BFH: Do not allow losses from debt waiver to become time-barred

On November 19, 2024, the German Federal Fiscal Court (“BFH”) issued a landmark decision on the tax treatment of a shareholder’s debt waiver in exchange for a debtor warrant in its judgment VIII R 8/22. This decision provides important insights for shareholders of corporations regarding the recognition of losses and constructive contributions. The “Group Tax” practice group is available to answer further questions on this topic. 

Background of the case

In 2009, a GmbH’s shareholder granted the company a loan. Due to financial difficulties, he waived repayment of the claim in the same year, however, subject to the condition that the waiver only applies as long as the GmbH is not in a position to repay the loan amount from future profits or liquidation surplus (“debtor warrant”). The GmbH later became insolvent, meaning that no repayment was made.

The most important findings of the BFH decision

The BFH has made the following key statements in this regard:

• Loss realization already in the year of the waiver: The tax-relevant loss already occurs when the claim is waived and not only when it is clear that the condition subsequent no longer applies. In this respect, the better fortunes clause has no retroactive effect.
• Constructive contribution for recoverable part of the receivable: If the receivable still had a realistic value at the time of the waiver, this part is regarded as a constructive contribution to the GmbH.
• Tax recognition of the loss: The part of the receivable that is no longer recoverable can be recognized as negative capital gains in accordance with Art. 20 (2) EStG (German Income Tax Act).
• Overall view of loan and shareholding: In the tax assessment, both the shareholder loan and the participation in the GmbH must be considered together.

Practical implications for shareholders

This decision has the following tax implications for shareholders who finance corporations:

• Early recognition of losses: Losses from loan waivers with debtor warrant can or must be claimed for tax purposes at the time of the waiver. This means that later recognition would be rejected by the tax office and there is a risk that the relevant year can no longer be changed due to the lack of a correction standard or because the limitation period has expired.
• Treatment of the recoverable portion as a constructive contribution: The recoverable portion of the loan is treated as a constructive contribution and subsequently increases the acquisition costs for the shares in the corporation at shareholder level and the contribution account for tax purposes within the meaning of Art. 27 KStG (German Corporate Income Tax Act) at company level. In addition, the liability is reversed in a tax-neutral manner in an amount equal to the loan’s recoverable amount. The non-recoverable portion of the loan represents taxable income under both commercial and tax law. 
• Documentation of recoverability: Careful documentation of the receivable’s recoverability is crucial in order to avoid tax disadvantages.

Conclusion

The BFH decision creates clarity in connection with the tax treatment of shareholder loans. It emphasizes that the debt waiver with debtor warrant generally has a direct tax effect. For taxpayers who grant loans to corporations, it is essential to seek tax advice at an early stage in order to ensure that the financing is optimally structured.

Feel free to contact us at any time if you have any questions in this respect.