Executive compensation – Concurrent receipt of pensions and a regular salary is possible within certain limits

In the case in question, a sole shareholder and managing director retired from active working life, in 2010, and then started to draw a pension from his company. However, because relations between his successor and the business partners were not very harmonious at the outset, in 2011, the company called him back to work as an additional managing director so that he could get the customer management back on the right track again. Besides his pension, he thus received an active managing director’s salary that was merely 10% of the amount he had received prior to his retirement. The local tax office, having made reference to the relevant case-law, wanted to identify the salary payment as a hidden profit distribution; nevertheless, the judges at the Münster tax court ruled in favour of the taxpayer in this case (ruling from 25.7.2019, case reference: 10 K 1583/ 19 K). As his reappointment had not been agreed when his pension payments started and given that the salary amount was very small – it did not really constitute remuneration but rather recognition – it was thus deemed that there was no hidden profit distribution.

Please note: It remains to be seen how the BFH will judge the issue in the appeal that is pending against the ruling under case reference I R 41/19.