Salary for a managing director in a German GmbH: Legal limits

Introduction

Managing director salaries are a frequent point of dispute between companies and tax authorities, as the remuneration must be legally compliant and clearly justified. Otherwise, the tax office may suspect a hidden profit distribution.

A written managing director contract is essential. It draws a clear line between the managing director’s salary and profit distributions to shareholders. The distinction is important because:

• Managing director remuneration is taxed as wages.
• Profit distributions are taxed as income from capital assets.

This separation prevents the mixing of salary and profit withdrawals and helps protect the company from tax risks. If the tax office uncovers concealed profit distributions, they must be taxed retroactively — including corporation tax and trade tax.

Shareholder-managing directors must be especially careful: if they influence their own salary, the remuneration must be appropriate and aligned with industry standards. Excessive or unusual payments are a major red flag for the tax authorities.

What is an appropriate salary for a managing director?

To assess whether the salary of a GmbH’s managing director is appropriate, all elements of the MD’s total remuneration must be reviewed. This is essential, as the salary and its appropriateness will be examined during a tax audit. The following components should be evaluated:

• Monthly or fixed annual salary
• Holiday pay and Christmas bonuses
• Allowances and performance bonuses
• Pension commitments
• Discounts or fringe benefits
• Company car or mobility allowance
• Other benefits

All remuneration elements must be clearly defined in a written managing director employment contract. This ensures transparency and provides reliable documentation in the event of an unannounced audit.

Entrepreneurs should carefully analyse each component, include it in their payroll calculations and compare it with industry benchmarks. Current salary studies, such as those published by BBE Unternehmensberatung, are widely recognised by tax authorities and serve as a useful benchmark for determining reasonable MD pay.

The MD’s salary is not only influenced by the industry but also by factors such as annual turnover, company size, and the MD’s level of responsibility (e.g., sole MD, co-managing director or chairperson).

How to make the salary tax compliant

To ensure that an MD’s remuneration is accepted by the tax authorities and does not trigger allegations of a hidden profit distribution, the management contract must clearly regulate all salary components. Auditors pay close attention to the points below.

Check all salary components

The management contract should specify every element of the MD’s pay package, including:

• Fixed monthly or annual salary
• One-off payments (holiday pay, Christmas bonus)
• Bonuses, commissions and premiums
• Pension commitments
• Tax-free benefits
• Company car for private use

Define fringe benefits explicitly

Unlike regular employees, MDs are not protected by standard labour law. Therefore, the contract must explicitly regulate fringe benefits such as:

• Continued salary payment in case of illness
• Maternity protection
• Survivor benefits

Overtime arrangements

Overtime pay is generally irrelevant for MDs since they receive a fixed salary rather than hourly wages. This should be stated clearly in the contract.

Regulate bonuses and remuneration ratios

Bonuses must be clearly defined. In practice, two types are used:

• Sales bonuses (Umsatztantiemen) – rarely accepted and usually only during start-up or restructuring phases.
• Profit bonuses (Gewinntantiemen) – standard and generally accepted.

The ratio of fixed salary to variable pay should typically be 75% fixed to 25% performance-related. Higher ratios may be challenged by tax authorities as hidden profit distributions. For multiple MDs, the combined bonus pool should also not exceed 25%.

Pension commitments

Since MDs are usually not part of the statutory pension scheme, a pension commitment is an important part of remuneration planning. The company can promise:

• Old-age pension
• Widow’s or widower’s pension
• Orphan’s pension
• Disability pension

Pension commitments must be documented in the management contract and reviewed regularly, as they need to be adjusted when the MD’s salary increases. This ensures the commitments remain reasonable and tax compliant.

Salary increases

As the managing director (MD) of a GmbH, you may have good reasons to raise your salary. However, increases must be handled carefully to avoid tax risks and to ensure approval by the shareholders. The following points explain what you should consider.

Acting quickly in liquidity problems

Even if the GmbH faces short-term liquidity issues — for example, due to a crisis or the loss of a major client — an increased MD salary does not restrict flexibility. An MD can always agree to a salary waiver. The tax office accepts this if both sides agree that payments will resume once the company’s financial situation improves.

The principle of prudence

Many MDs tend to pay themselves too little rather than too much. However, shifting too many profits into the company instead of your private income can become costly. Retained profits are subject to corporation tax and trade tax, and later to the withholding tax (25%) when distributed.

A reasonable salary increase can therefore be more tax-efficient, as your earnings are taxed once through wage tax and income tax.

Salary increases cannot be offset retroactively

If you realise years later that you could have paid yourself more, you cannot retroactively compensate for this lost personal income — at least not without creating tax risks. The tax office only accepts gradual, market-based increases, not sudden jumps.

As a rule of thumb: salary increases of more than 10% may trigger suspicion of a hidden profit distribution, unless they can be clearly justified.