Lender GmbH acquired all shares in T GmbH from T in 2012 (year in dispute) for a purchase price of … €.
To finance the purchase price of the shares, Lender GmbH took out a loan from its sole shareholder, D GmbH, a loan in the amount of … €, which bore interest at 8% p.a. (shareholder loan). The interest was not to be paid on an ongoing basis, but only on expiry of the loan agreement on 31.12.2021. No collateral was agreed.
D GmbH, for its part, borrowed funds in the same amount and under identical terms and conditions from its shareholders, among others from its Dutch shareholder N U.A.
In addition Lender GmbH received a bank loan in the amount of … €, which had an average interest rate of 4.78% p.a. and was fully secured.
Finally Lender GmbH also received a vendor loan from the vendor T in the amount of … €, which bore an interest of 10 % p.a. and was not secured.
The shareholder loan was subordinated to all other liabilities.
The tax office issued a tax assessment in 2016 with regard to interest payments on the shareholder loan. According to the tax authorities an interest rate of of 5 % would have been agreed between independent parties. The difference up to the actual interest rate of 8% was therefore considered a hidden profit distribution(vGA) and added to the income of Lender GmbH.
A complaint filed by Lender GmbH against the tax assessment was unsuccessful (Cologne Fiscal Court, Judgment of 29.06.2017 – 10 K 771/16.)
The appeal before the Bundesfinanzhof was directed against this judgment.
Lender GmbH claims that there has been an infringement of substantive law and requests that the contested judgment be set aside and that the the 2012 corporate income tax assessment be annulled.
The tax authorities requests that the appeal be rejected.
Judgment of the Court (Bundesfinanzhof)
When determining the arm’s length loan interest rate for an unsecured shareholder loan, the statutory subordination of shareholder loans (section 39(1)(5) InsO) does not preclude a risk premium when determining the interest rate to compensate for the lack of loan collateralisation.
It is contrary to general principles of practice if the court assumes without factual findings that a third party would agree on the same interest rate for a subordinated and unsecured loan as for a secured and senior loan.
The judgment of the Cologne Fiscal Court of 29 June 2017 – 10 K 771/16 is set aside and the case is referred back to the Cologne Fiscal Court for a different hearing and decision.
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Germany vs Corp May 2021 Bundesfinanzhof 62-17