Significance of interest on shareholder loans

In many companies, shareholder loans play an important role in raising capital. With such loans, shareholders lend money to the company to bridge financial bottlenecks or finance investments. However, the correct interest rate for shareholder loans presents many companies with a complex challenge under tax law, where it is essential to look at comparable companies.

Interest on shareholder loans is important in order to provide shareholders with an appropriate return on their investment. It ensures that the loan is not regarded as a gift-like benefit and that the legal requirements are met. In addition, the interest rate can also have tax implications, as the interest payments may be tax deductible as expenses.

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Calculation of interest

Interest on shareholder loans can be calculated in various ways. The most common methods are

1. Fixed interest rate: With this method, a fixed interest rate is agreed that remains constant during the term of the loan. The interest rate can be negotiated either at market rates or individually, depending on the financial conditions of the company and the expectations of the shareholder.
2. Variable interest rates: Here, the interest rate is linked to a reference interest rate such as Euribor. This means that the interest rate reflects current market conditions and can change over time.
3. Profit-related interest: This method is based on the success of the company and links the interest rate to the profit made. In this case, the interest rate can be variable and adjusted according to the company's financial performance.

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Arm's length principle for the interest rate on shareholder loans

The arm's length principle must be observed when calculating interest on shareholder loans. This means that the agreed interest rates should be similar to those that would apply if it were a loan between independent third parties. This has also been confirmed by the Federal Fiscal Court (BFH) in its ruling ref. no. IR 62/17.

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Example from case law

The case concerned a German company that had taken out a fully secured bank loan with an interest rate of 4.78% p.a., an unsecured loan from the seller with an interest rate of 10% p.a. and a loan from its sole shareholder with an interest rate of 8% p.a.. The loan from the shareholder had no collateral and ranked last in comparison to other debts, particularly other loans. The tax office considered the interest rate on the shareholder loan to be too high and only granted an interest rate of 5% based on the bank loan. The tax office saw the difference between the two interest rates as a kind of hidden profit distribution that increased the company's profit.

However, the BFH ruled that an unrestricted comparison with the bank loan was incorrect, as a third party would not grant a subordinated and unsecured loan at the same conditions as a senior and secured loan. The statutory subordination of shareholder loans is irrelevant for the arm's length comparison and does not prevent the application of a compensatory risk premium when determining the interest rate for an unsecured shareholder loan. Actual agreements with third parties (in this case the secured, senior bank loan) would have to be mathematically adjusted to compensate for special circumstances at affiliated companies before they can be used for the arm's length comparison. The BFH thus followed the OECD transfer pricing guidelines.

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Wrapping it up

The correct calculation of interest on shareholder loans is crucial in order to avoid tax risks and meet the requirements of the arm's length principle. By observing the various calculation methods and applying appraisers in accordance with the IDW S1 standard, companies can ensure that their loans are subject to appropriate and tax-compliant interest rates. SmartZebra's tools and expertise support this process efficiently and reliably.

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