Article by Silke Imig

The Supreme Ttax Court decided that the write-down of a loan to a shareholder does not constitute a hidden distribution as the anticipated loss of the loan asset has not yet been realised.

A GmbH provided a loan to its shareholder without security and subsequently wrote down the loan in its accounts. In its tax return, however, the GmbH treated the write-down as a non-deductible expense. The Tax Office concluded that the write-down gave rise to a "hidden distribution" of profits to its shareholder. Germany still operated a Corporation Tax Imputation (or Credit) System during the year of the write-down. As a result of the "hidden distribution" the Tax Office therefore adjusted the tax burden in respect of the profits deemed to be distributed to bring the actual corporation tax "distribution burden" to 30%.

The Supreme Tax Court held that the mere write-down of a loan to a shareholder does not constitute a "hidden distribution" as the loan might still be repaid and the anticipated loss of the loan asset has therefore not yet been realised. The Court explained in its reasoning that a "hidden distribution" is defined as a reduction or prevented increase of the company's assets. While the GmbH posted an adjustment to the value of the loan in its balance sheet, the loan is still shown as an asset. The company's assets have therefore not yet been withdrawn by the shareholder and no "hidden distribution" has taken place. As a result, the corporation tax payable by the company for the year in which the profits were deemed to be distributed does not have to be increased to the "distribution burden" of 30%.

The Court's decision continues to be relevant to foreign shareholders after the abolition of the German Corporation Tax Imputation System, as the Withholding Tax would have to be paid on "hidden distributions".

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