When a loan claim becomes irrecoverable, it is more than frustrating. Clients in this situation want to know from us what the tax position is. We explain it using an example:
In 2010 you lent an acquaintance 40,000 euros. Repayment including 5% interest p.a. was due on 31.12.2016. It now turns out that your acquaintance is on the verge of insolvency and cannot repay the loan, or can only repay a small part of it.
Since the introduction of the final withholding tax (Abgeltungssteuer) on 1.1.2009, gains and losses on the disposal of private loans have for the first time been captured for income tax purposes. Unfortunately, the Dusseldorf Tax Court ruled on 11.1.2015 that "the loss on a loan is not treated as equivalent to a disposal and is irrelevant for income tax purposes." However, an appeal on points of law (Revision) was lodged against that judgment.
So what can you do?
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If your acquaintance is already in insolvency, you should apply for the loan loss to be taken into account in the income tax assessment. The tax authority will in all likelihood refuse. You should lodge an objection (Einspruch) against this tax assessment and apply for the proceedings to be stayed, referring to the pending appeal on points of law. This allows you to benefit from a favourable Federal Tax Court (BFH) ruling without any cost risk.
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If your acquaintance is not yet in insolvency, there is a straightforward approach: you sell the at-risk loan claim to a third party. You will certainly find someone who is prepared to bet, for example, on recovering 10% of the loan claim = 4,000 euros, either as an insolvency dividend or by way of a settlement. The disposal loss of 36,000 euros can in any event be claimed as a capital loss for income tax purposes and set off against other investment income - though not against other types of income. In the best case, you save income tax of 25% of 36,000 euros = 9,000 euros, plus the solidarity surcharge and, where applicable, church tax.
If you have any questions, please do not hesitate to contact us.