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Luxembourg is of course under no obligation to apply the concept of hidden dividend
distributions as defined by German case law.(1) The core of such case law, however, is
widely accepted in Luxembourg tax literature, and should apply as it remains consistent
with the spirit of the LITL (which is itself based on German income tax law). Moreover, the
reasoning in Luxembourg case law dealing with hidden dividend distributions is in line with
the above mentioned definition.(2)
2.2. Decrease (or averted increase) in the company’s net equity
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In accordance with relevant case law, hidden dividend distributions require a decrease
(or averted increase) in a company’s net equity.(3) In other words, without the hidden
dividend distribution, the company’s net equity would be higher than it actually is (net
equity test). The decrease (or averted increase) in the company’s net equity should be
determined on the basis of the company’s tax balance sheet.(4)
While a decrease in a company’s net equity regularly relates to expenses (for example,
excessive rental payments), an averted increase in a company’s net equity is linked to
lost profit (that is, where a company forgoes income that could be realized under market
conditions). An averted increase in a company’s net equity exists, for example, where a
company disposes of an asset at a sales price below the fair market value or provides
services for a remuneration that is below the market price.
1 - In particular, the application of more recent German jurisprudence requires a detailed examination of the facts and circumstances and
the consistency of the decision with Luxembourg tax law and jurisprudence.
2 - Some examples of relevant Luxembourg case law include, Arrêt du Conseil d’Etat du 13.1.1987 n° 6690 (ID Legitax: 936), «Considérant que cette disposition de droit positif luxembourgeois, dont l’origine remonte à des errements jurisprudentiels des
cours et tribunaux fiscaux allemands, s’explique par le souci du législateur de contrecarrer des manœuvres camouflant la véritable
nature d’une opération de distribution de bénéfices par le recours abusif à des techniques juridiques licites en droit privé.»; Tribunal
Administratif, Decision of 21.2.2001, No. 12028 (ID Legitax: 397); Tribunal Administratif, Decision of 27.11.2006, N° 21033
(ID Legitax: 675); Cour Administrative, Decision of 12.2.2009, No. 24642C (ID Legitax: 9626); Tribunal Administratif, Decision
of 16.2.2009, N° 24105, (ID Legitax: 9414).
3 - See Guy Heintz, «L’impôt sur le revenu des collectivités», Études Fiscales, Saint Paul, No. 113, 114, 115 (1999), p. 102.
4 - BFH, Decision of 23.6.1993, I R 72/92, BStBl II 1993, p. 801; according to Article 40 (1) LITL, the tax treatment follows the
accounting treatment unless a special tax provision or concept provides for a different treatment for Luxembourg tax purposes.
However, within the net equity test tax adjustments relating to the hidden dividend distributions have no effect.
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Characteristics of hidden dividend distributions
Example II-1: Decrease in the company’s net equity
A Luxembourg company (“LuxCo”) receives a EUR 2,000,000 loan from its Luxembourg
parent company (“LuxParentCo”) bearing interest at a rate of 12%. The arm’s length interest
rate would amount to 7%. Thus, LuxCo is shifting an advantage of EUR 100,000 per annum
(= EUR 2,000,000 * [12% - 7%]) to its shareholder, resulting in a decrease in its net equity.
LuxParentCo
Loan (EUR 2m;
interest rate >
arm’s length rate)
LuxCo
Example II-2: Averted increase in the company’s net equity
LuxCo sells a car worth EUR 30,000 at its EUR 10,000 book value to its shareholder. The difference
between the fair market value and the sales price (EUR 20,000) is an advantage shifted to the
shareholder that results in an averted increase in the company’s net equity (i.e. without the hidden
dividend distribution, the net equity of LuxCo would be EUR 20,000 higher).
SA
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Shareholder
Disposal of a car at a
sales price below fair
market value
LuxCo
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The company’s net equity is not, however, reduced if the company has a corresponding
receivable against the shareholder as a consequence of the transaction (provided the
receivable has value).(1)
Example II-3: Payment of expenses incurred by the shareholder
LuxParentCo incurred EUR 70,000 expenses in relation to advisory services performed by an
external service provider. Since LuxParentCo did not have sufficient cash to pay the invoice, it
was agreed that LuxCo pay the liability and receive a refund within one month’s time. In addition,
LuxCo’s receivable bears interest at arm’s length.
LuxParentCo
Receivable
(EUR 70,000)
LuxCo
Receivable
(EUR 70,000)
Service
provider
Payment
(EUR 70,000)
In the present case, the net equity of LuxCo is not affected by the transaction, as a receivable
(EUR 70,000) is recorded in LuxCo’s balance sheet. Hence, the payment of LuxParentCo’s
invoice should not be classified as a hidden dividend distribution.(2)
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The question arises as to whether advantages shifted by a company to its shareholder
may be offset by corresponding advantages shifted from the shareholder to the company
in a separate transaction (Vorteilsausgleich(3)). Certain conditions need to be met for
such intentional set-offs to be considered for Luxembourg tax purposes. In particular,
in the absence of an economic connection between the two transactions, it is crucial
that the intentional set-off be agreed beforehand between the parties. Moreover, there
1 - If the company records a receivable towards the shareholder, neither the net equity nor the taxable income of the company is affected;
BFH, Decision of 14.9.1994, I R 6/94, BStBl II 1997, p. 89; BFH, Decision of 30.7.1997, I R 65/96, BStBl II 1998, p. 402.
2 - The receivable bears interest at arm’s length. If the receivable were interest-free, an averted increase corresponding to the arm’s
length interest rate may be classified as a hidden dividend distribution.
3 - Intentional set-off.
Characteristics of hidden dividend distributions
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should be a certain link between both transactions from a timing perspective.(1) Under the
aforementioned conditions, a hidden dividend distribution should only be considered in as
far as the advantage shifted by the company exceeds that received from the shareholder.
Intentional set-offs may also be found within company groups for restating arm’s length
conditions in the transfer pricing between associated enterprises (so-called “balancing
payments”).
Example II-4: Intentional set-off
LuxCo rents out an apartment to its shareholder for rental payments of EUR 20,000 per annum
(arm’s length rental payments would be EUR 30,000 per year). The shareholder rents out a factory
building to LuxCo for rental payments of EUR 110,000 per annum (arm’s length rental payments
would be EUR 120,000 per year). The shareholder and the company agree that the advantage
shifted by the company to the shareholder compensates the reduced rental payments for the
factory building.
Shareholder
Letting of an apartment
at a monthly rent below
market prices
Letting of a factory
building at a monthly rent
below market prices
LuxCo
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In the present example, the advantage shifted to the shareholder (EUR 10,000) should be offset
by the advantage received by LuxCo (EUR 10,000). As a result, the company’s net equity is
unaffected and the advantage shifted by the company should not be classified as a hidden
dividend distribution.
