Judgment of 18 May 2021, I R 62/17
Excessive interest on a shareholder loan as vGA
ECLI:DE:BFH:2021:U.180521.IR62.17.0
BFH I. Senate
KStG § 8 para 3 sentence 2 , InsO
§ 39 para 1 no 5 , KStG VZ 2012 , FGO § 96
previously FG Cologne, 29 June 2017, Ref: 10 K 771/16
Guiding principles
(1) 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.
(2) It is contrary to general principles of experience if the court of
fact assumes without factual findings to the contrary that a third party would
agree on the same interest rate for a subordinated and unsecured loan as for a
secured and senior loan.
Tenor
On appeal by the plaintiff, the judgment of the Cologne Fiscal Court of
29 June 2017 - 10 K 771/16 is set aside.
The matter is referred back to the Cologne Fiscal Court for a different
hearing and decision.
The decision on the costs of the proceedings is transferred to this
court.
Facts
I.
1. The plaintiff and appellant (plaintiff), a domestic limited liability
company (GmbH), acquired all shares in T GmbH from T in 2012 (year in dispute)
for a purchase price of ... €. The latter GmbH was then merged with the
plaintiff by way of a merger agreement dated ... 2012 (tax transfer date: 31
December 2011).
2. In order to finance the purchase price, the plaintiff took out a loan
of € ... from its sole shareholder, D GmbH, in the year in dispute, which bore
interest at 8% p.a. (shareholder loan). The interest was not payable on an
ongoing basis, but only upon expiry of the loan agreement on 31 December 2021.
No collateral was agreed. For its part, D GmbH borrowed funds in the same
amount and under identical conditions from its shareholders, among others from
its Dutch shareholder, N U.A., a loan of ... €.
3. In addition, the plaintiff received a bank loan in the amount of ...
€, which bore interest at an average rate of 4.78% p.a. and was fully collateralised --also by D GmbH.
4. Finally, it received a vendor loan from the vendor T in the amount of
... €, which bore interest at 10% p.a. and was not secured.
5. The shareholder loan was subordinated to all other liabilities of the
plaintiff, in particular to the other two loan liabilities. In its balance
sheet as at 31 December 2012, the plaintiff recorded an interest liability of
... € in connection with the shareholder loan.
6. The defendant and appellant (the tax office --FA--) based the
challenged corporation tax assessment of 16 February 2016 on the view that
third parties had agreed on an interest rate of 5% with regard to the
shareholder loan. In the amount of the difference to the actually agreed
interest rate of 8%, there was a hidden profit distribution (vGA) pursuant to § 8 para. 3 sentence 2 of the Corporate
Income Tax Act (KStG). Therefore, the plaintiff's
income for the year in dispute was to be increased by ... €.
7. The action brought against this ruling was unsuccessful (Cologne
Fiscal Court (Finanzgericht --FG-- Köln), ruling of
29 June 2017 - 10 K 771/16, printed in Entscheidungen
der Finanzgerichte 2017, 1812).
8. The plaintiff's appeal is directed against the judgement. It claims
that there has been a violation of substantive law and requests that the
contested judgment be set aside and that the 2012 corporation tax assessment
dated 16 February 2016 be amended to the effect that further interest expenses
in the amount of ... € be taken into account to reduce profits.
9. The FA requested that the appeal be dismissed.
Reasons for the decision
II.
10. The appeal is well-founded. The judgement of the Fiscal Court is to
be set aside and the case is to be referred back to the Fiscal Court for a
different hearing and decision (§ 126.3 sentence 1 no. 2 of the Fiscal Court
Code - FGO). The factual findings of the Fiscal Court do not support its
assumption that, due to the agreed interest rate for the shareholder loan of 8%
p.a., a vGA in favour of D GmbH is to be assumed.
11. 1. a) A vGA within the meaning of § 8
para. 3 sentence 2 KStG is to be understood as a reduction
in assets (prevented increase in assets) of a corporation which is caused by
the corporate relationship, which affects the amount of the difference pursuant
to § 4 para. 1 sentence 1 of the German Income Tax Act (EStG)
in conjunction with § 8 para. 1 KStG. § Section 8 (1)
KStG and has no connection with an open distribution.
