Employment contracts between a GmbH and its shareholder-director are regularly a red rag in the context of tax audits and possibly subsequent court proceedings. The tax authorities assume that the managing director’s salary is excessive unless certain conditions are met. The tax authorities regard this as abusive, as they assume that an excessive salary was paid in order to avoid taxes.
Therefore, certain conditions must be met so that the tax authorities do not come to the conclusion that the salary is excessive and thus a hidden profit distribution exists. If such a distribution is determined, the profit of the GmbH is increased by this amount, and this leads to income from capital assets for the managing director.
The case law on the appropriateness of shareholder-directors is very diverse and there are many points to consider, such as:
If, in addition to the fixed salary paid, there are other remuneration components such as bonuses or holiday allowances paid by the GmbH to the managing director, these are reviewed for their appropriateness. The basis for this is the industry, the concrete type and scope of the activity of the managing director, the future earnings prospects of the company, the relationship of the salary to the total profit and the remaining return on capital of the company, the type and amount of remuneration paid in the same business (if comparable) or granted to managing directors in similar businesses for corresponding services.
For this purpose, the tax administration makes use of various internal tables, which, based on various market studies, show a collection of internal industry and size class ratios. These values form the basis for the tax authorities to assess whether salary payments of a GmbH to its managing directors are industry-specific and appropriate.
Furthermore, the agreements must be made clearly and unambiguously in advance. Retroactive increases in salary are not recognized.
Overtime payments for the managing director are also considered unusual by the tax authorities. On the other hand, annual one-off payments (e.g. holiday or Christmas bonuses) are accepted by the tax authorities, provided they are reasonable.
Persons closely associated with the managing director
The amount of salary payments is also examined if the salary is paid to a person close to the managing director. The contractual relationship must also be at arm’s length. This means that the remuneration corresponds to what would also be agreed between unrelated third parties.
Related parties in this sense include fiancés, spouses, parents or grandparents, siblings, brothers and sisters-in-law, nieces, nephews, foster parents and also foster children.
The contracts must be clearly and unambiguously formulated. There must be an actual will to implement, which means that the agreement made must be implemented in practice, i.e. the money must actually be paid out as in the case of third-party employees.