In its judgment of 1 October 2024 (Az. (case no.) VIII R 4/21), the Bundesfinanzhof (BFH, Federal Fiscal Court) had to consider the circumstances under which a shareholder’s private use of real estate owned by a corporation constitutes a hidden profit distribution (verdeckte Gewinnausschüttung, vGA).
Shareholdings and use of the property
The legal dispute was based on the following facts:
The claimants were married to each other and were jointly assessed for income tax in the tax years at issue, 2010 to 2012. Until 2007, they lived in Spain with their children. There, they occupied a property consisting of three sections of a building. While one section was owned by the husband, the other two sections were owned by two Spanish corporations. The spouses each held a 50% interest in both companies.
The spouses initially paid monthly rent for the use of the company-owned properties. In 2007, they relocated their residence to Germany and stopped making rental payments.
Following their departure, the property was to be sold. The claimants stated that they had visited the property only occasionally to prepare it for viewings and monitor its condition. They maintained that it was no longer used for private purposes.
The property was ultimately sold in 2013.
Tax assessment by the Finanzamt
The Finanzamt (German Tax Office) took the view that the property had remained available to the claimants for private use even after their departure. It therefore assumed a hidden profit distribution and assessed corresponding amounts for the years 2010 to 2012. This amount was based on assumed arm’s-length rent of EUR 3,500 per month.
The Hessisches Finanzgericht (Fiscal Court of Hesse) upheld the finding of a hidden profit distribution in principle and largely dismissed the action in its judgment of 14 December 2020 (Az. (case no.) 9 K 1266/17). The claimants appealed this decision to the BFH on points of law.
BFH: Mere possibility of use does not constitute a vGA
The BFH allowed the claimants’ appeal and set aside the judgment of the Hessisches Finanzgericht. The case was remitted to the Finanzgericht for a new hearing and decision.
As a matter of substantive law, the BFH clarified that the mere factual possibility for a shareholder to use privately a property owned by their corporation does not, in itself, constitute a hidden profit distribution.
Rather, a vGA can only be assumed if the shareholder has actually received a corresponding financial benefit.
Two possible scenarios constituting a vGA
The BFH distinguished between two scenarios:
First, a vGA may arise if the corporation makes a property available to its shareholder for private use free of charge or at a reduced rate. In this case, the benefit already consists of the right of use granted. Actual use by the shareholder is not required.
Second, a vGA may also arise if the shareholder actually uses a property for private purposes without a corresponding use agreement or in breach of an existing prohibition on use. In that case, the decisive factor is the actual private use.
Since the Finanzgericht had not given sufficient consideration to this distinction and had not made adequate findings regarding actual use, the BFH was unable to determine conclusively whether a vGA existed in the case at issue.
Requirements for a hidden profit distribution
The BFH’s decision is based primarily on the requirements for a hidden profit distribution under § 20 Abs. 1 Nr. 1 Satz 2 EStG (German Income Tax Act).
A hidden profit distribution (vGA) arises where a corporation confers a financial benefit on its shareholder outside the distribution of profits provided for under company law and that benefit is attributable to the corporate relationship. The benefit is therefore not granted to the shareholder by way of an openly declared profit distribution.
The assessment is based on the arm’s-length principle. The decisive question is whether a prudent and conscientious managing director would also have granted a corresponding benefit to a non-shareholder under otherwise identical circumstances. If this would not have been the case, this indicates that the benefit was attributable to the corporate relationship.
Distinguishing between the possibility of use and actual use
The BFH first clarified that the mere ability to access a business asset does not automatically constitute an economic benefit. The fact that the claimants, as shareholders, had access to the properties at any time and could theoretically also have used them privately was not sufficient to establish a vGA.
The situation is different if the company expressly or implicitly permits the shareholder to use the property privately. In that case, the financial benefit already consists of the right of use granted.
In this respect, the BFH referred to its earlier case law concerning the provision of a Spanish holiday property free of charge (BFH, judgment of 12 June 2013 – Az. (case no.) I R 109-111/10). According to that case law, the permanent grant of a right of use free of charge may itself constitute a hidden profit distribution (vGA). The extent to which the property is actually used is not decisive. Rather, the decisive factor is that it is made available for use on a permanent basis without appropriate consideration.
