, are to be regularly regarded as VGA (BFH judgment of March 27, 2012, VIII R 27/09, BFH / NV 2012 , 1127; BFH judgment of December 13, 2006, VIII R 31/05, BStBl II 2007, 393; BFH judgment of March 27, 2001, IR 40/00, BStBl II 2001, 655). In this respect, the BFH primarily focuses on the fact that payment, after overtime has been performed by the company, creates the wrong incentives and therefore does not represent regulatory behavior in line with the market. In addition, the notion that, due to the independent activity of MD, there is the possibility for MD to increase their salary at will without corresponding results occurring at the level of the GmbH is remarkable. In a decision of February 7, 2007, the BFH confirmed this permanent case by rejecting a non-admission complaint against a tax court judgment (FG Düsseldorf judgment of May 16, 2005, 6 K 224/04 K), as there is no need for further clarification with regard to the assessment of separately paid overtime payments existed and insofar as there is no fundamental significance of the case (BFH decision of 7 February 2007, BFH / NV 2007, 1192; last confirmed by BFH decision of 24 February 2009, IB 208/08, BFH decision of 6 October 2009, BFH / NV 2010, 469).
The BFH decided the opposite case (no VGA) on January 28, 2004 (BFH judgment of January 28, 2004, BStBl II 2005, 524). According to this, compensation payments for unused vacation to the general manager or to a person close to him do not constitute a VGA (→ hidden profit distribution) if operational reasons prevent the vacation from being taken. This even applies if there is no agreement in the articles of association and in spite of the contrary provision in the BUrlG (statutory prohibition of compensation for vacation entitlements).
The parallel payment of the pension and salary of a partner who continues to be employed after reaching the age limit is a hidden profit distribution if it does not stand up to the hypothetical → arm's length comparison (BFH judgments of March 5, 2008, IR 12/07, BStBl II 2015, 409 and October 23 .2013, IR 60/12, BStBl II 2015, 413). For detailed explanations see → arm's length comparison. For the interpretation of agreements between a corporation and its managing partner in connection with a pension commitment, see BMF of August 28, 2001, BStBl I 2001, 594.
If existing salary claims of the shareholder-managing director are converted into an entitlement to benefits from the company pension scheme, then the tax law recognition of the pension commitment does not usually fail due to the lack of earning capacity (BFH of 7.3.2018, I R 89/15, BStBl II 2019, 70). This applies to every form of pension funded through deferred compensation. Pension commitments based on deferred compensation can also be caused by the corporate relationship.
In a series of judgments by changing the case law, the BFH determined that it is not the actual use but the mere possibility of using a car that constitutes a wage-taxable benefit (Section 8 (2) sentence 2 EStG) (BFH judgment of April 18, 2013 , BStBl II 2013, 920; BFH judgment of March 21, 2013, BStBl II 2013, 700; BFH judgment of March 21, 2013, BFH / NV 2013, 1302; BFH judgment of March 21, 2013, BStBl II 2013, 918). Until the change in the case law, prima facie evidence was valid for the general manager, according to which it was regularly assumed that a car was actually being used privately. However, he could possibly refute this. The mere contractual or implied usage option is now sufficient. The advantage is to be determined either according to the logbook or the list price method (→ car use).
Furthermore, the BFH now states that a wage-taxable benefit can only be assumed if the car is made available for use on a contractual basis, but at least on an implied basis. If the managing partner uses the car without authorization, this leads to the acceptance of a vGA (→ hidden profit distribution). Also bans on private use (BFH judgment of 8/8/2013, VI R 71/12, BFH / NV 2014, 153) or insufficient monitoring of such bans on use by the GmbH (FG Berlin-Brandenburg judgment of 3 September 2013, 6 K 6154/10, EFG 2013, 1955) can establish a vGA.
This article is made for informative purposes only. Please contact www.counselhouse.eu for legal & tax advisory.