Write-off of a Limited Liability Company Shareholder

Loans from shareholders to “their” limited liability company are a common financing instrument in practice. In a crisis or in the event of the company’s insolvency, corresponding write-offs at the shareholder level often result. The associated tax issues are repeatedly clarified by case law. In its ruling of November 19, 2024, case no. VIII R 8/22, the German Federal Fiscal Court had to decide at what point in time a write-off by a shareholder of a limited liability company in exchange for a debtor warrant is to taken into account.

According to the relevant case law of the German Federal Fiscal Court, in the case of a shareholder’s write-off against the limited liability company, a distinction must be made between the still recoverable and the no longer recoverable portion. In this respect, different taxation facts can be realized. The write-off of the recoverable portion of the claim results in a so-called hidden contribution. The pro-rata nominal value, which generally corresponds to the fair market value of the claim, is to be offset against the acquisition costs, so that a contribution profit of EUR 0 is ultimately obtained.

To the extent of the no longer recoverable portion of the claim, the write-off results in a capital loss, which is to be allocated to the (negative) income from capital assets. This is based on the assumption that the write-off results in the loss of the claim, which is equivalent to the case of assignment expressly covered by the law. In economic terms, it makes no difference whether the shareholder assigns a claim to the limited liability company or writes it off. This also applies in the case of a write-off subject to the condition subsequent. This is because at the level of the company as the debtor, the legal consequences of a write-off in exchange for a debtor warrant arise at the time of the write-off. At that point, the loan is reclassified from debt to equity. The shareholder loan only reverts to debt capital once the recovery occurs. Accordingly, the shareholder as creditor must take into account the loss from the conditional write-off at the time of the write-off and not only when it is certain that the condition subsequent, i.e. the recovery, will no longer occur.

Incidentally, until the recovery occurs, the shareholder acquires an expectancy in the revival of his claim. This is a distinct, marketable asset in its own right. In particular, the expectancy is not partially identical with the extinguished claim, but rather represents a preliminary stage for the new acquisition of the claim. The expectancy is to be valued at zero.