Constructive dividends (verdeckte Gewinnausschüttungen)

Constructive dividends result
in increased taxable income either through the disallowance of a
tax deduction claimed (e. G. Excessive service fees paid to a re-
lated person) or an increase in an income item (e. G. Below-mar-
ket interest rate charged on a loan to a related person).
Constructive dividends are, in general, taxed the same way as
declared distributions. Hence, constructive dividends received
by a corporation are in effect 95% tax-exempt.

An exception to this basic rule – the congruency principle – was introduced into
German tax law in 2007. Under the congruency principle, the
95% tax exemption on dividends received is limited to dividends
that have not reduced the taxable income of the distributing
corporation.

This means that a constructive dividend that is
deducted as a business expense at the level of the distributing
corporation will not be tax-exempt in the hands of a recipient
corporation.