For the majority of the cases decided, the Senate has assumed that the
transaction was caused by the corporate relationship if the corporation grants
its shareholder a pecuniary advantage that it would not have granted to a
non-shareholder if it had exercised the due care of a prudent and conscientious
business manager (so-called arm's length principle, constant case law of the
Senate since the judgement of 16 March 1967 - I 261/63, BFHE 89, 208, BStBl III 1967, 626). In addition, the transaction must be
suitable for triggering a purchase for the beneficiary shareholder within the
meaning of § 20, para. 1, no. 1, sentence 2 EStG
(constant case law, e.g. Senate judgements of 7 August 2002 - I R 2/02, BFHE
200, 197, BStBl II 2004, 131; of 8 September 2010 - I
R 6/09, BFHE 231, 75, BStBl II 2013, 186).
12. b) The arm's length comparison only requires the "thinking
away" of the close relationship. The continuation of all other relationships
is assumed (Senate ruling of 29 October 1997 - I R 24/97, BFHE 184, 482, BStBl II 1998, 573). 4.
13. 2. These legal principles on the application of the arm's length
principle are not satisfied by the challenged decision of the court. Its
conclusion that a third party would have granted the disputed loan (shareholder
loan, interest rate 8 %) at an interest rate of only 5 % is legally erroneous.
14. a) Insofar as the Regional Court refers to the fact that the average
interest rate of 4.78% agreed with the bank consortium also forms the standard
for the disputed loan, it overlooks the fact that an intelligent and
conscientious business manager would not have simply oriented himself to this.
This is because the loans of the banking syndicate were secured and had to be
serviced with priority. The loan in question, on the other hand, was unsecured
and subordinated. If, as in the present case, there are no findings to the
contrary, it is contrary to the general principles of experience if the court
of facts assumes that a third party would have granted a subordinated and
unsecured loan at the same "price". This violation of the general
principles of experience renders the Federal Fiscal Court (Bundesfinanzhof,
BFH) not bound by the findings of the court of facts (established case law, cf.
e.g. in general the Senate ruling of 27 March 1996 - I R 3/95, BFHE 180, 155, BStBl II 1996, 470). 6.
15. The FG's reference to the statutory subordination of shareholder
loans (§ 39 section 1 no. 5 of the Insolvency Code in the version of the Act to
Modernise the Law on Private Limited Companies and
Combat Abuses of 23 October 2008, Federal Law Gazette I 2008, 2026), which
cannot be nullified by the provision of collateral and consequently cannot
justify a risk premium when determining the interest rate, is legally
irrelevant for the arm's length comparison. In this comparison, the "close
relationship" is to be disregarded. In this case, however, a lender would
not be a shareholder but a third party and his claim would not be subject to a
statutory reduction in rank in the event of insolvency. If, on the other hand,
the third party decided by negotiation to "voluntarily" accept the
priority of a claim of another third party creditor, it would presumably demand
financial compensation from the borrower for accepting this disadvantage.
16. b) The fact that the plaintiff's assets had sufficient substance and
thus offered D GmbH as lender sufficient security for the repayment of the
loan, so that there was no need for a risk surcharge in the interest rate, as
the court stated, also does not correspond to the presumed thinking of a third
party. When determining the terms of the loan, a third party would not only
consider the current financial situation of its debtor, but above all its
future economic development. This is because his default risk essentially
depends on this development (cf. e.g. Scholz/Köhler, Deutsches
Steuerrecht 2018, 15). However, since he could at
best forecast the economic future of his debtor, it is obvious that he would
demand a higher "price" for the transfer of the capital than a
secured creditor in the given situation (subordination of the loan, lack of
collateral).
17. 3.For reasons of procedural economy, the senate points out the
following aspects for the second course of law:
18. a) First of all, the court will have to examine, on the basis of the
principles developed by the Federal Fiscal Court (Bundesfinanzhof, BFH),
whether the disputed loan agreement is to be recognised for tax purposes on the
merits. In particular, it will have to be taken into account that not every
deviation of individual factual features from what is customary for third
parties, such as individual agreements on the question of interest, the
provision of collateral or the due date of the interest payments, excludes the
recognition of the contractual relationship under tax law (cf. Senate ruling in
BFHE 184, 482, BStBl II 1998, 573; BFH ruling of 16
October 2014 - IV R 15/11, BFHE 247, 410, BStBl II
2015, 267). If the contract were not to be recognised, the claimed interest
expense would not be taken into account from the outset to reduce income.
