32d EStG, the so-called flat tax, was introduced in 2009. Politicians are now intensely discussing the – at least in part – tax abolition. The Federal Finance Court (BFH) is meanwhile clarifying the most important issues relating to the flat-rate tax.
Bad debt in private assets
One of the most important innovations in the withholding tax was the expansion of taxable income from capital assets. Section 20 (2) of the Income Tax Act made numerous previously non-taxable income taxable. It was a matter of course that this also had to apply to corresponding losses. However, the tax authorities had earlier contested the fact that a private loan was canceled due to taxation. Since her letter on the flat tax in 2009, she has argued that this is irrelevant for tax purposes. This statement can also be found in paragraph 60 of the most recent letter on the flat-rate withholding tax of 18 January 2016.
Arguments for tax consideration
However, the arguments for considering the bad debt were and are impressive. In section 20 (2) sentence 2 of the Income Tax Act, the legislature has listed replacement events. These should be equivalent to the sale of, among other things, assets under private law. The repayment is mentioned there as equal to the sale. However, if this is finally not the case, this must also be taken into account for tax purposes. There can be no one-sided “cherry picking” by the tax authorities. In addition, the losses can usually only be offset within narrow limits due to Section 20 (6) EStG.
BFH confirms consideration of bad debts
In its judgment of October 24, 2017 (VIII R 13/15), the BFH has now confirmed the deduction of a bad debt loss in private tax assets. The final default of a claim is equivalent to the lack of repayment. In this respect, the introduction of the flat-rate tax led to a “paradigm shift”. The downside of taking profits into account in accordance with section 20 (2) of the Income Tax Act is the recognition of losses. Section 20 (6) EStG prevents excessive use of losses from a private bad debt loss.
Shareholder loans follow their own rules
There are exceptions to the flat-rate withholding tax among other things for shareholder loans. Section 32d (2) no.1 Bu. b EStG prevents the application of the flat-rate tax in this respect. A participation share of at least 10% in the debtor corporation is required. The exception then also includes loss offsetting in accordance with Section 20 (6) EStG. This does not apply to qualified shareholder loans in accordance with section 32d (2) no. 1 sentence 2 EStG. In these cases, a complete loss offset from the private bad debt loss can also be achieved.
Loss of receivables partially tax deductible
The taking into account of operational loan losses has been legally restricted by section 3c (2) EStG and section 8b (3) KStG. In contrast, the BFH decision discussed now allows the bad debt loss to be managed at a private level. It remains to be seen whether the tax authorities will apply the BFH’s decision. The next iteration of the flat tax tax letter will hopefully bring clarity here.