1 - BFH, Decision of 22.4.1964 I 62/61 U, BStBl III 1964, p. 370, “Gewährt eine Kapitalgesellschaft zu Lasten des Gewinns ihren
Gesellschaftern mit Rücksicht auf das Gesellschaftsverhältnis Vorteile, die sie einer gesellschaftsfremden Person nicht gewähren
würde, so liegt eine verdeckte Gewinnausschüttung vor. Derartige Vorteile können durch Leistungen der Gesellschafter an die
Kapitalgesellschaft nur aufgewogen werden, wenn die Beteiligten eindeutige Abmachungen getroffen haben, die die gewährten Vorteile
als Gegenleistung für Leistungen der Gesellschafter an die Gesellschaft erkennbar machen, und wenn ein zeitlicher Zusammenhang
besteht, der Leistung und Gegenleistung miteinander verbindet.“; BFH, Decision of 8.6.1977, BStBl II 1977, p. 704; BFH, Decision
of 1.8.1984, BStBl II 1985, p. 18.
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2.3. Motivation by the shareholding relationship
2.3.1. Opening comments
A decrease (or averted increase) in a company’s net equity may only be considered a
hidden dividend distribution to the extent it is ‘motivated by the shareholding relationship’
(motivation test). Therefore, the advantage shifted by a company must be in the interest
of its shareholder. In contrast, when a decrease (or averted increase) in a company’s net
equity is motivated by business reasons (that is, it is in the best commercial interest of the
company), a hidden dividend distribution should not be considered.
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2.3.2. Existence of a shareholding relationship
A shareholding relationship between the beneficiary of an advantage (be it an individual
or a company(1)) and the company shifting the advantage is a necessary condition for a
hidden dividend distribution to exist. It follows that in the absence of any shareholding
relationship, no hidden dividend distribution should be considered.
Whether the shareholder is resident in Luxembourg or not is irrelevant for the
classification of an advantage as a hidden dividend distribution.(2) Additionally, there is
no de minimis rule for an advantage to be classified as a hidden dividend distribution;(3)
however, the shareholding percentage may constitute an important element in assessing
the motivation test.(4)
Hidden dividend distributions should only be considered in specific circumstances where
advantages are shifted to future or former shareholders. Advantages granted to a future
shareholder should in principle not fall within the scope of hidden dividend distributions
unless there is a close temporal (and economic) connection to the acquisition of the
participation in the company.(5) Advantages granted as an incentive for future shareholders
to invest in the company should also not be classified as hidden dividend distributions.(6)
1 - The shareholder may also be a partnership. However, due to the transparency of partnerships for Luxembourg tax purposes, the
hidden dividend distributions would be recognised at the level of the partners (the partnership may nonetheless be subject to
municipal business tax thereon).
2 - BFH, Decision of 21.12.1972, I R 70/70, BStBl II 1973, p. 449; BFH, Decision of 6.4.1977, I R 183/75, BStBl II 1977, p. 571.
3 - The beneficiary may either be a minority or a majority shareholder; BFH, Decision of 18.7.1985, IV R 135/82, BStBl II p. 635; “Der
Tatbestand der verdeckten Gewinnausschüttung ist nicht an eine bestimmte Mindestbeteiligung des Gesellschafters an der leistenden
Gesellschaft geknüpft.“
4 - The existence of a minority participation of, say 5%, in the company shifting an advantage should not automatically lead to a
presumption that the advantage was motivated by the shareholding relationship since, in general, such shareholders have little or
no control over the company.
5 - BFH, Decision of 24.1.1989, VIII R 74/84, BStBl II 1989, p. 419, “Eine verdeckte Gewinnausschüttung ist möglich, wenn
die Leistung der Gesellschaft zwar vor Begründung des Gesellschaftsverhältnisses erbracht wird, ihren Grund aber in diesem
Gesellschaftsverhältnis hat. Das gilt jedenfalls dann, wenn die Leistung in engem zeitlichen Zusammenhang mit der Begründung des
Gesellschaftsverhältnisses steht und der Empfänger dann auch tatsächlich Gesellschafter wird.“
6 - BFH, Decision of 3.7.1968, I 83/65, BStBl II 1969, p. 14, “Denn verdeckte Gewinnausschüttungen können nur Gesellschaftern
zufließen, sei es unmittelbar, sei es mittelbar auf dem Weg über Zuwendungen an Personen, die den Gesellschaftern nahestehen
(BFH- Urteil I 325/61 Svom 25. Oktober 1963, BFH 78, 46, BStBl III 1964, 17). Die Absicht der Steuerpflichtigen, die ausländischen
Firmen als neue Gesellschafter an sich zu ziehen, reicht nicht aus, um verdeckte Gewinnausschüttungen an sie anzunehmen.“
Characteristics of hidden dividend distributions
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In contrast, advantages granted by a company to a former shareholder may be classified
as hidden dividend distributions to the extent that the beneficiary was a shareholder at the
time the underlying agreement was concluded.(1)
Example II-5: Excessive pension payments
A former shareholder of LuxCo receives a pension of EUR 6,000 per month in relation to services
rendered in the past as director of LuxCo (the arm’s length monthly pension would amount to
EUR 4,000). At the time the former shareholder was a director and a shareholder of LuxCo,
the latter accounted for pension payments through a provision for its future liability towards the
(former) shareholder.
(New)
shareholder
Former
shareholder
Excessive
pension payments
LuxCo
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In the present case, the advantage shifted by LuxCo to the former shareholder (EUR 2,000 per
month) should be classified as a hidden dividend distribution at the level of the shareholder, since
he was a shareholder of LuxCo at the conclusion of the pension agreement. Thus, the former
shareholder should consider deemed dividend income of EUR 24,000 per annum.(2)
1 - BFH, Decision of 22.4.1971, I R 114/70, BStBl II 1971, p. 600; BFH, Decision of 22.6.1977, BStBl II 1978, p. 33; BFH, Decision of
24.1.1989, VIII R 74/84, BStBl II 1989, p. 419, “Entscheidend für eine verdeckte Gewinnausschüttung ist nach der Rechtsprechung
des BFH, wie bereits ausgeführt, daß die Zuwendung der AG ihre Ursache im Gesellschaftsverhältnis hat. Das ist nicht nur dann möglich,
wenn der Empfänger im Zeitpunkt, in dem die Gesellschaft leistet oder in dem ihm die Leistung zufließt, tatsächlich Gesellschafter ist.