The BFH also emphasised that unauthorised private use by the shareholder may also trigger a hidden profit distribution (vGA). This applies where the shareholder uses a property privately without a corresponding use agreement or in breach of an existing prohibition on use. In that case, the shareholder obtains a benefit at the company’s expense without any valid basis for doing so in their relationship with the company.
MTR Legal Rechtsanwälte advises on the tax treatment of hidden profit distributions.
Requirements for establishing the facts
There were insufficient factual findings in the specific case. In particular, the Finanzgericht had not adequately examined whether the claimants had actually used the property for private purposes.
In the second round of proceedings, the Finanzgericht must therefore examine, among other things, the size, location and features of the property, as well as its furnishings and habitability. The duration of the stays and the respective reasons for them must also be taken into account.
Possible evidence may include, for example:
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Flight tickets
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Photographs
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Sales documentation
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Utility bills
Valuation of a potential hidden profit distribution
The BFH also established principles for valuing any vGA that may be found to exist:
Where a right of use is granted on a permanent basis, the relevant amount is generally the cost-based rent, including an appropriate return on capital and an appropriate profit mark-up.
By contrast, where actual use is limited to individual days, the fair market value of the benefit, including an appropriate profit mark-up, must generally be applied.
By comparison, the annual amount assessed by the Finanzamt in the case at issue was based on assumed arm’s-length rent for the entire year.
Significance for tax practice
The BFH judgment of 1 October 2024 clarifies the requirements for a hidden profit distribution where shareholders privately use business properties.
Of particular importance is the distinction between the mere factual possibility of use, a right of use granted by the company and actual unauthorised use by the shareholder.
A vGA does not arise merely because a shareholder could theoretically access a property owned by their company at any time. Rather, the company must either have granted a corresponding right of use or actual private use must be established.
Consequences for shareholders and corporations
For tax practice, this means that the specific arrangements governing the use of real estate owned by corporations should be carefully documented. In particular, stays for business or company-related purposes should be clearly distinguished from private stays.
The judgment therefore strengthens the position of shareholders by countering any blanket assumption of a vGA based solely on the theoretical possibility of private use. At the same time, it makes clear that actual private use may have tax consequences even without express permission.
Context and scope of the BFH judgment
The judgment should not be understood to mean that the private use of company-owned real estate will generally be unobjectionable for tax purposes in the future as long as there is no express use agreement.
Rather, the BFH clarified the conditions under which an economic benefit for the shareholder may be assumed.
The tax authorities must therefore distinguish between whether a right of use was actually granted and whether there was merely an opportunity to use a property without authorisation.
This distinction is also relevant to determining and valuing a vGA. A permanently granted right of use may have a different economic value from a single, time-limited instance of private use.
Furthermore, the tax assessment must take account of the actual circumstances. A property that can be shown to have been offered for sale and was entered only for necessary inspections and viewings cannot be equated, without further examination, with a holiday property used permanently for private purposes.
In practice, this means that neither the company’s ownership of the property nor the shareholders’ interests in the company are sufficient on their own to establish a vGA.
Nevertheless, the separation under company law between the company and its shareholder remains decisive. Anyone who uses company assets for private purposes must generally expect the use to be treated for tax purposes as the conferral of a benefit if no appropriate consideration is provided.
Conclusion: BFH requires specific findings on private property use
In its judgment of 1 October 2024 (Az. VIII R 4/21), the BFH further clarified the requirements for a hidden profit distribution arising from the private use of company-owned real estate.
The central finding of the decision is that the mere theoretical possibility for a shareholder to use privately a property owned by their corporation does not yet constitute a financial benefit relevant for tax purposes.
Rather, a vGA may arise if the company has actually granted the shareholder the right to use the property privately or if the shareholder uses the property for private purposes without authorisation.
A careful examination of the actual use arrangements is therefore required for the tax assessment. In particular, a distinction must be drawn between permanently granted rights of use, unauthorised private stays and visits for company-related purposes.
The valuation of a potential vGA must also be based on the specific circumstances. A permanent grant of a right of use cannot simply be equated with private use limited to individual days.
