039. Constructive Dividends - So What?

KPMG Germany Webpage
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The avoidance of constructive dividends can be of great importance under the German imputational system of corporation tax. The corporate tax system is often not well understood by foreign managers, and German tax advisers frequently find it difficult to explain even in their own language, much less in a foreign one. Obviously, income will be increased for tax purposes when a payment which has been accounted for as a deductible expense turns out to be a constructive dividend. The increase applies both to the trade tax on earnings and to the corporation tax. It is also clear that, aside from criminal sanctions for intentional or reckless conduct (sec. 370, 378 AO), there are no penalties under German law by reason of the underpayment of taxes which occurs until the constructive dividend is determined and corrected. Interest accrues