„Hidden dividend” distributions

What’s going to change?

As of January 1, 2023, taxpayers may be required to exclude certain payments made to a shareholder or related party from tax deductible costs to the extent they constitute a hidden dividend.  

What is a hidden dividend? 

Under the current regulations, costs may be considered a “hidden dividend” if: 

1. the amount or timing of the payment is based on the taxpayer making a profit or the amount of that profit, or  
2. a “reasonable taxpayer” would not have incurred, or could have incurred, a lower cost if a comparable benefit had been provided by an unrelated party, or  
3. the costs include consideration for the right to use assets that were owned or co-owned by the partner (shareholder) or an entity related to the partner (shareholder) prior to the formation of the taxpayer 

At the same time, the restrictions resulting from point 2 and 3 are not to apply if the sum of the costs incurred in the tax year by the taxpayer, which constitute a hidden dividend under these provisions, is lower than the amount of gross profit, within the meaning of the accounting regulations, obtained in the tax year in which these costs were included in the financial result of the taxpayer. 

What does this mean?

Although the entry into force of the so-called “hidden dividend” provisions has been postponed until 1 January 2023, taxpayers should already today bear in mind the shape of current and planned agreements concluded within the group, including in particular with shareholders/partners, as well as the nature of the resulting payments.

Costs of „hidden” dividend are not tax deductible:

1. Amount / timing of payment is correlated with profit, or
2. a “reasonable taxpayer” would not incur the cost or would incur it in a lower value if a similar payment is made to a non-related party, or
3. the costs include remuneration for the right to use assets that were owned or co-owned by the shareholder (related party) prior to the formation of the taxpayer.

BUT: Item 2. and 3. does not apply when sum of costs, which under those rules are hidden dividend and were incurred by the taxpayer, does not exceed gross profit, earned-out in the financial year in which those costs were included in taxpayer’s financial result.