# BFH on § 32a KStG in Cases of Hidden Profit Distributions

> The BFH clarifies when final tax assessments may be amended due to indirect consequences of a hidden profit distribution.

Source: https://www.mtrlegal.com/en/bfh-section-32a-kstg-hidden-profit-distribution/ · Language: en · Updated: 2026-10-22

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## BFH Specifies Possibility of Amendment under § 32a(1) KStG

The Bundesfinanzhof (BFH, Federal Fiscal Court) ruled in its [judgment of 08.09.2026 – IX R 16/25](https://www.bundesfinanzhof.de/de/entscheidung/entscheidungen-online/detail/STRE202610195/) that the amendment of a final tax assessment under [§ 32a(1) sentence 1 KStG (Körperschaftsteuergesetz, German Corporation Tax Act)](https://www.gesetze-im-internet.de/kstg_1977/__32a.html) is not limited to the direct effects of a hidden profit distribution taken into account at the level of a corporation. According to the decision, more far-reaching indirect consequences may also be covered if they are based on the facts that led to the recognition of a hidden profit distribution at the level of the corporation.

The proceedings concerned in particular the question of whether a hidden contribution derived from a hidden profit distribution can be taken into account as subsequent acquisition costs of a shareholding and thereby affect a liquidation loss under § 17(4) EStG (Einkommensteuergesetz, German Income Tax Act). The appeal proceedings IX R 16/25 had already been listed in October 2025 as newly pending proceedings before the BFH. In the case overview, the subject matter of the dispute was described as the request to recognize a hidden contribution as subsequent acquisition costs in the context of a liquidation loss under § 17 EStG.

The BFH set aside the judgment of the Finanzgericht des Landes Sachsen-Anhalt (Fiscal Court of the State of Saxony-Anhalt) of 06.08.2025 – 1 K 645/22 and remitted the case to the Fiscal Court for a new hearing and decision. The decision was released on 22.10.2026 as a decision intended for official publication.

## Starting Point of the Proceedings

### The Plaintiff’s Shareholdings and Loans Between the Companies

In the disputed year 2015, the plaintiff was the sole shareholder and managing director of a GmbH, referred to in the proceedings as A GmbH. He also held 50 percent of the shares in another GmbH, B GmbH.

A GmbH granted B GmbH several loans totaling EUR 485,000. These loans were to be repaid by 31.12.2007. In 2010, the two companies agreed on monthly installment payments of EUR 5,000. However, B GmbH paid only three installments totaling EUR 15,000; no further repayments were made.

### Tax Audit and Tax Treatment at A GmbH

The Finanzamt (Tax Office) carried out a tax audit at A GmbH, including for the year 2012. A GmbH lodged an objection against the tax assessments subsequently amended. During the objection proceedings, it became known that B GmbH had been deleted from the commercial register in December 2015.

In agreement with the Tax Office, A GmbH subsequently wrote off the remaining loan receivable as of 31.12.2012 due to uncollectibility, reducing its profit. Conversely, the Tax Office, likewise in agreement with A GmbH, treated the write-off as a hidden profit distribution to a person related to the plaintiff, namely B GmbH.

The Tax Office issued an amended corporation tax assessment for 2012 to A GmbH. In it, it recognized a hidden profit distribution of EUR 479,995, increasing income. This amount consisted of the defaulted loan repayment claim and costs assumed for B GmbH.

### Amendment of the 2012 Income Tax Assessment

The Tax Office also amended the plaintiff’s income tax assessment for 2012 pursuant to § 32a(1) KStG. It attributed to him a hidden profit distribution in the same amount as investment income under § 20(1) no. 1 sentence 2 EStG.

For the disputed year 2015, the plaintiff initially did not claim any loss from the liquidation of B GmbH under § 17(4) EStG in his income tax return. The income tax assessment of 26.01.2018 became final.

## Application for Amendment of the 2015 Income Tax Assessment

### Plaintiff’s Request

By letter dated 04.05.2020, the plaintiff applied for amendment of the income tax assessment for 2015. He requested recognition of a loss from the liquidation of B GmbH in the amount of EUR 479,995.

The Tax Office rejected the application by notice dated 12.05.2020. The objection lodged against this was unsuccessful; the objection decision was issued on 31.08.2022. The Tax Office took the view that, for [procedural reasons, the income tax assessment could no longer be amended](https://www.mtrlegal.com/anpassung-bestandskraeftiger-steuerbescheide-nach-aussenpruefung/).

