A RULING BY THE FISCAL COURT MAKES LENDING AMONG RELATIVES MORE ATTRACTIVE
Borrowing money, but from whom? – Not everyone gets the loan they want from the bank. Borrowing from a relative is therefore an alternative that many people use. However, even with such loans the state also collects, because interest by relatives is taxable. However not in principle, as the tax court Münster stated in this year.
THE NON-ARM’S LENGTH CONTRACT under review
The case of a loan from father to son was heard in the summer of 2022. To pay EUR 100 as a reserve into a GmbH (limited liability company) that was experiencing financial problems, the son borrowed the sum from his father. The father in turn had borrowed the money from the bank and passed on the corresponding conditions (term and 2.5 percent interest per year) to the son on a 1:1 basis. In addition, the two had agreed that the son would have to provide the father with collateral regarding the loan amount at any time upon request. In accordance with the principle of taxation of interest by relatives, the responsible tax office had demanded 25 percent final withholding tax from the father, which the latter refused to pay. Rightly so, as the Münster Fiscal Court ruled.
The court classified the family loan agreement as a “non-arm’s length contract between relatives”. A significant factor in this decision was the fact that the father did not make a profit from the loan, which was obviously based on private interests, since he offered the son the same conditions that he himself had received from the bank. In addition, the security of the loan relationship was not comparable to a classic third-party loan: due to the problematic finances of the GmbH, it would not have been possible to implement sufficient security.
CONCLUSION: INTEREST PAID BY RELATIVES UNDER A PRIVATE LOAN AGREEMENT IS principally NOT SUBJECT TO TAX
Source: Münster Fiscal Court, Judgment August 24, 2022 (7 K 1646/20 E)
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