Der BFH hat, wie zuvor der RFH, eine verdeckte Gewinnausschüttung auch an einen ehemaligen Gesellschafter für möglich gehalten
(BFH-Urteile vom 22. Juni 1977 I R 171/74, BFHE 123, 321, 326, BStBl II 1978, 33; vom 22. April 1971 I R 114/70, BFHE 102, 268,
BStBl II 1971, 600; RFH-Urteil vom 12. November 1931 I A 495/30, RStBl 1932, 60).“; for example, excessive pensions paid to a
former shareholder for previous employment by the company (e.g. as director) or advantages embedded in long-term contracts such
as rental or loan agreements (i.e. where the remuneration to be paid by the former shareholder is below market prices).
2 - It is interesting to note that LuxCo should have considered hidden dividend distributions when recording the “excessive” part of the
provision for future pension payments. In contrast, in the payment phase, the pensions should neither affect LuxCo’s net equity nor
its taxable income (to be analyzed on a case-by-case basis).
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2.3.3. Causation and the shareholding relationship
Once the existence of a shareholding relationship between a company and the
beneficiary of the advantage has been established, it is imperative to assess whether
or not there is a causal link between the shareholding relationship and the decrease (or
averted increase) in the company’s net equity. In essence, if the company would not have
agreed to the same terms and conditions with a third party, it is generally considered that
the advantage is primarily motivated by the shareholding relationship rather than business
considerations.(1)
The analysis of the arm’s length character of a transaction between a company and its
shareholders is generally conducted with reference to the concept of the prudent business
manager (ein ordentlicher und gewissenhafter Geschäftsleiter). Here, the terms and
conditions of transactions entered into by a company and its shareholders are compared
to those that a prudent business manager would have agreed to in regard to transactions
with third parties (prudent business manager test).(2)
The prudent business manager test is broadly similar to the arm’s length test in a
transfer pricing context. Accordingly, the arm’s length character of a transaction may be
analysed on the basis of internal comparables (that is, similar transactions between the
company and third parties) or external comparables (that is, similar transactions between
third parties). In certain cases, it may also be possible for the Luxembourg tax authorities
to rely on the hypothetical behaviour of a prudent business manager.(3)
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1 - BFH, 16.3.1967, I 261/63, BStBl III 1967, p. 626; BFH, Decision of 23.10.1968, I 228/65, BStBl II 1969, p. 243, “Eine verdeckte
Gewinnausschüttung setzt voraus, dass die Kapitalgesellschaft einem Gesellschafter einen Vermögensvorteil zuwendet, den sie bei
Anwendung der Sorgfalt eines ordentlichen und gewissenhaften Geschäftsleiters einem Nichtgesellschafter unter sonst gleichen
Umständen nicht gewährt hätte.”; it has, however, been acknowledged that a business manager has a certain degree of discretion in
regard to decision making, BFH, Decision of 10.1.1973, I R 119/70, BStBl. II 1973, p. 322, “Andererseits genügt bei einem Geschäft
zwischen der Gesellschaft und dem Gesellschafter das Mißverhältnis zwischen Leistung und Gegenleistung für sich allein nicht,
um eine verdeckte Gewinnausschüttung anzunehmen. Hinzukommen muß, daß ein ordentlicher und gewissenhafter Geschäftsleiter
dieses Mißverhältnis erkannt und keinen rechtlichen oder betrieblichen Anlaß gesehen hätte, das Geschäft dennoch abzuschließen.
Dabei darf nicht übersehen werden, daß einem Geschäftsleiter ein gewisser Spielraum kaufmännischen Ermessens einzuräumen ist.
Sein Handeln muß freilich an den Gegebenheiten des Unternehmens ausgerichtet sein.“
2 - Tribunal Administratif, Decision of 29.3.1999, No. 10428 (ID Legitax: 242); Cour Administrative, Decision of 1.2.2000,
No. 11318C (ID Legitax: 124); Tribunal Administratif, Decision of 24.4.2002, No. 13666 (ID Legitax: 438); Tribunal Administratif,
Decision of 6.6.2005, No. 19162 (ID Legitax: 631); Tribunal Administratif, Decision of 31.5.2006, No. 20705 (ID Legitax: 9184);
Tribunal Administratif, Decision of 27.11.2006, No. 21034 (ID Legitax: 676); Tribunal Administratif, Decision of 27.11.2006,
No. 21033 (ID Legitax: 675); Tribunal Administratif, Decision of 7.5.2007, No. 21466 (ID Legitax: 2121); Cour Administrative,
Decision of 16.10.2007, No. 23051C and 13432C (ID Legitax: 7527); Tribunal Administratif, Decision of 14.7.2008, No. 23094
(ID Legitax: 8198); Tribunal Administratif, Decision of 31.12.2007, No. 22777; Cour Administrative, Decision of 12.2.2009, No. 24642C
(ID Legitax: 9626); Tribunal Administratif, Decision of 16.2.2009, No. 24105 (ID Legitax: 9414); Tribunal Administratif,
Decision of 19.10.2009, No. 25396 (ID Legitax: 12164); Tribunal Administratif, Decision of 13.7.2010, No. 25358 and 25514
(ID Legitax: 14323); BFH, Decision of 10.1.1973, I R 119/70, BStBl II 1973, p. 322; an incorrect decision by a business manager
should not be classified as a hidden dividend distribution, BFH, Decision of 8.7.1998, I R 123/97, BFH/NV 1999, p. 269.
3 - For example, in regard to transactions that may only occur between a company and its shareholders (here, no comparables are
available). Besides, a prudent business manager would not enter into transactions that would, from the outset, lead to losses in the
long-term. On this basis, the Luxembourg tax authorities may challenge the transfer pricing of Luxembourg companies that are not
profitable; BFH, Decision of 22.10.1986, I R 107/82, BStBl II 1987, p. 293, “Dazu ist davon auszugehen, dass es die Aufgabe jeder
Kapitalgesellschaft ist, als Erwerbsunternehmen Gewinne zu erzielen und die Gewinne nach Möglichkeit zu steigern.”
Characteristics of hidden dividend distributions
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The intention of a company to distribute profits or a party’s consent to shift an advantage
is irrelevant when considering hidden dividend distributions. Rather, the arm’s length
principle is the defining factor in assessing hidden dividend distributions.(1)
In applying the arm’s length test, the time of conclusion of the agreement (as opposed
to the moment when agreement is exercised) is decisive.(2) Hence, all circumstances
prevailing at the moment of concluding the agreement must be taken into account.(3) In
contrast, developments following the conclusion of the agreement, such as a change
in market prices, are irrelevant unless the company has the right to request that the
contractual terms be adjusted (for example, in regard to long-term contracts).(4)
1 - BFH, Decision of 3.12.1969, I R 107/69, BStBl II 1970, p. 229, “Zu den Voraussetzungen einer verdeckten Gewinnausschüttung
gehört weder die Absicht der Kapitalgesellschaft, den Gewinn verdeckt zu verteilen, noch die Einigung der Parteien darüber, daß die
Zuwendung mit Rücksicht auf das Gesellschaftsverhältnis erfolgt.“; BFH, Decision of 10.1.1973, I R 119/70, BStBl II 1973, p. 322;
BFH, Decision of 13.9.1989, BStBl II 1989, p. 1029.
