25. February 2020

Clarification of control

In order to provide the advisor and legal practitioner with the information required under correct consulting approach, the following section defines the aspect of “control” among shareholder-managing directors and shareholder-executive boards for the areas of tax, labour and social security law and the resulting requirements and consequences.
Control in the sense of tax law
A shareholder-managing director is to be regarded as dominant within the meaning of tax law if he has effective management power in the company, i.e. if he can impose his “will” on the company with more than 50 % of the voting rights (federal finance court judgment, I R 51/76 of 28.04.1982). As a rule, the shareholding of the shareholder-managing director in the company is identical to the share of voting rights.
On the other hand, a shareholding of 50 % or less may be sufficient if special circumstances arise which justify control of the company. In this context, the aggregation of individual equity interests of 50 % or less may lead to the control of each individual share if the interests of the individual minority shareholders are the same and the sum of the shares of those managing directors or similar persons exceeds 50 %. On the other hand, a mere related relationship to another shareholder is not sufficient as such to assume similar interests (see Federal Constitutional Court, judgement13.03.1985, BStBl II 1985 p. 475).
With regard to these remarks, it is strongly recommended, when establishing or reviewing a direct pension commitment to the aforementioned group of persons, to check whether the shareholder-managing director or shareholder-board in question fulfils the above criteria in order to be classified as controlling in the sense of tax law. This examination is therefore indispensable, since pension commitments to this group of persons, as described above, are subject to increased scrutiny by the tax authorities. The background to this is that a controlling shareholder-managing director can de facto grant a pension commitment to himself. Because from § 46 No. 5 Limited Liability Companies
Act follows the competence of the partners’ meeting regarding the conclusion or the change of the employment contract of the managing director and thus also regarding the granting of consent. Thus a controlling partner-managing director is theoretically also in the position to “arrange” the company-internal profit determination of the enterprise after own interests and/or to steer after own interests.
The above statements also apply in principle to the controlling shareholder board of a stock corporation. However, the following information must also be observed in this regard:
Due to the structure of a stock corporation under company law, some differences to the Ltd can be noted. Whereas in a Ltd the managing director is appointed by the shareholders’ meeting, the executive board of a stock corporation is appointed by the supervisory board. Thus, at first glance, it cannot be said that the parties to the contract are identical, as is the case with a GmbH with its controlling managing director (cf. federal finance court judgment of 15.12.1971, I R 76/68). Therefore, in this case the idea may quickly become apparent that in this constellation the increased auditing standards are not applied to pension commitments directly made to the respective shareholder of the Executive Board. However, an “identity” of the contract parties may also exist in the case of a stock corporation if the controlling shareholder executive board can exert such “pressure” on the supervisory board that it can in fact enforce its will at will. This is particularly the case if he is closely related to the members of the supervisory board.
Control within the meaning of labor law
In the following, the control relationships under labour law must also be legally assessed. Company pension commitments to employees and persons similar to employees are subject to the protection of the Company Pensions Act in accordance with § 17 (1) Works Constitution Act. This does not apply to controlling shareholder-managing directors or shareholder-management board members who exercise a controlling position within the meaning of labour law by virtue of their shareholding in a corporation.
Against this background, a detailed examination should also be carried out as to the extent to which the person in question is to be regarded as controlling within the meaning of labour law. This is indispensable because a direct pension commitment to the aforementioned group of persons is not subject to statutory insolvency insurance. Thus, civil insolvency insurance would have to be provided. In the case of a reinsurance investment made, this can then be done by pledging the same to the person entitled to benefit.
Control in the sense of social security law
Finally, it must be determined in this context to what extent the person entitled to a pension is to be classified as dominant within the meaning of social security law. If the managing director or board member is one of these persons, he is generally not subject to compulsory insurance in the statutory pension insurance scheme.
The mentioned examination is indispensable also against the background of a possible overprovision problem. Because the financial administration recognizes operational pension promises in principle only in so far as these do not exceed 75% of the active purchases of the entitled person together with the expectancies from the legal old age pension insurance. Thus the consideration of a possible affiliation to the legal old age pension insurance is to be considered.