How to handle a GmbH profit distribution (Gewinnausschüttung) wisely
GmbH profit distribution (in German Gewinnausschüttung) is a fascinating topic, as many factors exist to consider. For instance, GmbHs are required to distribute profits among shareholders proportionately based on their ownership stake. However, GmbHs can also choose to distribute profits differently, depending on the company’s needs. For example, a limited liability company can choose whether to keep the money – or part of it – in the company to reinvest it or to pay a salary to the working shareholders. Ultimately, the shareholders’ meeting decides on the distribution of profits. Since various options for the use of profits have different tax effects, the individual tax situation should be clarified in advance.
Disquotal distribution of profit in a limited liability company such as a GmbH
GmbH profit distribution (Gewinnausschüttung) can happen in different ways. The GmbH statute always takes precedence over any shareholder agreement. The GmbH statute also allows for unequal GmbH profit distributions if different roles within the company or different levels of investment justify it. Unequal GmbH profit distributions must be approved by all shareholders and can only be changed with a unanimous shareholder agreement. Ultimately, the decision of how to distribute GmbH profits lies with the shareholders.
Profit sharing for employees
Profit sharing is a critical component of the German business model and helps ensure that employees are motivated to work hard and contribute to the company’s success. Profit sharing in a German firm is typically based on a percentage of profits, and employees may receive a bonus if the company achieves specific financial goals.
Profit sharing can be an effective way to motivate and retain employees, as well as to attract new talent. It can also help create a sense of ownership and responsibility among employees, leading to higher productivity levels. However, profit-sharing can also lead to conflict if not properly managed, so it is essential to carefully consider the pros and cons before implementing a profit-sharing plan in your business.
Profit distribution and dividend
GmbHs must distribute their profits among the shareholders according to their shareholdings (Unternehmensanteil). However, a limited liability company may also choose to reinvest the profits back into the company or pay out a dividend to shareholders. The advantage of reinvesting profits is that it allows the company to grow and expand its operations. This can lead to higher profits in the future, which can benefit all shareholders.
However, the disadvantage of reinvesting profits and paying dividends is that it can take years for the company to see any return on its investment. Investing in a GmbH that pays out the profit distribution may be a better option for shareholders looking for immediate income. Profit distributions provide shareholders with a source of income that they can use to cover expenses or reinvest in other ventures. However, the downside of profit distribution payments is that they reduce the amount of money available to reinvest in the company, which can hamper its growth.
What is the difference between profit distribution and profit allocation?
Allocation of profits (Gewinnverteilung)
Allocation of profits (Gewinnverteilung) is the process of distributing profits (Unternehmensgewinn)among the shareholders of a company. The basis for this is usually the share one holds in the company (Unternehmensanteil). For example, if you hold 50% of the shares in the company, you are entitled to 50% of the profits. However, a so-called disproportionate allocation of profits (disquotale Gewinnverteilung)can also be stipulated in the articles of association (Gesellschaftsvertrag). However, a disproportionate allocation of the profits can also be made for tax reasons.
Profit distribution (Gewinnausschüttung)
Profit distribution (Gewinnausschüttung) is the process of distributing profits among shareholders. To distribute profits, a resolution must be passed by the majority of shareholders (Gewinnausschüttungsbeschluss). Once the resolution is passed, the profits can be paid to individual shareholders. On the other hand, if a profit distribution resolution is not passed, the profits will remain in the company, also known as profit retention (Gewinn-Thesaurierung).
Note: Do not forget to pass a proper profit distribution resolution. This is necessary for a legally flawless distribution of profits, even if there is only one shareholder.
How is the distribution of profits for a GmbH taxed?
There are two options concerning the taxing of profit distribution of your limited liability company.
Option #1: The Capital gains tax (Kapitalertragsteuer)
When your profit shares are paid out, they will be taxed at a flat rate of 25%. To this 25%, the solidarity surcharge (Solidaritätszuschlag) and the church tax (Kirchensteuer) will be added. So the total tax rate amounts will be around 26.3% and 28%.