2 - BFH vom 22.4.1971, I R 114/70, BStBl II 1971, p. 600, “Leistungen einer Kapitalgesellschaft an einen Gesellschafter, die auf Grund
eines Vertrages bewirkt werden, stellen verdeckte Gewinnausschüttungen dar, wenn und soweit die Gesellschaft bei Anwendung der
Sorgfalt eines ordentlichen und gewissenhaften Geschäftsleiters den Vertrag mit einem Nichtgesellschafter nicht geschlossen hätte.
Diese Voraussetzung ist auf den Zeitpunkt des Vertragsschlusses, nicht auf den Zeitpunkt der späterliegenden Leistungen zu prüfen.“;
BFH, Decision of 9.4.1975, I R 166/73, BStBl II 1975, p. 617; BFH, Decision of 10.11.1993, I R 36/93, BFH/NV 1994, p. 827;
BFH, Decision of 13.7.1994, I R 112/93, BStBl II 1995, p. 198.
3 - All circumstances that a prudent business manager would consider are relevant for analysing whether an advantage has been shifted.
4 - BFH, Decision of 9.4.1975, I R 166/73, BStBl II 1975, p. 617, “Die Voraussetzung, ob ein ordentlicher und gewissenhafter
Geschäftsleiter den Vorteil auch einem Nichtgesellschafter gewährt hätte, kann vernünftigerweise nur auf den Zeitpunkt der
Vornahme der verdeckten Gewinnausschüttung geprüft werden. Werden die Leistungen auf Grund eines Vertrages bewirkt, sind
die Voraussetzungen auf den Zeitpunkt des Vertragsabschlusses, nicht auf den Zeitpunkt der später liegenden Leistungen zu prüfen
(BFH-Urteil vom 22. April 1971 I R 114/70, BFHE 102, 268, BStBl II 1971, 600). Die spätere Entwicklung der Verhältnisse hat
außer Betracht zu bleiben, es sei denn, die Gesellschaft habe von einer rechtlichen Möglichkeit, sich vom Vertrag loszusagen, was
insbesondere bei Dauerschuldverhältnissen in Betracht kommt, keinen Gebrauch gemacht.“; BFH vom 07.12.1988 I R 25/82,
BStBl. II 1989, p. 248.
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Example II-6: Arm’s length test and timing aspects
On 1 June 2011, LuxCo sells immovable property worth EUR 1,000,000 to its shareholder. In the
purchase agreement the parties determine a sales price of EUR 1,000,000 that has to be paid upon
transfer of the legal ownership on 1 September 2011. On 1 July 2011, the government announced
that the district in which the immovable property is situated will be part of a development area.
Shortly thereafter, the fair market value of the real estate increases to EUR 1,200,000.
Shareholder
Disposal of
immovable property
LuxCo
SA
MP
LE
Considering that the fair market value as of 1 June 2011 was agreed between the parties and
that no information on the government’s plan was then available, no averted increase in the
company’s net equity and, therefore, no hidden dividend distribution should be considered.
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Characteristics of hidden dividend distributions
Example II-7: Arm’s length test and timing aspects
LuxCo has been renting out an apartment to its shareholder for 10 years. The monthly rental
payments of EUR 1,000 reflect the market conditions prevailing at the time the rental agreement
was concluded. According to the rental contract, on 1 January of each year, the landlord has the
right to adjust rental payments to be in line with market conditions. LuxCo has not increased the
monthly rent, although monthly rents paid for similar apartments amount to EUR 1,250.
Shareholder
Letting of an
apartment
LuxCo
Since LuxCo did not renegotiate the monthly rent to reflect current market prices (though it was in a
position to do so), LuxCo shifts an advantage to its shareholder that results in an averted increase
in its net equity. A prudent business manager would not have granted the same advantage to a
third party. Thus, the advantage is considered to be motivated by the shareholding relationship.
SA
MP
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2.3.4. Related party of the shareholder
The scope of hidden dividend distributions extends to advantages shifted by a company
to a related party of the shareholder (so-called ‘triangular cases’). Here, a rebuttable
presumption that the advantage was motivated by the shareholding relationship is made,
which is derived from the relationship between the shareholder and the related party
thereof. However, where it can be evidenced that the company was acting in its best
interest, no hidden dividend distribution should be considered.(1)
1 - The fact that the recipient of the advantage is a related party of the shareholder does not per se trigger the classification of an
advantage as a hidden dividend distribution; BFH, Decision of 25.10.1963, I 325/61 S, BStBl III 1964, p. 17, “Zuwendungen
einer Kapitalgesellschaft an Nichtgesellschafter können grundsätzlich nur dann eine verdeckte Gewinnausschüttung darstellen,
wenn die Empfänger Personen sind, die den Gesellschaftern oder einem der Gesellschafter nahestehen. Daß es sich um
Personen handelt, die der Gesellschaft nahestehen, reicht für die Annahme einer verdeckten Gewinnausschüttung nicht aus.“;
BFH, Decision of 22.2.1989, I R 9/85, BStBl II 1989, p. 631; BFH, Decision of 18.12.1996, I R 139/94, BStBl II 1997, p. 301.
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The relationship between the shareholder and the related party can be of any nature
(familial(1), corporate(2), contractual(3)etc.); a common interest should however not suffice.(4)
Related parties of the shareholder may be individuals or companies.(5)
In order to meet the motivation test, an advantage shifted to a related party of the
shareholder must be in the interest of the shareholder. This is because an advantage
shifted to a third party cannot be classified as a hidden dividend distribution. However,
whether or not the advantage directly benefits the shareholder should be irrelevant.(6)
Where an advantage shifted by the company to a related party of the shareholder (for
example, a family relative) is classified as a hidden dividend distribution, the advantage
granted to the related party of the shareholder is, for Luxembourg tax purposes, deemed
to be:
(i) first granted by the company to the shareholder (hidden dividend distribution)
(ii) that subsequently shifts the advantage to the related party.(7)
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1 - BFH, Decision of 29.4. 1987, I R 192/82, BStBl II 1987, p. 797; BFH, Decision of 2.3.1988, I R 103/86, BStBl II 1988, p. 786.
2 - BFH, Decision of 13.9.1967, I 82/64, BStBl III 1967, p. 791; BFH, Decision of 6.12.1967, I 98/65, BStBl II 1968, p. 322;
BFH, Decision of 23.10.1985, BStBl II 1986, p. 178; BFH, Decision of 20.8.1986, I R 150/82, BStBl II 1987, p. 455.
