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 The company's assets have therefore not yet been withdrawn by the shareholder and no "hidden distribution" has taken place.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".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Jonathan Sheehan gives an Irish perspective in the October 2016 edition of The American Lawyer on the European Commission's decision that Ireland granted undue tax benefits of up to EUR13 billion, plus interest, to Apple.
Three of my favourite topics feature in this issue of the Denton Briefing – tax, Bond and beer. But not necessarily in that order and not necessarily for the right reasons.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).