In its judgment IX R 13/18 of 2.7.2019, published on November 14, 2019, the Federal Finance Court decided twice in favor of the taxpayer. The first question was whether the protection of legitimate expectations granted in the context of Section 17 of the Income Tax Act was lawful in connection with subsequent acquisition costs for equity-replacing loans. Here the BFH confirms the protection of legitimate expectations already granted in the landmark judgment IX R 36/15 of July 11th, 2017. Secondly, the BFH had to clarify to what extent the annual financial statements indicate the legal relationships recognized. The BFH affirmed this indicative effect of the adopted annual financial statements.
In addition to the positive results that are taxable, the judgment is also noteworthy with regard to its larger lines. In clear distinction from the lower court, the BFH clarifies its view on protection of legitimate expectations in interaction with non-tax changes in law and on the obligation to provide evidence in loan relationships with related parties. The publication of the judgment coincides with the 2019 Annual Tax Act, the newly introduced § 17 Para. 2a EStG for the future – and retrospectively at the request of the taxpayer – ensures the tax recognition of failed equity-replacing shareholder claims.
Background: MoMiG comes into force and protection of legitimate expectations
The so-called MoMiG came into force on November 1st, 2008. The MoMiG replaced the equity replacement law that had previously applied to equity-replacing financing with other regulations. On the basis of the equity replacement law that had been valid until then, the constant BFH case law had classified losses from equity-replacing financing as subsequent acquisition costs within the framework of section 17 (2) and (4) of the EStG. With judgment IX R 36/15, the ninth BFH Senate then decided that since MoMiG came into force, equity-replacing loans could no longer represent subsequent acquisition costs. Due to the changes in the MoMiG, there is no legal basis. However, the BFH granted the taxpayer protection of legitimate expectations until the judgment was published on September 27, 2017.
In the circumstances of the judgment IX R 13/18 there was an agreement between a sole shareholder and managing director and his GmbH. According to this, expenses and other deposits of the partner should be booked in a loan account of the GmbH. The agreement also stipulated that loans granted by the shareholder should be left in crisis.
The FG Berlin-Brandenburg ruled entirely against the taxpayer by judgment of April 18, 2018 – 3 K 3138/15: In the opinion of the FG, the BFH was not authorized to grant the taxpayer legitimate expectations for constitutional reasons. In the FG’s opinion, even if the arrangement of the protection of legitimate expectations were in conformity with the constitution, the present loan relationship could not have met the requirements of the principles of equity replacement law. The taxpayer had not sufficiently fulfilled his documentation obligation. The balance of the loan relationship alone is not sufficient as evidence.
The BFH judgment
The BFH contradicted the opinion of the FG in all points. Unsurprisingly, the BFH confirmed that the protection of legitimate expectations granted was legitimate. In addition, he assessed the documentation requirements far less restrictively than the FG previously. A loan liability recognized in the annual financial statements is indicative of the existence of the loan, both in terms of the reason and the amount. As the shareholders and the company reaffirmed the legal relationships accounted for by the approval of the annual financial statements, the annual financial statements could represent a declaration of debt. Any accounting errors that have occurred are harmless, provided they do not distort the facts relevant to the facts.
Implications for practice – annual tax law 2019
In practice, the first question of the judgment has recently become largely obsolete. With the JStG 2019, the legislator filled the gap that had arisen when the MoMiG came into force. As part of the annual tax law, a new section 17 (2a) EStG was introduced, through which the legislator expanded the provision of section 17 EStG with an independent definition of acquisition costs. Accordingly, the acquisition costs explicitly include equity-replacing financing of the shareholder to his corporation.
The new Section 17 (2a) EStG can be applied retrospectively at the taxpayer’s request. Section 52 (25a) of the Income Tax Act enables retroactive retroactive effect. The protection of trust granted by the BFH should therefore be superfluous in most cases. Neither the protection of legitimate expectations nor the possibility of voluntary application should, however, block the consideration of loan losses in the context of income from capital assets, provided that the losses can be taken into account in both types of income.