The judgment therefore increases legal certainty for shareholders and corporations. It prevents a hidden profit distribution from being inferred indiscriminately solely from an interest in a company and the theoretical ability to access its real estate assets.
At the same time, the BFH underscores the importance of proper documentation and clear arrangements governing use. Companies and shareholders should therefore ensure at an early stage that private use can be clearly distinguished from use for company-related purposes.
Frequently asked questions (FAQ)
When does the private use of company-owned real estate constitute a hidden profit distribution?
A hidden profit distribution arises in particular where a corporation makes a property available to its shareholder for private use free of charge or at a reduced rate. It may also arise if the shareholder uses the property privately without authorisation and without a corresponding use agreement.
Is the mere possibility of private property use sufficient to constitute a vGA?
No. According to the BFH judgment of 1 October 2024 (VIII R 4/21), the mere factual possibility of accessing and privately using a company-owned property does not constitute a hidden profit distribution. The company must additionally have granted a right of use, or actual private use must have occurred.
Must the property actually be used privately for a vGA to arise?
No. If the company has granted the shareholder the right to use the property privately free of charge or at a reduced rate, the tax benefit already consists of the grant of that right of use. Actual use is then not required.
How is a hidden profit distribution arising from property use valued?
Where a right of use is granted on a permanent basis, the cost-based rent, including an appropriate return on capital and an appropriate profit mark-up, must generally be applied. Where actual use is limited to individual days, the fair market value of the use, plus an appropriate profit mark-up, is generally decisive.
Can visits to company-owned real estate for professional or company-related reasons trigger a vGA?
Not every stay by a shareholder in company-owned real estate automatically constitutes private use.
Visits undertaken, for example, to inspect the condition of the building, coordinate contractors, perform maintenance or prepare a sale may be attributable to company-related purposes.
The specific circumstances of the individual case are decisive. The relevant activities should therefore be documented in a verifiable manner so that they can subsequently be distinguished from private stays.
What is the significance of the judgment for holiday properties owned by a GmbH?
The judgment is particularly relevant to companies that hold holiday homes or other residential properties that could, in principle, also be used by their shareholders.
If such a property is made permanently available to the shareholders for private use, the right of use granted may itself constitute a vGA. Actual use is then not required.
By contrast, if there is no corresponding use agreement and the property is not actually used privately, the mere theoretical possibility of access is generally insufficient.
How can shareholders avoid an unjustified finding of a vGA?
Shareholders should document the actual use arrangements in a verifiable manner. In particular, private stays should be distinguished from stays for business or company-related purposes.
Efforts to sell the property, viewing appointments and necessary inspection visits should, for example, be documented by estate agency agreements, emails, travel documents, photographs and other suitable evidence.
It is also advisable to establish clear rules governing rights of use. If private use is to be excluded, this should not only be documented in writing but also implemented in practice.
What happens if a property remains owned by the company after the shareholders move away?
A shareholder’s departure does not automatically terminate a previously existing grant of a right of use. Rather, the decisive question is whether the possibility of private use continues to exist and is granted by the company.
If the property is retained exclusively for sale after the shareholders move away, it must be examined whether the shareholders still actually have a right to use it privately or whether their stays are exclusively attributable to company-related purposes.
The BFH judgment makes clear that this question must be answered on the basis of the specific factual circumstances.
Can a vGA arise even if the company has not entered into an express use agreement?
Yes. A hidden profit distribution may also exist without an express written agreement.
A right of use may, for example, be granted implicitly if the company actually permits or tolerates the shareholder’s private use over an extended period.
Furthermore, a vGA may arise if the shareholder uses the property privately without authorisation. In that case, the decisive factor is the actual use of the company’s assets.
How can shareholders avoid an unjustified finding of a vGA?
Shareholders should document the actual use arrangements in a verifiable manner. In particular, private stays should be distinguished from stays for business or company-related purposes. Efforts to sell the property, viewing appointments and necessary inspection visits should, for example, be documented by estate agency agreements, emails, travel documents and other suitable evidence.
MTR Legal Rechtsanwälte advises companies, investors and high-net-worth private individuals on matters of tax law and related areas of commercial law. Further information is available under Tax law advice.
