German financial authorities on treatment of loan granted to subsidiary

Shall – especially in a group-structure – a loss-carrying subsidiary be wound-up, quite frequently (and especially with regard to taxation) the question arises, on how to handle any group loans that may have been granted to the subsidiary. In order to synchronise the actions of the tax authorities in these cases, the Frankfurt Regional Tax Office (“Oberfinanzirektion Frankfurt, OFD Ffm”) has recently issued a general decree, which shall be discussed in the following article.

In case, the shareholder originally secured the financing of the subsidiary by means of loans and later decides to liquidate it, e.g. since the subsidiary shows a permanent operational deficit, the management has to critically assess some seemingly “easy solutions” to the problem:

Quite often, a simple repayment of the loan is out of the question due to the poor economic situation of the subsidiary. On the other hand, an explicit waiver of claims by the parent company would lead to a (taxable) book profit for the subsidiary (in this context, see also the various articles on “turnaround profits”, here). Also, due to the lack of actual value, a contribution of the loan into the capital reserve of the subsidiary is not an option either. Although it would be possible to solve the situation through a merger of the subsidiary with the parent company such an approach would require the assumption of all liabilities and risks associated with the subsidiary and is therefore in many cases inadvisable, too.

Finally, it is possible to liquidate the subsidiary without expressly waiving the claim (which is regularly subordinated anyway). However, it is questionable whether the resolution on the liquidation might be regarded as a implied waiver by the parent company and whether this – again – would lead to taxable book profits for the subsidiary. In some cases, the tax authorities held that the loan should be written-off at the conclusion of the liquidation due to the lack of any actual economic burden related to it. If  in such cases, the parent company could not or did not intend to provide the subsidiary with sufficient financial means (for example, through a contribution to the capital reserve) to settle the claim, the subsidiary would be forced to file for insolvency.

With the general decree of 30 June 2017, the OFD Ffm has challenged this view held by some tax authorities and declares that

  • the application to liquidate the company by the shareholder or the consent of a third party creditor does not constitute a implied waiver of claims and therefore does not lead to a write-off of the respective loan,
  • even a impecuniousness of the corporation, as evidenced by the liquidation balance-sheet, neither leads to a write-off of the loan nor to the creation of a liability below the nominal value,
  • a write-off of the loan should only be required if, on an objective assessment of the circumstances, it is to be assumed that the creditor would no longer assert his claim,
  • the aforementioned principles also apply in case of a company’s liquidation in insolvency.

In addition, the OFD FFm clarifies with a somewhat ambiguous wording that the hitherto valid rules regarding the subordination of loans according to a letter of the German Ministry of Finance (“Bundesministerium der Finanzen, BMF“) issued in 2006 also apply after a judgement of the German Federal Civil Court (“Bundesgerichtshof, BGH“) issued in 2015. Since, under certain circumstances, a subordination agreement not in compliance with the aforementioned requirements may result in the taxable write-off of the respective loan, this clarification was needed.

Actually, this directive is directly binding for the area of responsibility of the OFD Ffm only – but not for other regional tax offices. However, as with the decrees on the judgment of the German Federal Tax Court (“Bundesfinanzhof, BFH“; after the abolition of the “Decree on Turnaround” (“Sanierungserlass”; cf. here), the BMF often uses the OFD Ffm informally as a “distributor” of policy decisions. In addition, the decree was harmonized at Federal and State level (including the BMF) in order to achieve a nationwide synchronization of the financial administrations. Therefore, the application of this decree by other OFDs in Germany is likely.

It remains to seen whether the BFH does not regard this creative solution of the financial administration as yet another circumvention of its jurisdiction on the “Decree on Turnaround”.


OFD Frankfurt v. 30.06.2017 – S 2743 A-12-St 525

BMF, Schreiben v. 8.9.2006, BStBl. I 2006, 497

BGH, Urt. v. 5.3.2015, IX ZR 133/14

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