In a recent ruling, the German Federal Fiscal Court (Bundesfinanzhof, BFH) has commented on the interest on shareholder loans. The issue here is whether a loan granted by a shareholder of a corporation must bear interest at a certain rate in order not to be considered a hidden profit distribution.
The regulations governing interest on shareholder loans can be very complex in individual cases and are repeatedly the subject of legal disputes. The BFH ruling provides important information and clarification in this regard.
For entrepreneurs and corporations in particular, knowledge of the regulations on interest rates for shareholder loans is of great importance. It is therefore advisable to deal with this issue in detail and, if necessary, to consult an expert.
Introduction
The Federal Fiscal Court (BFH) has made a decision on the interest on shareholder loans which is likely to be of importance to many companies. Because in practice, the issue of shareholder loans is a frequent point of contention between companies and tax authorities.
The BFH decision of 23.01.2018 (Az. VIII R 13/15) concerns interest on shareholder loans in accordance with Section 233a of the German Fiscal Code (AO). The BFH ruled that a GmbH must pay interest of 6% per annum on a loan granted to it by a shareholder without contractually agreed interest, provided that the loan is to be regarded as equity due to the economic circumstances of the GmbH.
It can be assumed that the tax authorities will interpret the BFH ruling very restrictively and will probably try to qualify loans as equity capital in many cases. Companies should therefore proceed extremely carefully when structuring shareholder loans and seek advice from a tax advisor.
- Conclusion: The BFH ruling on interest on shareholder loans has far-reaching consequences for companies. It is recommended that extreme care be taken and advice sought when drafting such loans.
BFH rules on interest on shareholder loans
In November 2021, the German Federal Fiscal Court (Bundesfinanzhof, BFH) issued a decision on interest on shareholder loans. This concerned the question of which interest rates must be used as a basis for discounting loans.
The BFH ruled that the interest rate at which a corporation could borrow from a bank is an appropriate benchmark for discounting shareholder loans. However, the interest rate would have to be modified upwards or downwards to take into account the circumstances of the individual case.
The BFH’s decision could have an impact on many companies that have taken out shareholder loans. In particular, it can be difficult to determine an appropriate interest rate for loans to related parties such as managing directors or shareholders.
- BFH rules on interest rates when discounting shareholder loans
- Interest rate of bank loans as benchmark
- Implications for companies with shareholder loans
It remains to be seen how the tax authorities will react to the BFH’s decision. Companies should, however, ensure that appropriate interest rates are used when discounting shareholder loans.
Implications for the practice of the BFH ruling on interest rates for shareholder loans
The decision of the German Federal Fiscal Court on interest rates for shareholder loans has significant implications for practice. Entrepreneurs should understand that inappropriate interest rates on their loans can lead to higher tax liabilities. Negotiating loan agreements now requires a careful analysis of the business needs of the business as well as a realistic estimate of interest rates.
It is also important that companies carefully review their existing loan agreements to ensure that they are legally compliant and meet the requirements of the BFH. In addition, they must ensure that their accounting is proper and adequate.
The BFH ruling also has implications for the tax consulting industry. Tax advisors must ensure that they have in-depth expertise and understanding of the tax and business implications to assist companies in the new legal environment.
- Increased legal liability. Directors and shareholders can now be held liable if they make an inappropriate or improper decision regarding interest on their loans. Therefore, if in doubt, they should always seek detailed advice from a competent tax advisor.
- Need for documentation. Companies should carefully maintain all necessary documentation related to their loans and interest rate agreements. In particular, care should be taken to ensure that loans are adequately valued and that interest rates are realistic and in line with market conditions.
- Adequacy of loan agreements. Companies should ensure that their loan agreements are reasonable and in line with the market and help the company achieve its objectives. Loan agreements should be carefully drafted with the help of experts in order to be legally sound and comply with the requirements of the BFH.
Alternatives to interest on shareholder loans
The legal situation regarding interest on shareholder loans is complicated, and in some cases, companies struggle to earn a sufficient rate of interest. However, there are some alternatives that companies can consider to reduce their cost of capital.
One option is to convert the loan into equity capital. This can be advantageous from a tax perspective, as the equity does not have to earn interest. However, companies should be careful not to jeopardize their own credit rating by issuing too much equity capital.
Another alternative is for the shareholder to take a direct stake in the company. This means that the shareholder is not only a lender but also a partner in the company. In this case, the risk is shared and the shareholder usually receives a dividend instead of a specific interest payment.
Another option is to agree on a variable interest rate. In this case, the interest rate on the loan is linked to the success of the company. If the company is successful, the shareholder receives a higher interest rate. However, if the company performs worse, the interest rate may be lower or even zero.
- Converting the loan to equity may have tax advantages.
- The shareholder’s direct participation in the company can share the risk and replace the interest with a dividend.
- A variable interest rate tied to the success of the business can be a way to cut costs.
Conclusion
The Federal Fiscal Court’s decision on interest on shareholder loans has far-reaching consequences for shareholders of corporations. The court had ruled that shareholder loans that carry a market interest rate must be recognized for tax purposes and bear interest accordingly.
This decision means that shareholders can no longer make loans to their corporations without further tax consequences. Companies must now ensure that the interest rates for loans granted are in line with the market in order to obtain tax recognition and interest rates.
It is important that companies and shareholders are aware of the implications of the decision and adjust their financial instruments accordingly. Careful planning and monitoring of funding measures can help avoid fiscal consequences and secure funding for the company.
- Overall, the Federal Fiscal Court’s decision shows that there is a narrow interpretation of tax regulations and that companies and shareholders must plan their financing projects carefully to avoid tax risks.
- Adequate documentation of financing measures and interest rates is essential to prove tax recognition and interest on shareholder loans in the event of a tax audit.
- Ultimately, the Federal Fiscal Court’s decision requires careful consideration of the financial and tax risks involved in making shareholder loans.