On 4 November 2021, The German Ministry of Finance (MoF) published Tax Court Decision No. IR 32/17of 9 June 2021, on the taxation of corporate income based on unsecured loans to foreign related companies. In that case, a domestic company granted shareholder loans to its foreign subsidiaries. Most of the loans were fixed interest. For one of the loans, annual participation in net profit was agreed as compensation in lieu of a fixed interest rate. The loans were unsecured.
The Federal Fiscal Court comes to the conclusion that the lack of loan security is one of the conditions that must be included in the overall assessment of the non-customary nature of the business relationship. A non-collateralization can therefore also trigger an income correction in accordance with Section 1 (1) AStG.
In its decision, however, the Federal Fiscal Court ties in with its recently published rulings of 18 May 2021 on unsecured corporate loans and reiterates that unsecured loans are not per se external. The decisive factor is whether a third party would also have granted the loan under the same conditions.