3 - BFH, Decision of 25.10.1963, I 325/61 S, BStBl III 1964, p. 17.
4 - BFH, Decision of 23.10.1985, I R 247/81, BStBl II 1986, p. 195, “Zum Kreis der dem Gesellschafter nahestehenden Personen
können auch juristische Personen gehören (BFHE 91, 239, BStBl II 1968, 322). Die Beziehungen zwischen dem Gesellschafter
und dem Dritten, die die Annahme einer mittelbaren Zuwendung an den Gesellschafter rechtfertigen, können schuldrechtlicher,
tatsächlicher oder gesellschaftsrechtlicher Art sein.“; BFH, Decision of 18.12.1996, I R 139/94, BStBl II 1997, p. 301, „Zur
Begründung des “Nahestehens” reicht jede Beziehung eines Gesellschafters der Kapitalgesellschaft zu einer anderen Person aus, die
den Schluß zuläßt, sie habe die Vorteilszuwendung der Kapitalgesellschaft an die andere Person beeinflußt. Derartige Beziehungen
können familienrechtlicher, gesellschaftsrechtlicher, schuldrechtlicher oder auch rein tatsächlicher Art sein.“; even a friendship
between the shareholder and the beneficiary may be sufficient.
5 - BFH, Decision of 25.10.1963, I 325/61 S, BStBl III 1964, p. 17; BFH, Decision of 27.1.1972, I R 28/69, BStBl II 1972, p. 320,
“Eine verdeckte Gewinnausschüttung kann auch dann in Betracht kommen, wenn der Vermögensvorteil nicht unmittelbar
dem Gesellschafter, sondern einer ihm nahestehenden Person zugewandt wird. Voraussetzung ist aber, daß die unmittelbare
Zuwendung an die nahestehende Person einen Vorteil für den Gesellschafter selbst zur Folge hat.“; BFH, Decision of 31.7.1974,
I R 238/72, BStBl II 1975, p. 48; BFH, Decision of 18.7.1975, IV R 135/72, BStBl II 1975, p. 635.
6 - An advantage shifted to a related party may be in the interest of the shareholder if (i) a liability of the shareholder is satisfied, (ii) a
voluntary benefit is granted by the shareholder to the related party or (iii) the advantage shifted to the related party otherwise benefits
the shareholder; BFH, Decision of 23.10.1968, I 228/65, BStBl II 1969, p. 243, “Der Vermögensvorteil muss einem Gesellschafter
zufließen, sei es unmittelbar von der Kapitalgesellschaft, sei es mittelbar über eine ihm –dem Gesellschafter – nahestehenden
Person. Eine mittelbare Zuwendung des Vorteils ist vor allem anzunehmen, wenn der Vorteil, den die Kapitalgesellschaft einem
Nichtgesellschafter gewährt, wirtschaftlich auch dem Gesellschafter zufließt.“; BFH, Decision of 6.4.1977, I R 86/75, BStBl II 1977,
p. 569; BFH, Decision of 13.4.1988, I R 284/82, BFH/NV 1989, p. 395; BFH, Decision of 18.12.1996, I R 139/94, BStBl II 1997,
p. 301, „Eine verdeckte Gewinnausschüttung i.S. des KSTG § 8 Abs. 3 Satz 2 KStG in Form der Zuwendung eines Vermögensvorteils
an eine einem Gesellschafter der Kapitalgesellschaft nahestehende Person setzt nicht voraus, daß die Zuwendung einen Vorteil für
den Gesellschafter selbst zur Folge hat.“
7 - The deemed advantage to the shareholder is not to be considered as a fiction; rather, it follows the economic reality of the transaction;
BFH, Decision of 13.9.1967, I 82/64, BStBl III 1967, p. 791; BFH, Decision of 3.2.1971, I R 51/66, BStBl II 1971, p. 408.
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Characteristics of hidden dividend distributions
Example II-8: Advantage granted to a related party of the shareholder
LuxCo employs the daughter of the shareholder for a salary of EUR 8,000 per month. Under
market conditions, the salary would only amount to EUR 5,000 per month.
(2)
Advantage shifted to the
related party
Related Party
Shareholder
The shareholder is the
f ather of the related party
(1)
Hidden dividend
distribution
(Excessive)
salary
LuxCo
SA
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In the present example, an advantage of EUR 3,000 per month is granted to the related party
of the shareholder. However, for Luxembourg tax purposes the advantage is first deemed to be
granted to the shareholder who subsequently shifts the advantage – in his private sphere – to his
daughter. The advantage granted by LuxCo to its shareholder should be classified as a hidden
dividend distribution.(1)
2.3.5. Triangular cases involving company groups
Related party transactions may in particular involve company groups shifting (i)
advantages through the chain or (ii) between (indirect) sister companies. Whilst unrelated
parties should have no interest in shifting advantages to each other, related parties may,
in the absence of diverging interests, intentionally circumvent the arm’s length principle in
order to reduce the overall tax burden. Since the concept of hidden dividend distributions
aims at preserving arm’s length conditions in intra-group transactions (at least for tax
purposes), it has become a cornerstone of Luxembourg transfer pricing rules.(2)
1 - The daughter should only be subject to tax on the arm’s length part of her salary (EUR 5,000). The excessive part should – as an
advantage shifted by the father in his private capacity – not be subject to income taxation.
2 - See section 2 of the Tax Circular 164/2 dated 28 January 2011; see Oliver R. Hoor, “Luxembourg’s New Transfer Pricing Circular on
Intra-group Financing activities”, Tax Notes International, May 2011, p. 414.
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Hidden dividend distributions through the chain may be considered where a company
shifts an advantage to an indirect shareholder. Here, the company may not, in the absence
of a direct shareholding relationship, directly distribute the advantage to the beneficiary of
the advantage. Rather, for tax purposes, several hidden dividend distributions are deemed
to be made subsequently:
(i) the company is deemed to shift an advantage to its direct shareholder (hidden dividend distribution 1);
(ii) the direct shareholder is deemed to shift an advantage to the indirect shareholder
(hidden dividend distribution 2).(1)
Chain transactions may involve any number of intermediary companies (and therefore
any number of hidden dividend distributions).
Example II-9: Chain transaction
A Luxembourg company (“LuxParentCo II”) grants a EUR 5,000,000 interest-bearing loan to its
indirect subsidiary LuxCo. The applicable interest rate is 10% but the arm’s length interest rate
is 6%. Accordingly, an advantage of EUR 200,000 per year (= EUR 5,000,000 * [10% - 6%]) is
shifted to LuxParentCo II.
