Federal Fiscal Court: Below-market interest loans can trigger gift tax

Germany's Federal Fiscal Court (BFH) has ruled that a loan agreement between siblings, with an agreed interest rate of only 1% per annum, constitutes a partial gift and is subject to gift tax. The case concerned a loan of approximately EUR 1.8 million.

The tax authorities initially assessed gift tax of approximately EUR 229,500 on the borrower. They argued that the taxable benefit should be calculated as the difference between the statutory interest rate of 5.5% and the agreed rate of 1%. The lower regional tax court upheld this assessment, viewing the loan as a voluntary transfer where the value is determined by the difference between market rates and the agreed rate.

However, the Federal Fiscal Court revised the tax court's calculation. While acknowledging the loan as a gift, it determined that the taxable benefit should not be based on the 5.5% statutory rate. The court found that, based on the information available, the market interest rate for such a loan was approximately 2.81%. Consequently, the taxable benefit was calculated based on the difference between this market rate and the agreed 1% rate, resulting in a tax liability of approximately EUR 59,140.

The ruling highlights the gift tax implications of low-interest loans. BDO AG advises that in such circumstances, it is advisable to obtain documentation proving that the agreed interest rates are in line with market conditions. This can include obtaining binding loan offers from banks with comparable terms. Failure to do so may lead tax authorities to deem part of the loan as a tax-free gift.