Tax Ruling: Loan Deduction Prohibition Clarified for Multi-Level Shareholdings

Germany's Federal Fiscal Court (Bundesfinanzhof) clarified interpretative rules concerning the prohibition of deductions under Section 8b of the German Corporate Tax Act (KStG) for multi-level shareholding structures in a ruling dated November 27, 2024.

The case involved a situation where a parent company, a GmbH, held a limited partner interest in a non-commercial asset-managing KG (Kommanditgesellschaft). This KG had granted loans to two subsidiaries that subsequently became insolvent. The KG attempted to deduct the losses from these loans as expenses, but tax authorities disallowed this, citing the 25 percent shareholding threshold in Section 8b (3) sentence 4 KStG.

The Federal Fiscal Court determined that the prohibition of deduction did not apply in this instance. The court held that the determination of the relevant shareholding for the lending entity must consider the individual taxpayer's calculated shareholding, not that of an intermediary partnership. This is due to the tax principle where assets in such partnerships are allocated to the partners pro rata. Consequently, the losses realized by the KG were not its tax-deductible expenses but should be allocated to the parent GmbH based on its proportionate interest in the subsidiaries.

This ruling is significant as it clarifies the determination of the 25 percent "harmfulness" threshold in complex ownership arrangements. It may reduce the instances where this threshold is exceeded in similar practical scenarios. It remains to be seen how tax authorities will adjust their interpretative stances.