LuxParentCo II
(2)
Hidden dividend
distribution
SA
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Loan
(interest rate >
arm’s length rate)
LuxParentCo
(1)
Hidden dividend
distribution
LuxCo
For Luxembourg tax purposes, the advantage shifted up the chain should be classified as a
hidden dividend distribution via the direct parent company (“LuxParentCo”). Accordingly, a
first hidden dividend distribution is considered to have been made by LuxCo to LuxParentCo
(EUR 200,000), and a second from LuxParentCo to LuxParentCo II (EUR 200,000).
1 - BFH, Decision of 29.1.1975, I R 135/70, BStBl II 1975, p. 553; BFH, Decision of 23.10.1985, I R 247/81, BStBl II 1986, p. 195,
“Wendet die Enkelgesellschaft einen Vorteil unmittelbar der Muttergesellschaft zu, ist der normale Weg der Gewinnausschüttung
der Enkelgesellschaft an die ihr übergeordnete Tochtergesellschaft und der weiteren Gewinnausschüttung der Tochtergesellschaft an
die Muttergesellschaft abgekürzt. Die Tochtergesellschaft bedient sich der Enkelgesellschaft, um Gewinne an die Muttergesellschaft
verdeckt auszuschütten. Die Enkelgesellschaft wendet dadurch, daß sie diese Aufgabe übernimmt, der Tochtergesellschaft einen
Vorteil zu.“; BFH, Decision of 9.9.1986, VIII R 159/85, BStBl II 1987, p. 257.
Characteristics of hidden dividend distributions
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Advantages may also be shifted between sister companies. Here, the advantage is
deemed to be motivated by the relationship with the common shareholder. Therefore, for
Luxembourg tax purposes, the advantage is deemed to be:
(i) granted to the common shareholder (hidden dividend distribution),
(ii)that subsequently shifts the advantage to the beneficiary sister company (hidden
capital contribution).(1)
Whilst the advantage shifted to the common shareholder should be classified as a
hidden dividend distribution, the advantage shifted to the subsidiary company may qualify
as a hidden capital contribution.(2) Though such transactions generally occur in company
groups, the shareholder may also be an individual, holding the participations as part of his
business or private property.
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1 - BFH, Decision of 29.1.1964, I 209/62 U, BStBl III 1965, p. 27; BFH, Decision of 23.10.1968, I 228/65, BStBl II 1969, p. 243;
BFH, Decision of 21.12.1972, I R 70/70, BStBl II 1973, p. 449; BFH, Decision of 29.1.1975, I R 135/70, BStBl II 1975, p. 553;
BFH, Decision of 23.10.1985, I R 247/81, BStBl II 1986, p. 195; BFH, Decision of 9.9.1986, VIII R 159/85, BStBl II 1987, p. 257;
BFH, Decision of 22.10.1986, I R 107/82, BStBl II 1987, p. 293, “Bei Vorteilszuwendungen zwischen Schwestergesellschaften
leistet zwar die begünstigende Schwestergesellschaft unmittelbar an die begünstigte Schwestergesellschaft. Die wirtschaftliche
Veranlassung für diese Vorteilsgewährung ist jedoch in der Beteiligung der gemeinsamen Muttergesellschaft zu suchen. Dazu ist
davon auszugehen, daß es die Aufgabe jeder Kapitalgesellschaft ist, als Erwerbsunternehmen Gewinne zu erzielen und die Gewinne
nach Möglichkeit zu steigern. Eine Kapitalgesellschaft wird deshalb grundsätzlich nicht bereit sein, Vorteile unentgeltlich zu überlassen.
Tut sie es dennoch, so spricht eine Vermutung dafür, daß die Vorteilsüberlassung nicht betrieblich veranlaßt ist. Der Muttergesellschaft
fließt eine verdeckte Gewinnausschüttung zu, weil es ihre Sache ist, einer Tochtergesellschaft (verdeckte) Einlagen zuzuführen. Diese
Grundsätze gelten sinngemäß wenn - wie hier - Schwestergesellschaften nicht von einer gemeinsamen Muttergesellschaft beherrscht
werden, aber an ihnen dieselben natürlichen Personen als Gesellschafter beteiligt sind.”; see Guy Heintz, „L’impôt sur le revenu des
collectivités“, Études Fiscales, Saint Paul, No. 113, 114, 115 (1999), p. 69.
2 - BFH, Decision of 29.1.1964, I 209/62 U, BStBl III 1965, p. 27; BFH, Decision of 23.10.1968, I 228/65, BStBl 1969, p. 243;
BFH, Decision of 21.12.1972, I R 70/70, BStBl II 1973, p. 449; BFH, Decision of 19.5.1982, I R 102/79, BStBl II 1982, p. 631;
BFH, Decision of 20.8.1986, I R 150/82, BStBl II 1987, p. 455; BFH, Decision of 22.10.1986, I R 107/82, BStBl II 1987,
p. 293; BFH, Decision of 26.10.1987, GrS 2/86, BStBl II 1988, 348; BFH, Decision of 9.6.1997, GrS 1/94, BStBl II 1998, p. 307;
BFH, Decision of 15.10.1997, I R 103/93, BFH/NV 1998, p. 572; however, where services are rendered for partial or no consideration
between sister companies (for example, interest-free loans and rent-free lettings of real estate), such advantages should be classified
as a hidden dividend distribution to the common shareholder, but not as a hidden capital contribution by the common shareholder
to the beneficiary sister company; see Oliver R. Hoor, Philippe Neefs, “L’apport caché: Un chemin dans la brume”, Les cahiers du
droit luxembourgeois, No. 3, Legitech, April 2009.
chapter Ii – HIDDEN DIVIDEND DISTRIBUTIONS
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Example II-10: Advantages shifted between sister companies
LuxCo A sells an excavator worth EUR 100,000 for EUR 70,000 to its sister company LuxCo B.
Although LuxCo A grants the advantage (EUR 30,000) directly to LuxCo B, the economic reason
is to be found in the companies’ common shareholding relationship with the Luxembourg parent
company (“LuxParentCo”). A hidden dividend distribution is therefore considered to be made by
LuxCo A to LuxParentCo, and a corresponding hidden capital contribution from LuxParentCo to
LuxCo B.
(1)
Hidden dividend
distribution
(2)
Hidden capital
contribution
LuxParentCo
LuxCo A
LuxCo B
Disposal of assets at
a sales price below
fair market value
Example II-11: Advantages shifted between indirect sister companies
SA
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LuxCo B sells an excavator worth EUR 100,000 for EUR 70,000 to its indirect sister company
LuxCo C. An indirect hidden dividend distribution is considered from LuxCo B to LuxParentCo
through LuxCo A (EUR 30,000), and a corresponding hidden capital contribution to have been
made by LuxParentCo to LuxCo C (EUR 30,000). For tax purposes, therefore, two subsequent
hidden dividend distributions are followed by a hidden capital contribution.
