C is the parent company of the C-group which is involved in the construction business. C is part of a joint venture and for the expansion of these activities a framework agreement on shareholder loans was concluded. Under the agreement two shareholder loans were granted: ***loan*** II totalling 212,935,716.33 euros and ***loan*** III totalling 446,000,000 euros. At issue is whether (***loan*** II and ***loan*** III) are to be regarded as hidden equity capital or debt capital.
In regards of loan II a binding ruling had previously been issued stating that the loan was hidden equity.
C took the position that both loan II and loan III were to be treated for tax purposes as equity capital.
Following an audit the tax authorities assessed both shareholder loans as debt capital and added interest income to the taxable income of C. In regards of the binding ruling previously issued, the authorities stated that the underlying facts had changed to such an extend that the ruling was no longer binding.
The court of first instance held in favour of C, and an appeal was then filed by the tax authorities.
Judgement of the Court
The court upheld the decision of the court of first instance and found that the shareholder loans should be treated as hidden equity capital.
Excerpts
Loan II
“Pursuant to § 118 (7) BAO, there is a legal claim that the assessment under tax law made in the information notice is used as a basis for the levying of the tax if the actual facts do not or only insignificantly deviate from those on which the information notice was based.
It is certain that the complainant was issued a legally binding information notice in connection with the interest on the shareholder loan ***loan*** II. This information notice confirms that the loan granted has the character of hidden equity capital; an interest calculation for income tax purposes can therefore be omitted.
It is also clear that the facts on which the tax office based the information notice have not changed. However, the tax authority now assumes that the factual elements on which the legal assessment of the information notice was based, and which were actually realised, were irrelevant for the assessment of the hidden equity in the present case.”
Loan III
“The separation principle is derived from the legal personality of a corporation, which allows for tax-effective service relationships between the shareholder and the corporation (cf. e.g. VwGH 28.04.2011, 2007/15/0031). The limit of the separation principle is the arm’s length principle (cf. Raab/Renner in Lachmayer/Strimitzer/Vock (eds.), Die Körperschaftsteuer (KStG 1988) (32nd ed. 2019) § 8 marginal no. 146). In connection with the granting of shareholder loans, conditions that are not arm’s length speaks in favour of hidden equity (cf. e.g. Ressler/Stürzlinger in Lang/Rust/Schuch/Staringer (eds.) KStG2 (2016) § 8 marginal no. 47). Conditions that are not customary for third parties speak against the existence of a genuine or serious shareholder loan (cf. e.g. VwGH 14.12.2000, 95/15/0127; 26.07.2006, 2004/14/0151).
In the opinion of the authority concerned, only the lack of interest speaks in favour of the shareholder loan not being customary for third parties. A single indication was not sufficient to reclassify a shareholder loan as hidden equity. On the other hand, the subjective intention to repay the loan was to be regarded as the basis for the assumption that the loan was in fact debt and not equity.
The fact that subjectively there was already an intention to repay at the time the shareholder loan was granted is not questioned in principle by the complainant, who himself points out in justification of the chosen model that a greater flexibility for a possible later repayment should be ensured. In addition, the chosen construction can also be explained on the basis of the company law legislation of ***Land***, according to which a repayment of equity capital is only possible in the context of a capital reduction or in the event of liquidation (cf. the legal opinion submitted on 22 February 2022). For the Federal Supreme Finance Court it is clear that the shareholder loan ***loan*** III was not granted at arm’s length (see in detail the explanations and assessment of the circumstantial evidence as part of the evaluation of the evidence). Thus, in the opinion of the Federal Fiscal Court, there is no shareholder loan to be recognised for tax purposes, but hidden equity.
Since no interest is to be paid on equity capital (for tax purposes), the appeal is to be upheld on this point and the interest payment made by the authorities is to be reversed.”
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