Loan to Company Deductible when Reimbursement Waived

When a minor shareholder, who is also a managing director, waives the reimbursement of a loan in order to save his job and so maybe even to help finance the company, can this be deducted as professional expenses? The BFH clarified this with its judgment of November 25, 2010 (re VI R 34/08, published on February 16, 2011).


The managing director, Jerry, owned 4.6% of a GmbH. In November 2000, the company needed funds to go public. Jerry, next to other shareholders, gave the company a loan over DM 160,000. After this attempt failed, the major shareholders demanded from the minor shareholders that they waive the disbursement of their given loans, to avoid possible bankruptcy and the loss of jobs. So Jerry waived his claim of around DM 160,000. In 2001, he tried to deduct this amount on his tax return but the tax office denied his claim.

Jerry sought legal recourse in court and lost in the Finanzgericht (lower tax court). He appealed and finally in Federal Tax Court, he won his case. The tax court denied the deduction because the waiver was to be allocated to the employment and not to Jerry's income from dividends.

Expenses can only be deducted from the income they apply to. In this case, where a loan to a managing shareholder is concerned, independent of other sources of income (earnings from capital) and employment, the closer and economic relationship to an income the source of income determines whether it can be deducted or not.

The BFH connects the grant of the loan to Jerry's shareholding situation and not to his employment status. Further, the court considers the payment waiver relevant to his employment and therefore deductible. The motives for the loan waiver are to be considered as a separate act of financing the company, which may not necessarily have the same justification as granting the loan.

If you wonder what all the commotion is about, it's simple. When you have more expenses than income, you have a (tax) loss. Tax losses only reduce positive income from the same source of income and not the total bill. In other words, you can have a 1,000 € loss in self-employment but still have to pay income tax for capital income.

Additional information