### Decision of the Fiscal Court

The Finanzgericht des Landes Sachsen-Anhalt upheld the action. The overturned judgment of 06.08.2025 – 1 K 645/22 bore the heading “Recognition of an Increased Liquidation Loss as a Consequence of a Hidden Profit Distribution”. The Fiscal Court ordered the Tax Office, setting aside the rejection notice of 12.05.2020 and the objection decision of 31.08.2022, to amend the 2015 income tax assessment (notice of 26.01.2018). It was therefore a judgment ordering the authority to act (Verpflichtungsurteil).

In the Fiscal Court’s view, § 32a(1) sentence 1 KStG was applicable. The provision did not cover only the direct consequences of a hidden profit distribution recognized at the level of the corporation. It also encompassed consequential amendments associated with the recognition of a hidden profit distribution at shareholder level.

The Fiscal Court assumed that the hidden profit distribution at A GmbH resulted in a hidden contribution by the plaintiff to the assets of B GmbH. This hidden contribution had led to subsequent acquisition costs for the plaintiff in respect of his shareholding in B GmbH and was to be taken into account in the disputed year as part of a liquidation loss under § 17 EStG.

## Appeal Arguments of the Tax Office

### Alleged Breach of Federal Law

With its appeal on points of law, the Tax Office challenged the Fiscal Court’s decision. It alleged a breach of federal law.

In the Tax Office’s opinion, the possibility of amendment under § 32a(1) KStG is limited to consequential effects arising from a hidden profit distribution. Recognition of a liquidation loss under § 17(4) EStG was not a consequence of the hidden profit distribution to be taken into account at A GmbH, but was based on a distinct set of facts.

### Further Objections by the Tax Office

The Tax Office also argued that the Fiscal Court had wrongly assumed that discretion to amend under § 32a(1) KStG had been reduced to zero. Furthermore, the Fiscal Court had not examined whether a liquidation loss should be recognized for the disputed year at all.

The Tax Office applied for the Fiscal Court’s judgment to be set aside and the action dismissed. The plaintiff applied for the appeal to be dismissed as unfounded. He considered the Fiscal Court’s decision to be correct and pointed out that the Fiscal Court had found, without objection from the Tax Office, that the substantive requirements for a liquidation loss were met.

## BFH Decision: Set-Aside and Remittal

### Lack of Findings of Fact on the Liquidation Loss

The BFH allowed the appeal. It set aside the Fiscal Court’s judgment and remitted the case pursuant to § 126(3) sentence 1 no. 2 FGO (Finanzgerichtsordnung, German Fiscal Court Code) for a new hearing and decision.

In the BFH’s view, the Fiscal Court’s findings did not support its conclusion that a liquidation loss subject to the partial-income procedure under § 17(4) sentence 1 EStG in the amount of EUR 479,995 was to be taken into account for the plaintiff in the disputed year. In this respect, factual findings were lacking as to whether the plaintiff had incurred such a liquidation loss and, if so, in what amount.

At the same time, the BFH clarified: If the findings still to be made show that a corresponding liquidation loss must be taken into account as a matter of substantive law, the already final income tax assessment for 2015 may be amended in this respect under § 32a(1) sentence 1 KStG.

## Standards for Liquidation Gains and Liquidation Losses under § 17 EStG

### Shareholding in a Corporation

According to § 17(1) sentence 1 EStG, income from business operations also includes gains from the disposal of shares in a corporation if, within the last five years, the seller directly or indirectly held at least 1 percent of the company’s capital. Under § 17(4) sentence 1 EStG, the liquidation of a corporation is deemed equivalent to a disposal, among other things.

According to the settled case law of the BFH, these principles also apply to losses arising from the liquidation of a corporation.

### Determination of the Liquidation Gain or Liquidation Loss

Liquidation gains and liquidation losses within the meaning of § 17(4) sentence 1 EStG are to be determined according to the principles of § 17(2) EStG. Accordingly, a liquidation gain exists to the extent that the fair market value of the assets of the corporation allocated or repaid to the taxpayer, after deduction of the related costs, exceeds the acquisition costs.

Hidden contributions by the shareholder may be taken into account as subsequent acquisition costs of the shareholding. In this context, the BFH refers to § 17(2a) sentence 3 no. 1 EStG.

### Time of Loss Realization

For the realization of a liquidation gain or liquidation loss, the relevant time is when the gain or loss would have been realized in determining profit by comparing business assets under § 4(1), § 5 EStG, observing the principles of proper accounting under commercial law.

A gain is to be recognized only in the year in which the company assets attributable to the shareholding were distributed. A loss may already be taken into account in the year in which no material change in the already established loss is to be expected.

