When a non-profit corporation grants its managing director a disproportionately high remuneration for work, it constitutes a misuse of funds (German Federal Court of Finance, judgment of March 12, 2020, V R 5/17). This can lead to the revocation of the non-profit status of the corporation by the German tax office. The board members should check, or let check, in advance of any salary adjustments their respective proportionality, as they can, and must, be determined in accordance with the arm's length principle.
For the arm's length comparison can be used general salary structure studies for commercial enterprises. A reduction in the salary for managing directors of non-profit organizations is not to be undertaken. The examination of these salary structures will reveal a range with an upper and lower limit. The upper limit may not be exceeded by more than 20%.
If disproportionality is found after an increase in the managing director's salary has already taken place, the non-profit status of the organization can only be withdrawn if it is not just a minor violation of the rules for the application of funds. However, this can only be specifically examined in individual cases.
The above-mentioned judgment is of fundamental importance as it can be applied to other business relationships of the non-profit corporations, such as rental, loan and lease agreements. This means that contracts of non-profit corporations with related persons or affiliated companies must always be checked for proportionality by means of the arm's length principle.
Example for disproportionality: A shareholder in a gGmbH is granted an interest-free loan with unusually long repayment terms by the gGmbH.