Hidden profit distribution – what is it?

Hidden profit distributions are payments of monetary value made by a company to its owners/shareholders or related third parties that are clearly disproportionate to the consideration. In contrast to an ‘open’ profit distribution, i.e. a dividend, it is not recognised as a charge to profit or reserves, but as a ‘hidden’ contractual benefit.

A hidden profit distribution has three characteristics:

1. it is a benefit paid by the company to shareholders or related parties.
2. no or no appropriate consideration is provided.
3. the benefit would not be provided to an independent third party.

A concealed profit distribution has a negative impact on the income statement and the company reports a profit that is too low, which has a tax-saving effect.

If a hidden profit distribution is discovered, it has three tax consequences:

1. profit tax is incurred by the company due to the reduced profit being offset
2. withholding tax is incurred by the company due to the reduced profit distribution
3. income tax is payable by the shareholder due to the profit received: the tax office will treat the hidden profit distribution as a dividend.

Under certain circumstances, hidden profit distributions can also have consequences under criminal tax law.