(2)
Hidden dividend
distribution
(3)
Hidden capital
contribution
LuxParentCo
LuxCo A
LuxCo C
LuxCo B
Disposal of assets at
a sales price below
fair market value
(1)
Hidden dividend
distribution
Characteristics of hidden dividend distributions
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2.3.6. Burden of proof
The burden of proof that advantages have been shifted by a company to its
shareholder(s) is generally on the Luxembourg tax authorities; it is for the latter to prove
that a transaction does not adhere to the arm’s length criterion.(1)
As a rule, the Luxembourg tax authorities are duty bound to investigate all the facts and
circumstances of a tax case (Untersuchungs- or Amtsermittlungsgrundsatz).(2) Conversely,
taxpayers are duty bound to cooperate with the tax authorities (Mitwirkungspflicht) and
they have to provide consistent arguments that substantiate the business reasons behind
their transactions.(3) Both principles go hand in hand and complement each other.(4)
In cross-border situations, the Luxembourg tax authorities will have to rely on information
provided by the taxpayer to prove or disprove the granting of any hidden advantages.(5)As
the Luxembourg tax authorities need to base their decision on all available evidence, the tax
payer is obligated to fully cooperate and assist the tax authorities with their investigation.(6)
SA
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1 - In general, the Luxembourg tax authorities have to prove facts that result in a tax claim; Cour Administrative, Decision of 1.2.2000,
No. 11318c (ID Legitax: 124); Tribunal Administratif, Decision of 24.4.2002, No. 13666 (ID Legitax: 438); Tribunal Administratif,
Decision of 6.6.2005, No. 19162 (ID Legitax: 631); Tribunal Administratif, Decision of 31.5.2006, No. 20705 (ID Legitax: 9184);
Tribunal Administratif, Decision of 27.11.2006, No. 21033 (ID Legitax: 675); Cour Administrative, Decision of 16.10.2007,
No. 23051C and 13432C (ID Legitax: 7525); Tribunal Administratif, Decision of 9.6.2008, No. 23324 (ID Legitax: 7946); Cour
Administrative, Decision of 12.2.2009, No. 24642C (ID Legitax: 9626); Tribunal Administratif, Decision of 16.2.2009, No. 24105
(ID Legitax: 9414); Tribunal Administratif, Decision of 13.7.2010, No. 25358 and 25514 (ID Legitax: 14323); BFH, Decision
of 5.11.1970, V R 71/67, BStBl II 1971, p. 220, “Das FA trägt die objektive Beweislast (Feststellungslast) für das Vorliegen der
Tatsachen, die zur Geltendmachung des Steueranspruchs erforderlich sind.”; BFH, Decision of 20.5.1969, II 25/61, BStBl II 1969,
p. 550, “Schließlich ist noch darauf hinzuweisen, daß die AO der Behörde die Mittel zur Ermittlung des Sachverhalts dadurch
in die Hand gibt, daß sie dem Steuerpflichtigen ins einzelne gehende Auskunftspflichten auferlegt (§§ 166 ff., 170 bis 172 AO)
und andererseits den Finanzbehörden umfassende Rechte, die der Ermittlungspflicht entsprechen, gewährt (§§ 173, 174, 204 ff.
AO). Es ist jedoch nicht zu verkennen, daß das FA zum Zweck der Wahrheitserforschung im wesentlichen auf die Angaben des
Steuerpflichtigen angewiesen ist. Erfüllt der Steuerpflichtige die ihm durch das Gesetz auferlegten Mitwirkungspflichten nicht, so
wird das FA häufig nicht imstande sein, den Sachverhalt genau festzustellen. Vereitelt oder erschwert der Steuerpflichtige durch
schuldhafte Verletzung seiner Mitwirkungspflicht (vgl. auch § 76 Abs. 1 FGO) die Sachverhaltsfeststellung, kann es gerechtfertigt
sein, das Verhalten des Steuerpflichtigen zu dessen Nachteil zu würdigen. Diese Würdigung kann dazu führen, an die schuldhafte
Pflichtverletzung eine Tatsachenfeststellung zu knüpfen, die der durch die Feststellungslast belasteten Behörde günstig ist. Dies
ist jedoch nur dann zulässig, wenn andere Erkenntnismittel, die zur Aufklärung geeignet sind, nicht ohne weiteres greifbar sind.“;
BFH, Decision of 17.10.2001, I R 103/00, BStBl II 2004, BFH/NV 2002, p. 134.
2 - § 204 (1) Abgabenordnung, ID Legitax: 1005.
3 - § 171 Abgabenordnung; Tribunal Administratif, Decision of 3.6.2009, No. 24935 (ID Legitax: 11295); Tribunal Administratif,
Decision of 10.9.2008, No. 23544 (ID Legitax: 8507); Cour Administrative, Decision of 12.2.2009, No. 24642C (ID Legitax: 9626);
BFH, Decision of 7.12.1955, V z 183/54 S, BStBl. III 1955, p. 75; BFH, Decision of 12.7.1962, IV 124/58 U, BStBl III 1962, p. 522;
BFH, Decision of 26.8.1993, I B 25/93, BFH/NV 1994, p. 268.
4 - BFH, Decision of 25.3.1955, III 81/54 U, BStBl. III 1955, p. 133; BFH, Decision of 7.12.1955, V z 183/54 S, BStBl. III 1955, p. 75;
BFH, Decision of 7.4.1959, I 2/58 S, BStBl. III 1959, p. 233; BFH, Decision of 29.10.1959, IV 579/56 S, BStBl. III 1960, p. 26;
BFH, Decision of 13.7.1962, VI 100/61 U, BStBl. III 1962, p. 428; BFH, Decision of 20.2.1979, VII R 16/78, BStBl. II 1979, p. 268.
5 - RFH, Decision of 23.1.1935, RStBl 1935, p. 306; BFH, Decision of 13.7.1962, V I 100/61 U, BStBl III 1962, p. 428.
6 - See Oliver R. Hoor, “Documentation prix de transfert au Luxembourg: Ce que peuvent attendre les autorités fiscales luxembourgeoises”,
Les cahiers du droit luxembourgeois, No. 11, September 2010, Legitech.
