Subordination: Possible tax liability despite interest waiver

In its decision dated February 13, 2025 (case no. 4 K 545/22), the Saxon Tax Court ruled that interest from a loan to a corporation is deemed to have accrued to a controlling shareholder within the meaning of Art. 11 (1) EStG (German Income Tax Act) even if it was not actually paid out due to an agreed subordination.

The decision underlines the strict standards that are applied to the taxable inflow of income for controlling shareholders.

Facts: Focus on loans with subordination

The plaintiff held a 90 % stake in a GmbH – 50 % directly and a further 40 % indirectly via another corporation – and was also its managing director. In the years in dispute, he granted the GmbH several interest-bearing loans. The loan agreements contained a subordination clause according to which the repayment of the loans and the payment of interest were to be subordinated to all current and future liabilities of the company.

The GmbH had reported the interest owed as payables to the shareholder in its annual financial statements. No actual payment was made in the years in question. The tax office nevertheless saw a taxable inflow and treated the interest as income from capital assets in accordance with Art. 20 (1) no. 7 EStG. As a result, the shareholder's income was increased accordingly. The shareholder objected to the tax recognition of the unpaid interest and filed a lawsuit with the aim of denying the inflow.

Decision of the tax court: Tax liability confirmed despite waiver

In its decision, the tax court confirmed the tax authorities’ opinion and dismissed the claim. The decisive factor was that, in the case of controlling shareholders, a due and undisputed claim against the company is generally deemed to have been received – even without actual payment. Due to his controlling position, the shareholder regularly had the opportunity to secure the payments himself.

This was not contradicted by the subordination. It only concerned the enforceability of the claim under German insolvency law (Art. 39 (2) InsO), but did not change the maturity under German civil law pursuant to Art. 271 (1) BGB. An actual insolvency of the company had not been proven; an application for insolvency had not been filed either. It could therefore be assumed that the interest was economically available, which would constitute an inflow for tax purposes.

The appeal was permitted due to the decision’s fundamental importance.

Significance for practice

The decision shows that subordination agreements alone are not sufficient to prevent interest from accruing to controlling shareholders for tax purposes. Without an explicit deferral or contractually agreed payment deferrals, interest claims due must regularly be recognized for income tax purposes – regardless of the company's actual liquidity.

This results in an increased need for action for the tax structuring of shareholder loans: subordination clauses should be combined with a clear provision on non-maturity or a deferral of payment if taxation without payment is to be avoided.