On 14 October 2015, the Federal Fiscal Court (Ref. I R 20/15), the Federal Constitutional Court (Bundesverfassungsgericht - BFH) was asked whether the regulations on the interest barrier pursuant to Section 4h EStG 2002 and Section 8a KStG 2002 violate Article 3 (1) GG (principle of equality). The Federal Fiscal Court (BFH) considered the ban on deducting interest expenses triggered by the regulations on the interest barrier to be a violation of the constitutional principle of ability to pay according to financial capacity.
Anyone looking for an overview of the interest barrier can find it in the TXGT blog from 20 November 2024.
Claim of evil tongues
In our opinion, the BFH's comprehensively substantiated order for reference is very helpful in the legal and economic assessment of the interest barrier and is in line with our practical experience and the associated tax dilemma: interest flows out at 100% ("liquidity withdrawn", para. 20) and is not an accounting figure and, in addition, massive taxes of around 30% (corporation) or 45% (partnership) will be paid. Evil tongues are therefore wondering whether the Federal Constitutional Court will need more than 10 years to find objective reasons against the BFH's order of reference.
The problem with the interest barrier
The problems of the interest barrier are manifold. They have also been exacerbated by a Reform 2024 tightened. Last but not least, the completely impractical and highly controversial administrative interpretation in accordance with BMF letter dated 24 March 2025 for a high level of uncertainty. Particularly noteworthy is the administrative interpretation of the regulation on harmful shareholder debt financing in the case of recourse-entitled third parties (Section 8a (3) KStG).
The fact that one of the legislator's main objectives when introducing the interest barrier was the "avoidance of abusive tax arrangements" (BT-Drs. 16/4841, p. 35) shows the outdated nature of the considerations regarding the provision at the time. Furthermore, the BFH already 13 years ago realised that just not abusive cases are covered by the provision.
Criticism of the regulation on harmful shareholder debt financing in the case of recourse-entitled third parties
- Legal basis
The interest barrier is limited by three exceptions (see Section 4h (2) EStG): the exemption limit (net interest expenses of the business are less than EUR 3 million), the exemption of businesses that are not part of a group and the possibility of an equity comparison for businesses that are part of a group (so-called escape clause).
However, the escape clause only applies if there is no harmful shareholder debt financing within the meaning of Section 8a (3) KStG. Harmful shareholder leverage always exists if more than 10 % of the negative interest balance of a company is paid to a shareholder with a direct or indirect interest of more than 25 % in the share capital or share capital, to a related party or to a third party with a right of recourse.
- Systematic position and objective
The exception in Section 8a (3) KStG extends the scope of application of the interest barrier to cases in which a third party provides the corporation with debt capital, but can fall back on the shareholder with a material interest or a related party.
The aim of this extension is to prevent circumvention arrangements, in particular so-called back-to-back financing, in which the shareholder economically injects own funds via a third party in order to circumvent the restriction on interest deduction.
While this normative purpose is legitimate in principle, the legal formulation is unanimously criticised in literature and case law as excessive, vague and constitutionally questionable.
- Broad and imprecise interpretation of the concept of recourse
According to the legislator and the tax authorities, the term "recourse" in section 8a para. 3 KStG is to be understood very broadly. This means that there does not have to be a legally enforceable claim - for example from a surety, guarantee or security - in order to assume harmful shareholder debt financing.
It is sufficient if the shareholder or a related party effectively guarantees the debts of the company. This means that both legal securities (such as letters of comfort, land charges, security property) and mere economic dependencies can fulfil the criteria. In the opinion of the tax authorities, the pledging of shares in the debt-financed company also constitutes recourse.
This broad wording means that the statutory offence can be applied almost without restriction and is in fact extended to mere credit guarantees. A result that contradicts the legislative objective.
- Inappropriateness of the provision
The practical implications of the regulation are particularly clear in the SME sector:
Banks require collateral for loans. As a result, even normal debt financing that does not demonstrate abusive behaviour can be qualified as "harmful shareholder debt financing". It is particularly problematic that the broad interpretation primarily affects companies that are financially weak or in economic difficulties. These companies are often dependent on their shareholders providing collateral in order to obtain loans.
The provision therefore leads to a disproportionate burden on precisely those companies that are dependent on such financing. Against this backdrop, the BFH already expressed considerable constitutional doubts in its ruling of 13 March 2012 (I B 111/11), as the provision on a large scale not abusive cases and thus exceeds the scope of standardisation.
Our appeal - also to the legislator
Since coronavirus and the rising interest burden following the end of the zero interest rate phase, we have observed a creeping - and irreversible - decline in the German industrial landscape. High interest rates are depressing the profitability of SMEs.
The regulation of the third party entitled to recourse in Section 8a (3) KStG is an example of an over-typical prevention of abuse without sufficient precision or even excessive effect. It violates both the principle of proportionality and the requirement for clarity of the law and penalises medium-sized companies in particular.
It is therefore an economically obvious view that interest for operationally necessary investments and other expenses can be deducted without exception. Of course, the legislator can, within the meaning of Section 4 (4a) of the German Income Tax Act (EStG), penalise obviously externally financed pleasure expenditure that is not economically related to the business purpose of the company.
Yours TAXGATE Team is at your disposal for proactive advice on how to avoid these adverse effects and for further information. StB Ilkan Dadusut and StB Dr Tobias Stiegler support medium-sized companies and international family businesses in fulfilling their complex cooperation and tax declaration obligations.