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In a transfer pricing context, relevant facts include assets used, functions performed
and risks assumed.(1) The preparation of special transfer pricing documentation as such
is, however, excluded from taxpayers’ duties of cooperation.(2) Rather, the taxpayer merely
has to obtain and provide pre-existing documents.(3) Where transfer pricing documents
have been prepared, these must be provided to the Luxembourg tax authorities for the
purposes of their investigation.(4) It is for the tax administration to verify whether transfer
prices for goods and services transferred between group companies adhere to the arm’s
length criterion.(5) Even where the burden of proof is on the tax authorities, they may still
reasonably oblige the taxpayer to provide consistent arguments justifying their transfer
pricing policy.(6)
Where the Luxembourg tax authorities can evidence that an advantage has been shifted
to the shareholder,(7) a presumption is made that the company did not adhere to the arm’s
length principle. Here, the Luxembourg tax authorities may look to public databases and
data from comparable transactions in other cases (under certain conditions).(4) In this
case, the taxpayer has to provide the necessary arguments underpinning the arm’s length
character of the transaction.(8)
Should a company be unable to justify the arm’s length character of its intra-group
transactions, the tax authorities may generally rely on the “hidden dividend distribution”
concept to make necessary tax adjustments.(9)
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1 - Particularly in cross-border situations, the Luxembourg tax authorities will have to use information provided by the taxpayer; RFH,
Decision of 23.1.1935, RStBl. 1935, p. 306; BFH, Decision of 13.7.1962, V I 100/61 U, BStBl. III 1962, p. 428
2 - However, if a Luxembourg financing company would like to obtain advance certainty as to whether the margin realized in relation to its
financing activity is consistent with the arm’s length principle, the Circular L.I.R. No. 164/2 issued on 28.1.2011 (ID Legitax: 15474)
provides that the financing company has to prepare a transfer pricing study; see Oliver R. Hoor “Prix de transfert et financement intragroupe au Luxembourg: la Circulaire 164/2 du 28 janvier 2011”, Les cahiers du droit luxembourgeois, No. 12, April 2011, Legitech.
3 - BFH, Decision of 10.5.2001, I S 3/01, BFHE 194, 360.
4 - BFH, Decision of 17.10.2001, I R 103/00, BFH/NV 2002, p. 134.
5 - RFH, Decision of 23.1.1935, RStBl 1935, p. 306; BFH, Decision of 13.7.1962, V I 100/61 U, BStBl III 1962, p. 428; see Oliver
R. Hoor, “Documentation prix de transfert au Luxembourg: Ce que peuvent attendre les autorités fiscales luxembourgeoises”, Les
cahiers du droit luxembourgeois, No. 11, September 2010, Legitech.
6 - The taxpayer has to provide consistent arguments underpinning the arm’s length character of the transfer price representing at least a
probable possibility; RFH, Decision of 21.12.1938, RStBl 1939, p. 307; BFH, Decision of 7.4.1959, I 2/58 S, BStBl III 1959, p. 233.
7 - According to Luxembourg case law, the tax authorities only need to evidence that it is likely that an advantage has been shifted by the
company (without having to determine exactly a breach of the arm’s length principle) in order to cause a reversal of the burden of
proof; Tribunal Administratif, Decision of 27.11.2006, No. 21033 (ID Legitax: 675); Tribunal Administratif, Decision of 31.12.2007,
No. 22777 (ID Legitax: 6149); Tribunal Administrative, Decision of 9.6.2008, No. 23324 (ID Legitax: 7946); Cour Administrative,
Decision of 12.2.2009, No. 24642C (ID Legitax: 9626); Tribunal Administratif, Decision of 16.2.2009, No. 24105 (ID Legitax: 9414).
8 - RFH, Decision of 21.12.1938, RStBl 1939, p. 307; BFH, Decision of 7.4.1959, I 2/58 S, BStBl III 1959, p. 233.
9 - § 217 (1) AO; it should be noted that the presumption that transfer prices do not comply with the arm’s length principle (following
the proof by the Luxembourg tax authorities) is a precondition for the estimation of transfer prices if Luxembourg companies fulfil
their duty of cooperation.
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Importantly, the tax authorities must investigate the taxpayer’s compliance with the arm’s
length principle even where taxpayers do not fulfil their cooperation duties and especially
when the tax authorities suspect deceit on the taxpayer’s behalf. In these situations, the tax
authorities must investigate as far as is reasonably possible. The burden of proof remains,
however, at the level of the tax authorities.(1)
Finally, as part of their duty to examine all underlying facts, the tax authorities are also
entitled to (cross-border) administrative assistance.
2.4. Reduction of the company’s taxable income
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A hidden dividend distribution within the meaning of Article 164 (3) LITL may only be
considered to the extent a decrease (or averted increase) in a company’s net equity affects
a company’s taxable income (taxable income test). In other words, tax adjustments should
only be made with regard to transactions that decrease or could increase the taxable
income.
Indeed, Article 164 (3) LITL aims at avoiding a reduction of the company’s taxable
income motivated by the shareholding relationship.(2) The taxable income of the company
is compared to the taxable income that would have been realized had the company
adhered to the arm’s length principle in regard to the transactions under scrutiny.
1 - BFH, Decision of 13.7.1962, VI 100/61 U, BStBl. III 1962, p. 428, “Wenn das Finanzamt geprüft hat, ob sich die Vorgänge in der Tat
so zugetragen haben, wie der Bg. es behauptet, so entspricht das den §§ 204 und 205 AO, nach denen das Finanzamt nicht bloß
berechtigt, sondern sogar verpflichtet ist, die tatsächlichen Verhältnisse zu ermitteln und, wenn es Bedenken gegen die Richtigkeit
der Erklärung eines Steuerpflichtigen hat, die Zweifel zu klären. Nach §§ 170 und 171 AO ist der Steuerpflichtige zur Mitwirkung bei
der Aufklärung verpflichtet. Das Finanzamt darf zwar nichts Unzumutbares verlangen. Es kann und soll auch in aller Regel von der
Richtigkeit der Angaben des Steuerpflichtigen ausgehen, solange nicht besondere Umstände eine Aufklärung nahelegen.“
2 - Article 164 (3) LITL provides that hidden dividend distributions are to be included in the company’s taxable income. Thus, a
hidden dividend distribution under Article 164 (3) LITL only exists to the extent the taxable income is reduced as a result of the
advantage shifted to the shareholder (or could be higher without the advantage); BFH, Decision of 3.2.1971, I R 51/66, BStBl II 1971,
p. 408, “Für die Annahme einer verdeckten Gewinnausschüttung nach § 6 Abs. 1 Satz 2 KStG genügt es, daß die Zuwendung
des Vermögensvorteils an den Gesellschafter bei der Kapitalgesellschaft den Gewinn gemindert hat. Denn § 6 Abs. 1 Satz 2 KStG
will verhindern, daß der Gewinn der Kapitalgesellschaft durch Vorabführungen an den Gesellschafter mit steuerrechtlicher Wirkung
geschmälert wird. Welche steuerrechtlichen Folgen die verdeckte Gewinnausschüttung beim Gesellschafter auslöst, ist dafür
unerheblich.”