Prohibition of deduction in Section 8b of the German Corporate Tax Act in loan cases for multi-level shareholdings

When determining the income of taxable corporations, profit distributions and capital gains from investments in other corporations and associations of persons, among other things, are not recognised (Section 8b (1) and (2) of the German Corporate Tax Act (KStG)) in order to avoid taxation at several levels of participation. This favourable treatment is offset by a general prohibition on the deduction of profit reductions associated with the respective shareholding (Section 8b (3) sentence 3 KStG). This also includes reductions in profits from a loan receivable if the loan is granted by a party with an indirect or indirect interest of more than one quarter in the share capital of the borrowing corporation (section 8b (3) sentence 4 KStG). In its ruling of 27 November 2024 (case reference I R 21/22), the German Federal Fiscal Court had to clarify how the aforementioned harmfulness threshold of 25 percent is to be determined in the case of an intermediary asset-managing Limited Partnership (Kommanditgesellschaft, KG).


In the case in dispute, a parent Limited liability company (GmbH) held a limited partner's interest of 2,02 percent in the total capital of an asset-managing, non-commercial GmbH & Co. KG. The latter held a 100 percent stake in each of two GmbHs whose assets were declared insolvent in the year in dispute and the following year. In its profit calculation as at 31 December 2015, the KG reported losses from the loans granted to the two GmbHs, which had become irrecoverable due to their insolvency, as an expense. In its 2015 corporate tax return, the parent GmbH declared a net loss for the year, which included a proportionate loss from the KG investment. Following an external audit of the KG, the tax office denied the tax deductibility of the bad debt losses, among other things. For this, it based its assessment of the relevant shareholding of 25 percent on the KG's shareholding in the respective borrowing GmbH and made an off-balance sheet addition in accordance with its shareholding of 2,02 percent in the KG when assessing the parent GmbH. The Fiscal court upheld the appeal against this decision. The German Federal Fiscal Court confirmed the legal opinion of the Fiscal court. 

The prohibition of deduction in Section 8b (3) sentence 4 KStG does not apply in the present dispute. It is true that the losses on receivables represent a reduction in profits in connection with loan receivables within the meaning of the provision, as the loans were granted to subsidiaries. However, contrary to the opinion of the tax office and the BMF, which intervened in the proceedings, it is not the shareholding of the KG that is to be taken into account in this respect, but the respective calculated shareholding of the individual corporation tax subjects. The term ‘shareholder granting the loan’ required by the wording of the regulation is to be understood primarily under civil law, but not in the case of the interposition of a partnership with assets that is not commercially characterised. This is because such an indirect participation in a corporation - from a civil law perspective - is to be regarded as direct due to the fractional tax treatment under Section 39 (2) of the German Fiscal code. Thus, assets - such as shares in corporations - that are owned jointly by several persons are to be allocated to the participants on a pro rata basis, insofar as a separate allocation is required for taxation purposes. This requirement is fulfilled for income and corporation tax purposes in the case of purely asset-managing, non-commercial partnerships. Therefore, the facts realised by the KG in the case in dispute - expenses from losses on receivables - are of no significance for it under tax law and, in accordance with the principle of transparency under tax law, should only be taken into account for the parent GmbH. In this case, however, only the (calculated) participation ratio of the parent GmbH to the two GmbHs can be relevant.

This result also corresponds to the legal system, as it already follows from the determination of the corporation's income regulated in Section 8b (3) sentence 3 et seq. KStG, it already follows that the lending shareholder can only be a corporation with an (in)direct interest in the borrowing corporation. Furthermore, the purpose of the standard is precisely to disregard for tax purposes any reductions in profits arising in connection with the granting of loans that occur in the case of a corporation with a qualified interest in another corporation.

Notice:

This German Federal Fiscal Court ruling is a positive signal for comparable practical cases. This is because the harmfulness limit of 25 percent under section 8b (3) sentence 4 KStG is now less frequently exceeded, as the calculated participation ratio of the partners in the partnership has been confirmed by the German Federal Fiscal Court as being decisive. It remains to be seen whether the tax authorities will adjust their view accordingly.

Furthermore, the Fiscal court Münster ruled in its ruling of 28 January 2025 (case no. 2 K 3123/21 F) on a comparable issue relating to the application of the partial deduction prohibition in the case of amortisation of loans to subsidiary corporations that the relevant shareholding pursuant to Section 3c (2) sentence 2 of the German Income Tax Act does not relate to the partnership granting the loan, but to the natural persons behind it. The appeal was authorised due to the legal question that has not yet been decided by the supreme court. It remains to be seen whether the tax authorities will lodge an appeal following the decision on Section 8b KStG discussed here.