I. General information

Shareholder loans are a common way of providing a company with liquidity, particularly in the SME sector. In crisis situations, the company’s equity is often strengthened by agreeing on a loan waiver. The loan waiver is sometimes combined with an agreement whereby the waiver is declared subject to the condition subsequent that the company is economically or financially in a position to repay the loan again (so-called debtor warrant agreement). A loan waiver under a debtor warrant agreement has various tax implications, which the Federal Fiscal Court (BFH) recently dealt with once again (judgment of 19 November 2024 – VIII R 8/22). The following aspects had to be clarified in the case:

• Time and scope of loss recognition (see II.)
• Allocation of the loss to income from capital assets (see III.)

The following statements only apply with regard to shareholder loans to corporations.

II. Timing and scope of loss recognition

It should be noted in advance that it is irrelevant from a tax perspective whether the loan is waived or the claim is assigned to the company.
When determining whether and to what extent the loss is to be taken into account, a distinction must be made between the recoverable and the non-recoverable portion of the loan claim. The recoverable portion of the loan leads to a hidden contribution which increases the shareholder’s acquisition costs relating to the shareholding in the corporation. This process is therefore tax-neutral. However, to the extent the loan does not have value, there is no hidden contribution; rather, the shareholder incurs a loss as a result. In the opinion of the BFH, this loss must be taken into account at the time of the waiver. It is irrelevant that a debtor warrant was been agreed upon. This is because a waiver is merely a one-off event, the legal effects of which occur immediately; there is no delay in these legal effects until a point in time at which the (non-)occurrence of a debtor warrant has been or may be established.
A waiver of the non-recoverable portion of the loan also does not lead to acquisition costs for a “betterment entitlement”. One could think about this concept as the shareholder acquires an expectancy right as a result of the debtor warrant agreement. However, in the opinion of the BFH, this expectancy right represents an independent asset which is not identical to the extinguished loan claim. The acquisition costs of the non-recoverable part of the loan claim are therefore not to be allocated to the expectancy right, which would prevent losses from being taken into account.
At the level of the corporation, the loan waiver for a worthless loan is recognized in full in profit or loss; an off-balance sheet adjustment is made if and to the extent there is a hidden contribution (= recoverable portion of the loan).

III. Allocation of the loss to income from capital assets

In the case in question, the shareholder providing the loan held at least a 1% stake in the corporation. In this context, it was questionable whether the loan loss should be given priority under § 17 German Income Tax Act (EStG). This could be inferred from the subsidiarity principle of § 20 para. 8 sentence 1 EStG, according to which commercial income takes precedence over capital income.
In the opinion of the BFH, however, losses can only be taken into account as part of income from capital assets (§ 20 EStG) if the loan waiver – as in the case in question – did not affect income in accordance with § 17 EStG. In the case in question, a loss could therefore be taken into account as part of capital income (§ 20 EStG). However, if the loan waiver were to have an additional effect on income under § 17 EStG at a later date, double consideration is not justified and the loss taken into account in the context of income under Section 20 (2) EStG would then have to be corrected under procedural law.

IV. Conclusion and outlook

In the case of a shareholder loan waiver, the transaction must be divided into two taxable events. If and to the extent the loan is recoverable, the waiver results in subsequent acquisition costs for the investment (“acquisition cost portion”). The non-recoverable portion must be recognized as a loss. The time at which the loss is recognized depends on the time at which the loan is waived. Any recovery agreements are not relevant at this point in time.
It should be noted in this case that § 17 para. 2a EStG was not yet applicable in the case in dispute in accordance with § 52 para. 25a sentence 1 EStG, so that the loan losses covered by the new version of § 17 para. 2a EStG can no longer be taken into account in accordance with § 20 para. 2 EStG.