Standard market interest rates are an important aspect when setting financing conditions between affiliated companies
Importance of interest on shareholder loans
In many companies, shareholder loans play an important role in raising capital. With such loans, shareholders lend the company money to bridge financial bottlenecks or finance investments. However, the correct interest rate on shareholder loans presents many companies with a complex tax challenge, in which a look at comparable companies is essential.
The interest rate on shareholder loans is important in order to offer shareholders an appropriate return on their investment. It ensures that the loan is not regarded as a gift-like benefit and that legal requirements are met. In addition, the interest rate may also have tax effects, as interest payments may be tax-deductible as expenses.
Calculation of interest
The interest on shareholder loans can be calculated in various ways. The most common methods include:
a) Fixed interest rate: With this method, a fixed interest rate is agreed upon, which remains constant over the term of the loan. The interest rate can be negotiated either in line with the market or individually, depending on the financial conditions of the company and the expectations of the shareholder.
b) Variable interest rates: Here, the interest rate is linked to a reference interest rate such as Euribor. As a result, interest rates reflect current market conditions and may change over time.
c) Profit-related interest rates: This method is based on the company's success and links the interest rate to the profit made. In this case, the interest rate can be variable and adjust according to the financial performance of the company.
Cross-reference principle for interest rates on shareholder loans
When paying interest on shareholder loans, the foreign settlement principle must be observed. This means that the agreed interest rates should be similar to what would be the case if it were a loan between independent third parties. This was also confirmed by the Federal Fiscal Court with its >> Judgment A.IR 62/17 underpinned.
The case involved a German company which 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 was in last place compared to other liabilities, in particular 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% on the basis of the bank loan. The tax office sees the difference between the two interest rates as a type of hidden profit distribution that increases the company's profit.
However, the Federal Fiscal Court ruled that an unrestricted settlement with the bank loan was erroneous, as a foreign third party would not grant a subordinated and unsecured loan on the same terms as a priority and secured loan. The legally mandated subordination of shareholder loans is irrelevant for the external comparison, and does not prevent the application of a compensatory risk surcharge when setting the interest rate for an unsecured shareholder loan. Existing agreements with foreign third parties (in this case the secured, senior bank loan) would have to be adjusted mathematically to compensate for special circumstances involving affiliated companies before they can be used for the external comparison. The Federal Fiscal Court thus followed the >> OECD transfer pricing guidelines.