With circular dated 21 October 2010 (IV 6 — S2244/08/10001) the Federal Ministry of Finance gave its opinion on the implications of the German Act to Modernise the Law Governing Private Limited Companies and to Combat Abuses (MoMiG) on subsequent acquisition costs and stated that it will substantially adhere to the principles concerning Sec. 17 German Income Tax Act (ITA) as developed by the Federal Fiscal Court and set forth in the circular of the Federal Ministry of Finance dated 8 June 1999 (IV C 2 — S 2244 — 12/99).
For the purpose of Sec. 17 ITA the loss of a shareholder loan is only tax relevant as subsequent acquisition costs of the participation in the corporation if the loan is granted due to the shareholder relationship. When deciding whether the granting of a shareholder loan was granted due to the shareholder relationship, the Federal Fiscal Court hitherto strictly adhered to the principles of equitable subordination under civil law, in particular Sec. 32a, 32b Limited Liability Company Law. Accordingly, a shareholder loan is regarded to be granted due to the shareholder relationship if the shareholder extended a loan to its corporation at a time at which a prudent businessman would have contributed equity capital (crisis of the company). However, under the MoMiG the German legislator deregulated the principles of equitable subordination and introduced in lieu thereof a legal subordination of all repayment claims under a shareholder loan in case of an insolvency irrespective of whether those loans have been extended in a crisis or not.
Notwithstanding the deregulation of the principles of equitable subordination under the MoMiG, in determining whether a shareholder loan has been granted due to the shareholder relationship the Federal Ministry of Finance continues to base its decision on what would be expected of a reasonable and prudent businessman; the term “crisis” and the tax link to it remains in place also under the MoMiG.
Accordingly, with regard to the amount of subsequent acquisition costs the Federal Ministry of Finance still distinguishes between the previously developed four case groups in a slightly modified form:
- Loans extended in a crisis;
- Loans not withdrawn in a crisis;
- Loans being part of the company’s financial planning ab initio; and
- Loans granted with the proviso that the loan will not be withdrawn in a crisis.
The amount of subsequent acquisition costs continues to be determined by the value of the loan receivable at the time at which the loan is regarded to be granted due to the shareholder relationship. However, under the MoMiG a shareholder loan is in any case granted due to the shareholder relationship at least as of the beginning of the time period in which challenges are permissible pursuant to Sec. 6 Creditors’ Avoidance of Transfers Act (CATA) (in most cases one year prior to the application for the opening of the insolvency proceedings). Hence, it has to be distinguished whether (i) the shareholder loan is only considered to be granted due to the shareholder relationship by virtue of the revised provisions of the Insolvency Act and the CATA, or whether (ii) such inducement by the shareholder relationship is inherent with the shareholder loan respectively at least contractually agreed. This is, because in the first case the subsequent acquisition costs are determined by the fair market value of the loan receivable at the beginning of the time period at which challenges are permissible pursuant to Sec. 6 CATA, and in the latter case the subsequent acquisition costs are determined by the nominal value of the loan receivable.
Although loans which have been granted for restructuring purposes are not subordinated under insolvency law, according to the opinion of the Federal Ministry of Finance such loans may still — as hitherto — result in subsequent acquisition costs in case of a loan default.
Under the MoMiG the loss of a loan receivable falling under the small investor privilege continues to be disregarded for the purposes of subsequent acquisition costs. However, the relevant participation amount changed under the MoMiG and, henceforward, the small investor privilege applies to non managing shareholders if they hold 10 percent or less in the corporation’s nominal capital irrespective of the legal form. Prior to the MoMiG, a loss of a shareholder loan was irrelevant for tax purposes if the relevant shareholder held less than 25 percent in the corporation’s nominal capital. Hence, in this respect the required participation amount has been decreased significantly.
Although the circular of the Federal Ministry of Finance directly refers to managing directors of a limited liability company, the principles set forth in this circular should also apply to other legal forms than limited liability companies. Unfortunately, the question of how a shareholder guarantee has to be treated for tax purposes under the new legal situation is not addressed by the circular; up to now the amount of subsequent acquisition costs was assessed in accordance with the principles of equity substituting loans.
In any case, in practice it is still important to provide for sufficient evidence that the granting of the shareholder loan is granted due to the shareholder relationship.