Germany generally does not levy withholding tax on interest payments to a non-German resident lender if the loan is fixed interest-bearing loan (except where the loan notes are publicly held (i.e. registered in a German or foreign register) or where a certificate is issued). In contrast, profit-participating / convertible loans and jouissance rights attract withholding tax at a rate of 25% (plus the 5.5% solidarity surcharge, giving rise to an effective rate of 26.375%).
In a decision dated 2 July 2009, the Lower Finance Court of Münster ruled that a loan will be presumed to be a profit-participating loan where the lender participates in the liquidation proceeds if the borrowing company liquidates. The characterization of a loan as a profit-participating loan does not necessarily require a permanent participation in the annual profits or annual turnover of the borrower.
A profit-participating loan is a loan in which the remuneration for the use of capital is not stated up front as a fixed percentage of the loan but (also) relates either to the profit or turnover situation of the borrower – a situation that cannot be predicted at the time the loan agreement is signed. The case involved a closed end fund operating a container ship that entered into a loan agreement with a foreign lender. The loan provided for an interest rate of 7.5% per annum, but also that for years in which insufficient profits were available for guaranteed distributions to the partners in the fund, interest payments would be deferred until sufficient cash was available. It also was agreed that the lender would participate in any potential liquidation proceeds in the event of the sale of the container ship. According to the court, the participation in the liquidation proceeds was sufficient to treat the loan as a profit-participating loan, at least in cases where it is likely that the participation would result in an actual benefit.
Ansprechpartner
Dr. Bettina Lieber | Düsseldorf
Petra Peffermann | Frankfurt