19. b) If the loan agreement is recognised on the merits, the
recognition of a vGA can only be considered if the
"price" (as the interest to which D GmbH is entitled as lender) for
the provision of capital would have exceeded the level of the arm's length
principle. It is primarily the responsibility of the tax court as the court of
fact to determine this. For the estimation to be regularly carried out by the
court, it can use various methods according to the established case law of the
senate; the determination of the most suitable method in the individual case is
also primarily the responsibility of the tax court. If, like the lower court,
it decides to apply the price comparison method (on the choice of method, cf.
Senate ruling of 18 May 2021 - I R 4/17, designated for publication), this
requires that the price to be assessed on the one hand and the comparison price
to be used as a benchmark on the other hand are based on at least essentially
identical service relationships. A price comparison is therefore not possible
or only possible with restrictions if special circumstances exist at an
affiliated company which would cause a different pricing in the relationship
between independent companies. In such a case, actually existing agreements
with or between third companies can at best be transferred to the specific
service relationship to be assessed after making appropriate adjustments (on
the above, Senate judgements of 17.10.2001 - I R 103/00, BFHE 197, 68, BStBl II 2004, 171; of 06.04.2005 - I R 22/04, BFHE 209,
460, BStBl II 2007, 658). If the court of facts wants
to compare the shareholder loan at issue with the loan actually granted by the
syndicate banks (internal price comparison), as was done in the present case at
first instance, it might be obvious to consider in particular the subordination
and the unsecured nature of the shareholder loan as such special circumstances
that might require adjustments in the pricing (Bärsch/Engelen, Internationales Steuerrecht --IStR-- 2018, 122;
Ebeling/Grundmann/Nolden, IStR 2018, 581, with detailed adjustment calculations). The
loan from the seller T, who, in the absence of indications to the contrary, is
likely to be regarded as a "third party", will also have to be
included in the context of a price comparison in the required assessment of all
circumstances of the individual case. 11.
20. Apart from this, the applicant's substantiated argument that there
is a market for subordinated loans will have to be assessed. If this is true
according to the assessment of the court of facts, this market provides the
appropriate benchmark for any external price comparison (cf. Gosch, KStG, 4th ed., § 8
marginal no. 693a; Bärsch/Engelen,
IStR 2018, 122). Against this background, it also
does not seem far-fetched that third parties on this market are willing to
grant unsecured subordinated loans against payment of a higher
"price", i.e. the agreement of an interest surcharge to compensate
for a higher risk of default (cf. Senate judgements of 19.01. 1994 - I R 93/93,
BFHE 174, 61, BStBl II 1994, 725; of 19.06.2019 - I R
54/17, marginal note 16, IStR 2020, 230; Gosch, loc. cit.; Schwenke, Internationale Steuer-Rundschau
--ISR-- 2020, 77), with the further consequence that such loans would also have
to be recognised in the relationship between the corporation and its
shareholders. Since the aforementioned third parties do not have to be
"classic banks", the focus is on the imagined behaviour
of these third parties and not on the behaviour of
banks. It would therefore not be a question of "banking custom" (Schwenke, ISR 2020, 77; also Wacker, Finanz-Rundschau
2019, 449).
21. c) With regard to the question of the significance for the price
comparison of the circumstance that the contracting parties are connected in a
group structure and that the lender as sole shareholder can influence the behaviour of the plaintiff as borrower (so-called retention
in the group), reference is made in detail to the Senate's ruling of 18 May
2021 - I R 4/17.
22. d) The burden of establishing that the agreed interest rate is not
at arm's length is in principle borne by the FA (cf. Senate ruling in BFHE 197,
68, BStBl II 2004, 171, with further references).
23. The transfer of the decision on costs is based on section 143 (2)
FGO.