A hidden distribution of profit presupposes that a corporation grants its shareholder a pecuniary advantage outside the distribution of profits under company law which it would not have granted to a non-shareholder — under otherwise identical circumstances — if the diligence of a prudent and conscientious manager had been applied. It should be noted that a director must be allowed a certain degree of commercial discretion.
1) As was stated in the judgment of the Senate in Case I R 21/68, a hidden profit distribution presupposes that a corporation grants its shareholder a pecuniary advantage outside the distribution of profits under company law which it would not have granted to a non-shareholder — under otherwise identical circumstances — if the diligence of a prudent and conscientious manager had been applied. This means that it is not the diligence of the managing director in the event of a dispute but the diligence of a prudent and conscientious manager that is the yardstick. For this reason, neither the intention of the corporation to distribute the profit in a hidden manner nor the agreement of the parties that the allocation is made with due regard to the corporate relationship is necessary (BFH judgement of 3 December 1969 I R 107/69, BFHE 97, 524, BStBl II 1970, 229). On the other hand, in the case of a transaction between the company and the shareholder, the disproportion between performance and consideration is not in itself sufficient for a hidden profit distribution to be assumed. In addition, a prudent and conscientious manager would have recognised this mismatch and would not have seen any legal or operational reason to conclude the transaction nevertheless. It must not be overlooked that a manager must be granted a certain degree of commercial discretion. His actions must, of course, be geared to the circumstances of the company.
BFH I R 119-70