BFH: Gift tax on low-interest loans between close relatives
The tax recognition of loan agreements is a perennial issue. The tax authorities are skeptical not only about agreements between corporations and their shareholders, but also between individuals and related parties. In order to avoid tax law or even criminal tax law consequences, loan agreements should in principle be structured and actually implemented on market terms.
Gift within the meaning of Section 7 (1) No. 1 ErbStG
If a loan that is not in line with market conditions, in particular a loan with an excessively low interest rate, is granted between family members, the interest savings are to be regarded as a taxable mixed gift within the meaning of Section 7 (1) No. 1 ErbStG and may therefore trigger gift tax. The Federal Fiscal Court (“BFH” ) confirmed this in its ruling of July 31, 2024, II R 20/22. The effective date for tax purposes is the date on which the generous gift is made, i.e., the date on which the loan is paid out.
Assessment of the interest advantage
In the case of loans with excessively low interest rates, the subject of the gift is the interest benefit resulting from the reduced cost of capital. In principle, the benefit of use, which is to be regarded as a gift, is calculated as the difference between the agreed interest rate and the standard interest rate of 5.5% specified in Section 15 (1) of the German Property Transfer Tax Act (BewG). As the BFH clarifies in the above-mentioned ruling, however, the interest rate specified in Section 15 para 1 BewG cannot be used if a lower market value for comparable loans has been established. According to the BFH, the effective interest rate published in the statistics of the Deutsche Bundesbank is to be used as the market rate in the case in question.
Practical information
In practice, this means that in order to avoid gift tax risks in loan agreements between family members, the interest rates must be in line with market conditions. Although there is no active obligation on the part of the taxpayer to provide evidence, careful documentation is always recommended. For new agreements, statistics from the Deutsche Bundesbank for comparable cases can serve as evidence. It is also still advisable to obtain specific comparative offers from credit institutions. Existing loan agreements should be reviewed and adjusted if necessary. Tax advice is recommended, especially in view of the large number of court rulings on this subject.
Johanna Kirner | TLI Steuerberater