A liquidation loss is established when, in particular, the following points are established:

- the fair market value of the assets allocated or repaid to the taxpayer,
- the liquidation costs,
- the shareholder’s acquisition costs,
- or reliable knowledge that an allocation or repayment of company assets to the shareholders is excluded,
- as well as the expenses caused by the shareholding.

## Why the Fiscal Court’s Findings Were Insufficient

### Hidden Contribution Not Sufficiently Established

The BFH objected that the Fiscal Court had not sufficiently established whether the plaintiff had in fact made a hidden contribution in the amount of EUR 479,995 to the assets of B GmbH, which could have formed part of a liquidation loss under § 17(4) sentence 1 EStG in the disputed year.

The Fiscal Court had essentially derived its assumption from the fact that A GmbH had written off its loan receivable from B GmbH as of 31.12.2012 due to uncollectibility. This had been accompanied by a hidden profit distribution by A GmbH to the plaintiff, which had at the same time been used for a hidden contribution to the assets of B GmbH.

The BFH confirmed the legal starting point that the granting of an advantage between sister companies may constitute a hidden profit distribution by the granting company to the common shareholder. At the same time, it may be assessed as a hidden contribution by that shareholder to the assets of the benefited sister company.

### Required Examination of a Waiver of Claim

In the BFH’s view, however, the Fiscal Court had not examined whether any benefit to assets caused by the corporate relationship had actually been granted to B GmbH. The Fiscal Court’s reasoning was limited to stating that A GmbH had written off its loan repayment claim through profit and loss due to uncollectibility.

The judgment did not indicate whether this write-off was based on an express or at least implied waiver by A GmbH of its claim. According to the BFH, only such a waiver at the level of B GmbH could have led to a corresponding profit-affecting derecognition of the recognized liability and, in principle, to a hidden contribution by the plaintiff.

### Recoverability of the Claim as a Further Open Point

Even if A GmbH had waived the claim, the BFH considered that findings were lacking as to the recoverability of the claim at the time of the waiver.

A hidden contribution consisting of a waiver of claim is not to be recognized at the nominal value of the claim, nor at the amount recognized as a liability. Rather, the relevant value is the going-concern value. A claim that is entirely irrecoverable from the company does not give rise to acquisition costs of the shareholder for the shareholding in the event of a waiver caused by the corporate relationship.

The BFH expressly clarified that mutually agreed treatment as a hidden profit distribution in the relationship between A GmbH and the plaintiff in the amount of EUR 479,995 does not change this. A hidden profit distribution and a hidden contribution need not correspond in value.

### Allocation to the Disputed Year 2015

If there had been a loan waiver caused by the corporate relationship and if the claim against B GmbH had still been at least partially recoverable at the time of the waiver, further findings were lacking in the BFH’s view. The Fiscal Court must plausibly establish why a liquidation loss under § 17(4) sentence 1 EStG, of which a hidden contribution would form part, would be attributable specifically to the disputed year 2015.

The BFH did not regard these missing findings as a merely waivable procedural defect. If the legal conclusions of a judgment are not supported by corresponding factual findings, the judgment contains a substantive defect.

## Scope of § 32a(1) Sentence 1 KStG

### Possibility of Amendment in the Case of a Hidden Profit Distribution

Under § 32a(1) sentence 1 KStG, a tax assessment or assessment notice may be issued, set aside or amended in relation to the shareholder to whom the hidden profit distribution is attributable, or in relation to a person related to that shareholder, insofar as a tax assessment is issued, set aside or amended in relation to a corporation with regard to the recognition of a hidden profit distribution.

The provision is intended to ensure procedurally that a hidden profit distribution recognized at the level of the corporation can also be taken into account at the level of the shareholder. This may be of particular importance even though the shareholder’s tax assessment is already final.

According to the case law of the BFH, however, § 32a KStG does not create a comprehensive substantive binding effect between the corporate and shareholder levels. Whether and in what amount a hidden profit distribution exists must be examined separately at both levels.

### Meaning of the Word “Insofar”

The BFH emphasizes that the power to amend under § 32a(1) sentence 1 KStG is limited to the facts that led to the issuance or amendment of the tax assessment at the level of the corporation. However, this does not necessarily result in a quantitative limitation of the scope of amendment.

It was disputed whether the provision covers only the direct implementation of a hidden profit distribution at shareholder level, in particular the recognition of investment income under § 20(1) no. 1 sentence 2 EStG. It also had to be clarified whether indirect consequences may also be included, for example where the benefit from a hidden profit distribution is used in a way relevant to income, or at the same time constitutes a hidden contribution to another corporation.

