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Sec. 8 para. 3 Sentence 2 of the Corporation Tax Code stipulates that hidden profit distribution shall not reduce the income of a corporation. The regulation itself does not provide any further explanation.

Thus, definition and further requirements for the interpretation of a hidden profit distribution was defined by judgements of the Federal Tax Court: a hidden profit distribution consists of (i) a decrease of a corporation’s assets or a prevention of the increase of a corporation’s assets caused (ii) by the corporation-shareholder relationship which (iii) reduced the income of the corporation and (iv) was not based on a regular profit resolution under company law.

A hidden profit distribution also serves to adjust the allocation of the profit to the shareholder as well as to the company in cross-border situations and is intended to prevent a shift of the profit from the company to the shareholder. Whether a hidden profit distribution exists and, if so, to what extent, is to be assessed on the basis of an objective disproportion between performance and consideration.