What are the payroll tax consequences of a corporate tax option?

Starting in 2022, commercial partnerships and partnership companies can opt for an irrevocable application for the corporate tax. They will then be treated like a corporation for the purposes of income taxation, and their shareholders like the non-personally liable shareholders in a corporation. The Federal Financial Ministry has put out a statement regarding the payroll tax consequences of the new legal situation for shareholders with respect to their work for the company.

Income which the shareholders receive from the company for their activities on behalf of it will be considered wages. This is even the case if the shareholders receive the income from a third party. Work is considered to be “in the service” of the company if equivalent activity by a shareholder in a corporation would be considered wages. In this respect, it is necessary that

• there is an employment relationship for payroll tax purposes, for instance confirmed by a formal employment contract, and
• payments from the company are made to the shareholder on the basis of this employment relationship.

In order for the income to qualify as wages, it must be considered as the result of the employment relationship. If there is no employment relationship for payroll tax purposes, then no wages are considered received. In place of compensation for the activities of the shareholder, the corporate law regulation can also provide for interim profits. This, then, is not a payment under an employment relationship subject to payroll tax, but rather a profit distribution.

If the income which the shareholder receives from the company for their activities on behalf of it is not reasonable, then the amount exceeding the reasonable threshold will be considered covert profit distributions. In the relationship between the company and controlling shareholder, income is generally also considered to be the result of the corporate relationship if

• there is no clear, unambiguous agreement concluded in advance and effective under civil law regarding whether and to what extent compensation is to be paid for the work of the shareholder, or
• the parties are not proceeding according to a clear agreement.

If the income which the shareholder receives for their activities in the service of the company is considered wages under tax law, then the opting company is considered an employer under payroll tax law, and the shareholder as an employee. In such cases, all regulations for collecting payroll tax must be applied. The opting company must, above all,

• maintain a payroll account for the shareholder,
• take a payroll tax deduction from the compensation, and
• submit a payroll tax statement for each payroll tax reporting period, in consideration of the payroll tax deduction, for their other employees.

Note: In addition, the employer flat rate and the tax exemption regulations applicable to employees, along with other (special) tax regulations must be taken into account.