Bonus of the GmbH Managing Director: Tax Regulations and Practical Examples

Introduction

The bonus is a variable compensation component that offers GmbH managing directors an attractive way to participate in the company's success. At the same time, the bonus raises many questions regarding tax treatment. It is important for both the GmbH and the managing director to understand the relevant regulations and structure the bonus agreement to avoid tax pitfalls. This article provides an overview of the basics of bonuses, examines the tax aspects, and illustrates what is important in structuring them with practical examples.

A bonus is a performance-based compensation paid in addition to the fixed salary to a GmbH managing director. Unlike the fixed base salary, which is paid regardless of the company's success, the bonus is directly linked to certain performance indicators.

Characteristics of the Bonus:

Performance-based: The bonus is only paid if certain predefined performance targets are achieved.
Incentive function: By directly linking to the company's success, the bonus is intended to serve as a performance incentive for the managing director.
Retroactive: The bonus is typically calculated and paid after the fiscal year ends and the financial statements are prepared.
Variable nature: The amount of the bonus can vary depending on the business performance—from zero to significant amounts.
Voluntary vs. Entitlement: Depending on the contractual arrangement, the bonus can be structured as a voluntary benefit or as a firmly agreed entitlement.

Types of Bonuses

In practice, various types of bonuses have emerged, differing in terms of the assessment basis and the definition of target parameters:

Contractually fixed bonuses: Here, the framework conditions for the bonus, such as target sizes, assessment bases, and percentages, are fixed in advance in the managing director's employment contract. This creates planning security for both parties.
Discretionary bonuses: In this variant, the shareholders' meeting decides on the amount of the bonus after the fiscal year ends. Thus, there is no predefined entitlement for the managing director. Discretionary bonuses offer more flexibility but also carry a certain potential for conflict.
"Goodwill" premiums: These are one-time special payments granted upon reaching certain milestones or extraordinary achievements, such as the successful integration of an acquired company.
Combinations and hybrid models: In practice, mixed forms are often found, where part of the bonus is contractually fixed and another part is determined at discretion or various target parameters are combined.

Calculation of the Bonus

Two aspects are crucial for calculating the bonus: the choice of the assessment basis and the determination of the percentage share the managing director receives. Common assessment bases include indicators such as net income, EBIT, or specific sales or profit targets. A combination of several reference sizes is also conceivable.

The percentage share of the managing director in the respective reference size is individually determined and depends on various factors such as the industry, company size, and the managing director's area of responsibility. Values between 1% and 5% are common, and in some cases, even higher.

A simplified example: Suppose the GmbH achieves a net income of 500,000 EUR. The managing director's employment contract stipulates a bonus of 2% of the net income. In this case, the bonus amounts to 10,000 EUR.

Tax Aspects of the Bonus

From a tax perspective, two dimensions must be considered for the bonus: the treatment for the managing director and the GmbH.

For the managing director, the bonus constitutes taxable wages subject to income tax in the year of receipt. It is important to note that the bonus may also be subject to social security contributions if the annual income threshold is exceeded.

At the GmbH level, the question of deductibility as a business expense arises. In principle, bonuses are deductible as long as they are reasonable. Excessively high bonuses, however, can be classified as so-called hidden profit distributions (vGA), which means they do not reduce the GmbH's taxable profit.

To avoid a vGA, the bonus must be effectively agreed upon in advance under civil law and withstand an arm's length comparison, i.e., an unrelated managing director would have received a similar compensation. Additionally, the total compensation of the managing director must not be disproportionate to the company's performance. As a rule of thumb, the total remuneration of a managing director should not exceed 75% of the profit before taxes and bonuses.

Structuring Bonus Agreements

To make an effective and tax-optimal bonus agreement, several points should be considered:

Clear definition of target parameters and assessment bases in advance
Alignment with common market practices regarding the bonus amount
Use of precise and legally secure formulations in the contract
Obtaining tax and legal advice

Especially for more complex agreements with multiple target sizes, it is advisable to rely on proven model agreements and adapt them to individual needs. Professional support from tax advisors and lawyers can help minimize tax risks and optimally balance the interests of both parties.

Target Agreements and Bonuses

The effectiveness of a bonus agreement depends crucially on the quality of the underlying target parameters. It makes sense to orient the target definition to the so-called SMART formula. SMART stands for:

Specific: The goals should be clearly defined and unambiguously formulated.
Measurable: The achievement of the goals must be verifiable based on objective criteria.
Achievable: The goals must be ambitious but realistic.
Relevant: The goals should align with the strategic objectives of the company.
Time-bound: A clear timeframe for achieving the goals must be defined.

An example of a SMART-formulated target would be: "Increase sales in product segment X by 10% compared to the previous year by December 31."

The more specific and verifiable the goals are defined, the easier it is to determine goal achievement later, and the lower the potential for conflict between the company and the managing director.

