Reduced-interest rate loan - Calculation of the interest-rate advantage for gift tax purposes
In the case of loans granted between related persons (such as friends or relatives), frequently, particularly favourable conditions are agreed. As the usual conflict of interests between the lender and the borrower does not apply, a reduced-interest rate loan could have tax consequences. In particular, the interest-rate advantage that is granted could trigger a gift tax liability. A recent ruling by the Federal Fiscal Court (Bundesfinanzhof, BFH) provides an explanation as to how the taxable interest-rate advantage is measured in such cases.
In the underlying dispute that the BFH had to decide in its ruling of 31.7.2024 (case reference: II R 20/22), the claimant had obtained a loan in the amount of €1.8m, for an indefinite period, from his sister and was paying interest on the loan at a rate of 1% per year. The local tax office (Finanzamt, FA) considered that granting a loan at a reduced interest rate constituted mixed gifting; to calculate the generous gift the FA used the difference between the actual interest rate of 1% that had been agreed and an interest rate of 5.5% and ultimately assessed gift tax of €229,500. The FA took the 5.5% rate of interest from the German Valuation Act; this interest rate had to be applied because there was no standard market interest rate available for comparable loans.
The BFH decided that the granting of a loan at a reduced interest rate had admittedly been correctly determined as being a generous gift (mixed gifting); however, when measuring the interest rate advantage, the FA should not have used 5.5% as a basis because a lower value was definitely available. According to the wording of the German Valuation Act, the interest rate of 5.5% may only be used if “no other value has been established”. In the previous instance, the tax court of Mecklenburg-Western Pomerania had however established that the standard market interest rate for loans to persons who are economically active, fixed for a period of one to five years, would effectively have been 2.81% per year. In the opinion of the BFH, because the loan that was the subject-matter of the dispute could have been cancelled after a term of four years and as the claimant was an economically active person, the applicable rate of interest under comparable conditions was thus 2.81% and, consequently, had to be used to calculate the gain for gift tax purposes.
