015. Retroactive Reversal of Constructive Dividends - Draft 1996 Tax Reform Act

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Included in the Draft 1996 Tax Act published by the German Government on 31 March 1995 is a provision permitting the retroactive reversal of constructive dividend distributions under certain circumstances. Following please find a short description of the problem of hidden dividend distributions in general and the most important facts to be taken into account if hidden dividend distribution treatment is to be retroactively avoided.

Under German corporate tax law, an agreement between a corporation and its shareholder or related parties which is not at arm's length, and is disadvantageous for the German corporation, results not only in an increase in the taxable income of the German corporation, but also in a constructive dividend distribution made by the German corporation to its shareholder. This procedure is best illustrated