Practical Examples and Case Studies

Finally, some practical examples illustrate how bonus agreements can be structured in different companies:

Example 1: Trading company with a simple bonus clause

A-GmbH, a medium-sized wholesaler, agrees with its managing director on a bonus of 3% of net income. No further target parameters are defined. The bonus agreement creates an incentive for profitable growth but is still not very specific.
Example 2: Technology startup with combined target sizes

B-GmbH, a young software company, sets a multi-tiered bonus for its managing director. 50% of the bonus is tied to achieving certain milestones in product development, 30% to customer growth, and 20% to adherence to the financial plan. By combining various control sizes, different company goals are addressed.
Example 3: Media company with discretionary bonus

C-GmbH, a traditional newspaper publisher, agrees with its managing director on a base bonus of 2% of EBIT. Additionally, the supervisory board can set a discretionary special bonus of up to 50,000 EUR if special strategic goals are achieved, such as establishing new digital formats. The discretionary bonus provides flexibility for goals that are difficult to quantify in advance.

In practice, it becomes clear that there is no perfect model, but that the bonus agreement must be tailored individually to the needs and goals of the respective company. It is important that the target sizes are meaningful and the compensation rules are clearly defined. Additionally, the bonus agreement should be regularly reviewed and adjusted if necessary.

The 75/25 Rule in Bonuses – Explanation and Examples

What is the 75/25 Rule?

The so-called 75/25 rule is a rule of thumb developed by tax authorities and case law to assess the appropriateness of managing director compensation, especially for shareholder-managing directors. According to this rule, the total compensation of the managing director (fixed salary plus bonus) should not exceed 75% of the profit before taxes and before deducting the managing director's compensation. In other words, at least 25% of the earned profit should remain with the company.

The 75/25 rule serves primarily as an indicator when examining whether a hidden profit distribution (vGA) exists. If the threshold is exceeded, it indicates that the compensation may no longer withstand an arm's length comparison and may be partially motivated by the shareholder relationship.

Practical Examples of the 75/25 Rule:

Example 1: Compliance with the 75/25 Rule

XYZ-GmbH generates a profit before taxes and before deducting the managing director's compensation of 400,000 EUR in the fiscal year 2024. The shareholder-managing director receives a fixed salary of 120,000 EUR and a bonus of 60,000 EUR, totaling 180,000 EUR.

Calculation:

Total compensation of the managing director: 180,000 EUR
Maximum allowable compensation according to the 75/25 rule: 400,000 EUR × 75% = 300,000 EUR
Actual share of compensation in profit: 180,000 EUR / 400,000 EUR = 45%

Conclusion: The compensation, at 45%, is well below the critical threshold of 75%. The 75/25 rule is complied with, and there is no risk of a hidden profit distribution.

Example 2: Exceeding the 75/25 Rule

ABC-GmbH generates a profit before taxes and before deducting the managing director's compensation of 200,000 EUR in the fiscal year 2024. The shareholder-managing director receives a fixed salary of 120,000 EUR and a bonus of 80,000 EUR, totaling 200,000 EUR.

Calculation:

Total compensation of the managing director: 200,000 EUR
Maximum allowable compensation according to the 75/25 rule: 200,000 EUR × 75% = 150,000 EUR
Actual share of compensation in profit: 200,000 EUR / 200,000 EUR = 100%

Conclusion: The compensation, at 100%, is well above the critical threshold of 75%. There is an increased risk that the tax office will treat part of the compensation (namely 50,000 EUR) as a hidden profit distribution.

Example 3: Structuring Option with Bonus Reservation

To minimize the risk of a hidden profit distribution, ABC-GmbH from Example 2 could introduce a bonus arrangement with a reservation:

"The shareholder-managing director receives a bonus of 40% of the net income before taxes and before the bonus, but no more than such that the total compensation (fixed salary plus bonus) does not exceed 75% of the net income before taxes and before the bonus."

With a profit of 200,000 EUR and a fixed salary of 120,000 EUR, the bonus would then automatically be limited to 30,000 EUR:

Maximum total compensation: 200,000 EUR × 75% = 150,000 EUR
Fixed salary: 120,000 EUR
Remaining room for bonus: 150,000 EUR - 120,000 EUR = 30,000 EUR

Important Notes on the 75/25 Rule:

No legal anchoring: The 75/25 rule is not a legally established norm but merely a guideline developed by case law and tax authorities.
Individual case consideration: Whether a hidden profit distribution exists depends on numerous other factors, such as industry standards, company size, the managing director's area of responsibility, etc.
Documentation: To ensure tax recognition of the bonus, good documentation of the appropriateness is important, e.g., through salary comparison studies or benchmarks.
Structuring options: Exceeding the 75/25 rule can be avoided through various arrangements, such as bonus reservations, multi-tier bonuses, or spreading the bonus over several years.
Dominant shareholder-managing directors: Special caution is required for dominant shareholder-managing directors (ownership > 50%), as the requirements for the appropriateness and arm's length nature of the compensation are particularly strictly examined.

The 75/25 rule thus provides a practical guideline for the tax-optimal structuring of bonus agreements and helps minimize the risk of a hidden profit distribution. However, individual tax advice is recommended in any case to adequately consider the specific situation of the company and the managing director.

Conclusion

The bonus is an effective tool to involve managing directors in the success of the GmbH and set performance incentives. However, when structuring it, several legal and especially tax aspects must be considered to avoid risks such as a hidden profit distribution. Careful contract drafting based on clearly defined target parameters is essential.

Shareholders and managing directors should take sufficient time to develop an individually suitable bonus arrangement and also seek tax and legal advice. With a well-thought-out and precisely formulated bonus agreement, nothing stands in the way of a motivating and goal-oriented compensation system.

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