Profit before taxes 100.000 EUR less average amount of business taxes 30% (corporation tax, solidarity tax, trade tax) ./. 30.000 EUR after-tax profit 70.000 EUR full dividend payout of 70.000 EUR less capital gains tax 28% (incl. solidarity surcharge and church tax, considering a tax-free allowance of 801 EUR for a person) (70.000 EUR ./. 801 EUR) x 28% = 19.376 EUR net dividend payout 50.624 EUR
Using this method, the overall tax rate would be around 50%.
Option #2: The Personal income tax and partial income method (Versteuerung mit persönlichem Steuersatz/Teileinkünfteverfahren)
In the case of the partial income method, the share of profits is taxed according to the personal income tax rate instead of being taxed as capital gains. But only 60% of the share is taxable within this option. The other 40% will not be taxed.
A fundamental premise for the partial income method is that you either are the business owner of a 25% share in your limited liability company or that you own a share of 1% and at the same time are an active part of the company.
Remember that you must apply for the partial income procedure in your tax return.
Profit before taxes 100.000 EUR less average amount of business taxes 30% (corporation tax, solidarity tax, trade tax) ./. 30.000 EUR after-tax profit 70.000 EUR full dividend payout of 70.000 EUR less income tax under the partial income method taking into account the top tax rate of 42%: 70.000 EUR x 60% x 42% = 17.640 EUR net dividend payout 62.440 EUR
As you can see, the total tax rate would be around 38%, which is 12% lower than in the first example. In addition, under the partial income method, you can also claim costs for the company shares (e.g., interest expenses for loans). However, these expenses are only 60% deductible.
Important: This is just an example of how you can reduce the overall tax rate. We are letting you know that there is no blanket answer as to which of these two variants is the more favorable. It depends on various factors, such as the personal income tax rate or other individual requirements. For this reason, a precise calculation should always be made before distributing profits.
By the way, there are many options to reduce the overall tax rate, i. e. by using the construct of a holding company, paying out a tax-optimized salary, or using the advantages of a good tax location (use our free German Trade Tax Calculator).
The distribution of profits is not the same for all companies
While all companies strive to make a profit, the distribution of those profits can vary greatly from one business to the next. For example, a publicly-traded company may be required to distribute a certain percentage of its profits to shareholders. At the same time, a privately-owned business may have more flexibility in allocating its earnings.
How is profit distributed in a private company (Privatunternehmen)
In a private company, the board of directors typically determines the distribution of profits. This group of individuals is responsible for deciding how the company’s money will be spent. For example, they may distribute profits among the shareholders, reinvest them in the company, or use them to cover expenses. The board of directors may also decide to distribute profits in different proportions depending on the level of ownership and partnership agreement each shareholder has. For example, someone who owns 10% of the company’s shares may receive 10% of the profits. Ultimately, the distribution of profits in a private company is up to the board of directors. However, shareholders typically have some input into this decision-making process.
How is profit distributed in a public company (Öffentlich gehandeltes Unternehmen)
A public company is a company that has sold shares to the public through an initial public offering. After a company goes public, its shareholders elect a board of directors to oversee its operations. In addition, they appoint executive officers to manage the company’s day-to-day affairs. The shareholders’ meeting determines the distribution of profits of a stock corporation. The shareholders’ meeting can decide to distribute the profits to the shareholders through dividends or share buybacks. Alternatively, the shareholders may reinvest the profits in the company to promote future growth.
Here is how you could proceed
You could prepare a plan for profit distribution, taking into account the most critical factors:
- Your GmbH’s business goals
- Your personal life position
- Your individual tax situation and your salary
You can check your plan with an expert and get advice on which ways are best for you from an economic and tax point of view. There are many solutions – find the best one for you and save money!
Fully qualified tax accountant under German law and specialist advisor for international tax law. More than 15 years of professional tax experience.