Tax pitfalls of waiver of shareholder loans with rising interest rates
Emre Sahin
by Emre Sahin
The waiver of shareholder loans entails extensive tax risks. With strongly fluctuating market interest rates, the question arises regarding the correct valuation and taxation of such waivers.
Example
M-Ltd. holds 100% of the shares in T-GmbH and in 2024 waives a loan granted in 2020 with a 10-year term and an original arm's length interest rate of 3%. However, the current market interest rate is 6%, which means a third party would acquire the receivable for less than its nominal value. How is the waiver to be treated for tax purposes at T-GmbH?
Balance sheet income and tax classificationThe debt waiver leads to extraordinary income at the level of T-GmbH in the amount of the liability exemption and is considered a hidden contribution. A hidden contribution is an informal contribution made by a shareholder to the company which is considered a capital contribution for tax purposes, although the amount is deducted from profit off the balance sheet.
Valuation of the hidden contribution – influence of interest rate developmentThe waiver is valued for tax purposes at the going-concern value. This corresponds to the amount that a third-party purchaser would pay. The decisive question is whether the increased market interest rate causes the partial value to fall below the nominal value. The German Federal Finance Court (BFH) regularly denies a partial value write-down for fixed-interest securities due to increased market interest rates, as there is no permanent reduction in value. The valuation of shareholder loans is more complex, particularly in corporate groups where the equity-replacing nature and economic benefits play a role.On the other hand, the BFH ruled in the case of business splits that the interest advantage alone is not decisive, but also the substance and earnings prospects of the working capital company. Some tax courts apply this to group loans, even without a business split. The Münster Fiscal Court argues that non-interest-bearing shareholder loans often serve to improve the earnings situation and increase the value of the investment, thus compensating for the lack of interest. However, it remains questionable whether this can be applied to loans with an original interest rate at arm's length and with a subsequent interest advantage. This must be examined carefully on a case-by-case basis, as there is no legal regulation in this case, and various court rulings have come to different conclusions.
Correspondence principle and off-balance sheet correctionsThe correspondence principle is of particular importance. If a tax expense is incurred abroad as a result of the debt waiver, the income of T-GmbH must be increased accordingly, unless a tax-neutral correction is made abroad as a hidden contribution. If this is the case, no off-balance sheet adjustment is to be made, contrary to the explanations above. This is a tax pitfall and should always be carefully checked by a German tax advisor.
Emre Sahin is a tax assistant at Benefitax GmbH. He will be taking his certified tax consultant exam this October. A Bachelor of Law with many years of professional experience in international taxation law, he provides complete tax consultancy and preparation of annual financial statements in accordance with German GAAP to various clients.Contact Emre.
GGI member firmBenefitax GmbH Steuerberatungsgesellschaft WirtschaftsprüfungsgesellschaftFrankfurt am Main, GermanyT: +49 69 256 227 60
Advisory, Auditing & Accounting,Corporate Finance, Fiduciary &Estate Planning, Tax
The highly qualified team of Benefitax GmbH offers tax consulting, accounting and business consultation for the service sector, industry, trade and individuals. Solving cross-border tax problems, transfer pricing documentation, due diligence, business valuations, tax planning and business succession are also part of their regular services. Based in Germany, they offer their services across the globe.