### Broad Scope of Application According to the BFH

The IX Senate of the BFH supports a broad scope of application for § 32a(1) KStG. The wording of the provision already indicates that indirect consequential amendments should be included. The power to amend is linked to the facts established at the level of the corporation regarding the hidden profit distribution and covers the tax consequences at the level of the shareholder or a related person insofar as they are connected with those facts.

This will often be the recognition of investment income under § 20(1) no. 1 sentence 2 EStG. According to the decision, however, further effects may also be covered if their legal basis lies in the recognition of the hidden profit distribution at the level of the corporation.

The BFH also bases this result on the system, purpose and objective of the provision. § 32a KStG is intended to procedurally enable corresponding tax recognition of the facts of a hidden profit distribution or hidden contribution at the levels involved. In the BFH’s view, the effects of a hidden profit distribution do not always end with the recognition of investment income.

## Triangular Structures Between Sister Companies

### Granting of an Advantage to a Related Company

The decision is particularly significant for so-called triangular structures. This refers to cases in which one corporation grants an advantage to another corporation and both companies are connected through a common shareholder.

In such a structure, the benefited company may be a person related to the shareholder. From the shareholder’s perspective, the transfer of value mediated through the granting company may be treated as if it were the shareholder’s own contribution to the benefited company.

### Hidden Contribution as Subsequent Acquisition Costs

A hidden contribution to the assets of the benefited company may trigger subsequent acquisition costs for the shareholder in respect of his shareholding. These acquisition costs may in turn become relevant in a later disposal or liquidation of the shareholding under § 17 EStG.

However, the BFH emphasizes that this does not replace the substantive legal requirements. It must be established whether a hidden contribution actually exists, what its value is and whether it is to be taken into account in the relevant assessment period as part of a liquidation loss.

## Exercise of Discretion under § 32a KStG

### Regular Reduction of Discretion to Zero in the Case of a Substantively Incorrect Assessment

§ 32a(1) sentence 1 KStG uses the word “may”. This initially suggests a discretionary decision by the tax authority. However, the BFH points out that in cases under § 32a KStG, discretion is generally reduced to zero if the tax assessment for the shareholder would be substantively incorrect without amendment.

In such a situation, any decision other than amending the incorrect tax assessment would have to be regarded as an abuse of discretion. Whether these requirements are met in the specific dispute depends, after remittal, on the findings still to be made by the Fiscal Court.

## Outcome and Significance of the Decision

### No Final Recognition of the Claimed Loss

The BFH has not made a final decision that a liquidation loss in the amount of EUR 479,995 is to be recognized for the plaintiff in the disputed year 2015. Rather, it set aside the Fiscal Court’s judgment because the necessary findings of fact were lacking.

Following remittal, the Fiscal Court must clarify in particular:

- whether the write-off of the loan receivable was based on an express or implied waiver of claim,
- whether such a waiver was caused by the corporate relationship,
- to what extent the loan receivable was still recoverable at the time of a waiver,
- whether and in what amount this resulted in a hidden contribution by the plaintiff to the assets of B GmbH,
- whether a resulting liquidation loss under § 17(4) sentence 1 EStG is to be taken into account specifically in the disputed year 2015.

### Clarification Regarding the Amendment Provision

The key statement of the decision lies in the scope of § 32a(1) sentence 1 KStG. According to the BFH, the possibility of amendment is not limited to direct consequences of the hidden profit distribution. Indirect consequences may also be covered if they are based on the facts that led to the recognition of the hidden profit distribution at the level of the corporation.

The BFH thereby provides important procedural clarification for cases in which hidden profit distributions, hidden contributions and shareholding losses under § 17 EStG are interconnected. At the same time, the decision makes clear that the procedural possibility of amendment does not replace the examination of the substantive legal requirements.

## Assessment for Shareholders, Companies and High-Net-Worth Individuals

The decision IX R 16/25 concerns an interface between corporation tax, income tax and procedural law. It shows that, in the case of affiliated companies, tax events may interact at several levels without this automatically resulting in a particular loss recognition. The decisive factors remain the specific transfer of assets, the recoverability of the claim concerned and the temporal allocation of the possible liquidation loss.

For shareholders, corporate groups, investors and high-net-worth individuals, comparable structures may have significant tax implications. MTR Legal Rechtsanwälte advises on issues relating to the taxation of companies, shareholdings and shareholders as well as procedural questions in tax law. Further information can be found at [Legal advice in tax law](https://www.mtrlegal.com/rechtsberatung/steuerrecht/).