Shareholder and intra-group loans – beware of tax risks | Hogan Lovells


Most business groups rely on shareholder and / or intragroup loans in order to manage liquidity needs within the group and easily transfer liquidity from one entity to another as needed.

While discussions of debts to third parties can take days, weeks or months, shareholder and intragroup loans are sometimes documented and granted on a short-term basis based on internal models.

However, based on the latest publications from the German Ministry of Finance, we expect shareholder (cross-border) and inter-group loans to come under further scrutiny by the German tax authorities in the future. to come up. When entering into new shareholder or intragroup loan agreements, it is therefore recommended to check the latest legal publication from the German Ministry of Finance.

What does the German Ministry of Finance say?

The tax framework for shareholder and / or intragroup debt financing in Germany is currently undergoing radical change. The current uncertainty is over the appropriate transfer pricing method and the fundamental question of whether tax authorities accept shareholder loans as debt for tax purposes or treat part of shareholder loans as equity.

The German Ministry of Finance issued a decree on July 14, 2021 concerning, among other things, the tax treatment of cross-border shareholder loans with some surprising statements regarding the accounting for a loan and the calculation of an arm’s length interest rate in cross-border situations between parties:

First, the financing will only be accepted fiscally as a debt if it is economically necessary. A prudent and conscientious entrepreneur will not borrow capital in the market unless there is at least a reasonable prospect of return covering the cost of financing. The use of borrowed capital should be in accordance with the purpose of the business. If these characteristics are not met, the loan will be considered as equity.

Second, if the loan is considered a debt, the deductibility of interest charges paid to a related enterprise without sufficient substance is limited to interest calculated on the basis of the cost plus method capped at the “risk-free” interest rate. . Although there is no definition of a “risk-free” interest rate in the decree itself, in some statements it appears to refer to the interest on the bonds of State with the highest credit rating. No higher rate of interest can be claimed for tax purposes as arm’s length, because in the case of a finance company without sufficient substance, the finance company is not acting as a lender but rather as an arm’s length finance company. as a servicer from a tax point of view and, therefore, only the cost-plus method may apply.

What must be considered when considering debt for tax purposes?

Although there are no clear statements from the tax authorities, the following aspects should be relevant in this context:

  • economic justification for the loan;
  • corporate and / or industry customs in debt structuring;
  • the use of the loan in accordance with the purpose of the business;
  • past behavior of the borrower and lender towards third party debt;
  • the creditworthiness of the borrower;
  • interest rate, accounting for interest payments for tax purposes;
  • terms and conditions of the loan;
  • whether or not the loan will be secure / guaranteed;

Overall, when agreeing on a shareholder loan, the circumstances of the situation should be considered in a holistic way, based on the diligence and diligence of a prudent businessman. As with any other business transaction, shareholder loans require proper substantive review before being entered into in order to avoid unwanted (legal) consequences.

Summary and additional points

The declarations of the German tax authorities are regarding intra-group financing structures very difficult if the financing is provided by non-resident companies with little or no substance. In particular, the potential for adjustment of interest rates by the German tax authorities should be taken into account as excessively high interest rates can have important implications for tax compliance. It should be noted that German tax courts, in particular German federal tax courts, have recently ruled that the cost plus method should only be applied if it is not possible to determine an arm’s length interest rate. on the basis of the price comparison method. . Although it seems more preferential in this case compared to a cap on the interest rate of government bonds with the highest credit rating, in today’s low interest rate market the actual effect may being weak. Therefore, it should be carefully considered which entity of a group of companies provides debt financing to German affiliates in order to avoid significant tax problems in Germany.