Shareholder loan — simple form of financing with pitfalls

Shareholder loans are an extremely common form of financing, the pitfalls of which become particularly apparent when not everything goes according to plan and loan repayment is in question. Then the crisis-exacerbating effects of this form of financing become apparent. Many a shareholder wonders how difficult it can be to dispose of this easily and quickly constructed form of financing without leaving any residue. Shareholder loans can also become a stumbling block in the event of a sale of the company.

When financing a corporation with its own funds, the shareholders have to decide whether to increase the subscribed (share or nominal) capital, make an additional payment to the free reserve or provide the new funds in the form of a shareholder loan. Shareholder loans may, under certain circumstances, be economically more advantageous for the shareholders than the injection of (real) equity. Instead of profit distributions subject to income tax, which are generally subject to the 25% withholding tax rate, the shareholders receive interest payments from the Company. These are also subject to income tax. Unlike profit distributions, however, interest payments at the level of the Company are generally tax deductible.

Legal framework

• Tax deductibility: interest barrier at company level

At the level of the Company, interest payments from the loan obligation lead to a reduction in profit. Since 2008, however, tax deductibility in this area has only been permissible within the framework of the so-called interest barrier (cf. Sec. 4h (1) Sentence 1 EStG, Sec. 8a (1) KStG). Accordingly, net interest expenses (i.e. interest expenses exceeding interest income of the Company) of less than EUR 3 million p.a. are deductible, while net interest expenses exceeding this amount are only immediately deductible to the extent of 30% of the tax EBITDA (earnings before interest, taxes, depreciation and amortization). If EBITDA falls, this has the effect of exacerbating the crisis by reducing the deduction potential for borrowing costs.

In the context of trade tax, in addition to the regulation on the interest barrier, the special addition rule for financing fees must also be taken into account, according to which interest expenses are generally only 75% deductible as operating expenses if the total financing fees paid by the company for the year exceed EUR 100,000 (Section 8 No. 1 GewStG).