If you are your own boss, can you also set your own salary? Not quite. Since the managing director’s salary reduces taxable profits as a business expense, tax authorities check particularly carefully whether the remuneration is “arm’s length” in the case of shareholder-managing directors. If the salary paid is too high, this can quickly constitute a hidden profit distribution (vGA) – with serious tax consequences.
When it becomes critical
The tax authorities consider not only the fixed base salary, but also variable remuneration components such as royalties, bonuses, pension commitments, or benefits in kind (e.g., company car, apartment, insurance).
The overall package is decisive: it must be in proportion to the size of the company, its turnover, industry, and profits. If the remuneration significantly exceeds the market standard, the excess portion is treated as a hidden distribution of profits—and subject to additional taxation.
Audit standard: arm’s length principle
The decisive factor is what an unrelated third party would receive for the same activity. A comparison with industry studies or remuneration benchmarks will help to document the appropriateness. If such evidence is lacking, the burden of proof regularly lies with the company. A lack of documentation will therefore be expensive.
Practical example: Hidden profit distribution through excessive bonuses
In a case before the Federal Fiscal Court, a managing partner of a medium-sized limited liability company received an annual bonus of 50% of the annual surplus in addition to a high fixed salary. The tax office considered this to be inappropriate remuneration – and the Federal Fiscal Court confirmed this assessment. A bonus may not regularly exceed 25–30% of the annual surplus if a high fixed salary is also paid. The excess amount was considered a hidden profit distribution.
Compliance obligations and liability issues
In addition to tax risks, corporate governance also plays a key role. Managing directors are obliged to protect the economic interests of the company (Section 43 GmbHG). An excessive or unauthorized salary can therefore be considered a breach of duty, resulting in personal liability. In addition, many compliance management systems (CMS) today require clear guidelines for determining and approving managing director salaries, especially in affiliated companies or family-owned companies.
Conclusion
Managing director salaries in family or shareholder structures are a classic risk between tax law and governance.
Three recommendations:
- Document the compensation decision in detail and justify it with market comparisons.
- Regularly check whether the salary is still “arm’s length” – especially after changes in the company.
- Integrate clear compensation guidelines into your compliance system to avoid tax and liability risks.
