If you invest in real estate or other assets together with business partners, you will accept some disadvantages if the investment takes place in private assets. Because both the current income and possible capital gains are subject to the personal income tax rate of up to 45 %. In addition, there is a solidarity surcharge and, if necessary, church tax. A shareholder loan enables business partners to significantly reduce the tax burden, at least in part.

A “classic” use case for shareholder loans is the purchase of real estate with subsequent renovation and resale. This quickly generates profits of several hundred thousand euros. The top tax rate, which applies from an income of around EUR 280,000, is quickly reached here.

First principle: How the shareholder loan works

The shareholder loan is initially a classic capital transfer. A lender provides the borrower with the desired amount of money, about EUR 200,000. The business partners conclude a written contract in which the specific conditions of the shareholder loan are regulated.

The special features of the shareholder loan are therefore not the payment of the loan amount, but the granting of interest. Unlike a classic annuity loan, the lender does not receive a fixed interest rate of, for example, 5%. Rather, it participates in the profit generated by the borrower with the capital provided – for example, in the amount of 50 %.

A corresponding clause in the loan agreement could look like this:

‘§ 2 Interest/profit sharing’

(1) The loan is to be remunerated exclusively depending on the profit.

(2) The remuneration is variable in terms of amount and amounts to 50 % of the profit made by the borrower on the sale of the property “ Musterstraße 10, Musterstadt”. If there is no profit, the interest rate is 10% a year.

If two persons now invest together in the renovation of a property, the “financier” receives his share of the proceeds of the sale in the form of interest on his shareholder loan. In this way, the tax burden is only 25 %, since interest from shareholder loans is also subject to the withholding tax rate.

The borrower, on the other hand, can deduct the interest paid to the lender as a cost of sale and thus also only taxes half of the profit. Here the tax rate is then up to 45 %, but the corresponding design can be repeated as often as desired. In the case of the second property, the former borrower therefore grants the shareholder loan to the former lender.

As a result, business partners reduce their combined tax burden to an average of 35% (25% + 45%: 2).

Tax treatment of the shareholder loan

Shareholder loans largely correspond to customary loan agreements, as they differ essentially only in terms of interest payment. This leads to the fact that the tax treatment largely corresponds to that of a “normal” loan.

2.1 Treatment with the lender

The lender shall recognise the interest accruing to it from the shareholder loan as capital income pursuant to § 20 (1) no. 4 EStG. As a rule no tax deduction is made, he must indicate the interest income in his income tax return and – if necessary – only submit a tax return (§ 32d paragraph 3 EStG).

Interest is subject to the capital gains tax rate of 25 % (§ 32d (1) EStG). However, the cases of paragraph 2 must be considered, because – analogous to loans between close relatives and close persons – there are certain cases in which the interest is subject to the regular income tax rate: