One often complains, and rightly so, about the very distant and coded language used by medical professionals, and not least by lawyers. A good example from my professional world is the so-called "vGA", an abbreviation that does not help the average citizen very much at first. I am afraid that there will be no "aha" moment even if one explains that this is the so-called "hidden profit distribution". Even with the greatest imagination, a layman will hardly be able to develop an idea of what is hidden behind this term. After all, one can guess that when talking about profits, the desires of the tax office arise almost automatically and, in fact, it is exactly this authority that defines tax obligations with this term.
I cannot promise that you will understand after the complete reading of this contribution the occasionally quite questionable logic of the derivation, but I will try it at least, but above all explain the connection of this term to Mallorca.
Behind everything is the basic consideration of the tax office that taxable income does not necessarily consist only of money, such as salary, pensions or other income, because taxable are also all other benefits that can be converted with some imagination into money. In the case of salaries, for example, one speaks of a "pecuniary advantage" if, in addition to the salary, a company car is provided free of charge, a company apartment or a cell phone that can also be used privately. These additional benefits from an employer are converted into euros and cents and are taxable.
Something similar happens with the above mentioned "hidden profit distribution", namely when it is about a company. To put this in a concrete example, German nationals/taxpayers are shareholders in a Spanish company (usually an SL; equivalent to a German GmbH), which in turn owns a property that is used by the shareholders.
Such a construction is by no means unusual; especially in the times of the extremely high Spanish inheritance tax applicable to foreigners (i.e. before 2014), many purchasers of vacation homes did not acquire them as natural persons, but rather interposed a company to avoid inheritance tax. Now the tax office is not at all interested in the motivation of private dispositions, but applies the same standard as for any entrepreneurial company. The stumbling block is the fact that the shareholders (who are actually the beneficial owners of the property) use the property of the company free of charge. Lawmakers don't share the notion that it's absurd, after all, if the beneficial owners of a property should also pay rent for its use. This is the perfect moment to read from a ruling of the Hessian Fiscal Court of 14.12.2020 to quote. There it says namely literally as follows:
"If a company leaves a property held in its corporate assets to its shareholders free of charge for use at any time throughout the year and waives the payment of customary market fees, this leads to capital income for the shareholders, because the company's waiver of profit is based on a prevented increase in assets in the form of the customary market fees, which, according to the relevant German regulatory situation in this respect, is suitable for triggering a hidden profit distribution for the company according to the relevant standards in this respect as well.".
The decisive passage is: "… leads to capital income for the shareholders" and since this capital income is not generated by cash payments, this is precisely where the hidden profit distribution, vGA, lies, and this is already known from the "pecuniary advantage" mentioned at the beginning, fictitious income is attributed to the shareholders. Who now thinks, it concerns nevertheless a vacations real estate, which is used only few weeks in the year and already from therefore at most for the actual time of use a rent would result, is wrong. It is irrelevant whether the property is used by the partners for only a few weeks or the entire year, it is sufficient that the property is available to the partners throughout the year, so that the entire annual rental value must be recognized as vGA.
From then on, the only thing that remains to be clarified is how much this "income" is. The starting point is the cost rent. How this is to be calculated, the mentioned court decision immediately provides: "according to the market interest rate for first mortgages". For Spain, therefore, the average mortgage interest must be applied, calculated on the acquisition cost of the property. In the specific case decided in the ruling, the purchase price was 3.500.000 €, assuming a mortgage interest rate of 2% p.a. the cost rent amounted to 70.000 € p.a. However, this was not enough for the court. The depreciation (AfA) would be added and a profit mark-up, because every "normal" company does not only want to get the costs out, but rather earn money.
The in such a way computed sum is then "… the personal tax rate of the partners … "to be submitted.
Although the ruling cited here is not yet legally binding, it is in line with several decisions made by the BFH (Bundesfinanzhof) on 12.06.2013. So there is little hope for a completely different outcome.