Distribute Profits or Repay Contributions?

Under company law, one and the same distribution. For tax purposes, two entirely different outcomes – and the course is set in the contributions register (Evidenzkonto).

One distribution, two routes

In the annual financial statements, every distribution is an appropriation of net profit. The decision is only made for tax purposes (§ 4(12) EStG, Income Tax Act):

Since 2024, the total tax burden on a distributed profit has been 44.18 % (23 % KSt [corporate income tax] + 27.5 % KESt [Austrian withholding tax on capital income]). Repaying contributions is the way to recover paid-in capital without this second level of tax.

Only those who have both can choose

Management decides – but only if both available internal financing (Innenfinanzierung) and available contributions exist.

1. Only internal financing available: profit distribution is mandatory.
2. Only contributions available: repayment of contributions is mandatory.
3. Both available: management is free to choose.
4. Neither – or in case of doubt: profit distribution with KESt.

Internal financing = cumulative UGB (Austrian Commercial Code) annual results less previous distributions. Losses consume it; contributions remain in place for tax purposes.

The contributions register is not a formality

§ 4(12) EStG obliges every corporation to keep a running record of contributions and internal financing – and to attach it to the tax return.

• Four sub-accounts: contributions and internal financing, each split into “restricted” and “available”. For small and medium-sized GmbHs (limited liability companies), only the share capital is restricted.
• Reference date is the resolution: coverage must exist at the time of the distribution resolution – not when payment falls due, and not retroactively.

If there is no contributions register, the contribution balances have to be reconstructed after the event – often over many years. If this cannot be proven, a profit distribution is assumed.

Which route benefits whom?

• Individuals: usually repayment of contributions – tax-neutral as long as the acquisition costs are covered. Beyond that, a taxable disposal without KESt deduction, hence assessment in the tax return.
• Domestic corporations as shareholders: usually profit distribution – the investment income is exempt from corporate income tax (§ 10 KStG, Corporate Income Tax Act).
• Foreign shareholders: usually repayment of contributions – no KESt deduction, generally exempt under the double tax treaty (DBA).

The catch: a distribution must be treated uniformly for all shareholders, either as a dividend or as a repayment of contributions. With a mixed shareholder structure, this is a genuine matter for negotiation.

The choice must be made actively

A repayment of contributions is not recognised automatically. The company must select it and document it.

• With the KESt return: the option is generally exercised with the withholding tax return on capital income.
• At the latest by the balance sheet date: until the end of the financial year of the distributing company, a distribution can still be reported as a repayment of contributions (VwGH, Supreme Administrative Court, 5 February 2021, Ro 2019/13/0027).

After that, the choice is forfeited. A hidden distribution can no longer be reversed with tax effect once the financial year has ended.

Practical pitfall 1: the investor comes in – the founder pays

A premium paid by the new shareholder increases the company's contributions – and thus the contributions register for everyone. The acquisition costs, however, increase only for the party that actually paid in.

Example: the founder holds her GmbH with share capital of 35. An investor takes over 50 % and pays in 35 of share capital plus a premium of 165. Three years later, the GmbH resolves a repayment of contributions of 140 – 70 to each.

Possible solution: keep separate records of contributions that do not correspond to the shareholding ratio and are later to be returned to the contributor, and regulate the repayment contractually from the outset.

Three further pitfalls

2. Debt-financed repayment of contributions: the interest is not tax-deductible – whereas it is for a debt-financed dividend.
3. Waiver of a receivable by the shareholder: only the remaining value of the receivable counts as a contribution. The non-recoverable remainder is taxable income for the GmbH (§ 8(1) KStG).
4. Capital increase from company funds: reserves become share capital, but the shareholders' acquisition costs remain unchanged. If this capital is later repaid, a taxable disposal may result.

Common denominator: the tax effect arises at the time the structure is set up – not years later, when the distribution is made.

Conclusion

The contributions register is tax planning, not a compulsory exercise. I know from my advisory practice that it often goes unmaintained for years – and when the first major distribution resolution comes, the evidence is missing.