2026-10-10 11:17

When is interest on a shareholder loan not taxed in Germany?

Only when four conditions hold at the same time: the loan is not secured on German real estate, carries no share in profits and bears an arm's-length rate, and the lender does not live in a jurisdiction on the German tax-haven list (StAbwV), which includes Russia. Interest that a German limited-liability company (GmbH) pays a non-resident shareholder on a shareholder loan (Gesellschafterdarlehen) is then not taxed in Germany; breach any one condition and it falls back into the German tax base. The lender's country of residence usually taxes the interest either way: in the example in Part 11, at a 40% rate, that is about €131,000 a year — almost twice the German saving.

German tax arises only in the cases the law lists

Interest that a German GmbH pays to a non-resident lender is taxable in Germany only in the cases listed in § 49(1) no. 5 EStG and, if the lender is resident in a jurisdiction on the StAbwV list, also under § 10 StAbwG. An ordinary loan falls into none of these cases, so its interest is not taxed in Germany and is not subject to German withholding tax (§ 43(1) no. 7 EStG). This holds only if all four conditions are met (see Part 9 of the series German Prime Retail).

Exhibit 1. Breaching any one of the four conditions triggers German tax

Condition	If it is not met
1. The loan is not secured on German real estate — neither by a land charge (Grundschuld) nor by a mortgage, not even a second-ranking one	The interest is taxed by assessment (§ 49(1) no. 5 c aa EStG); a double tax treaty may reduce the tax
2. The loan is not profit-participating	26.375% withholding tax
3. The rate is at arm's length and documented	The excess is a hidden profit distribution (verdeckte Gewinnausschüttung): it does not reduce the GmbH's profit and is taxed as a dividend (§ 8(3) KStG)
4. The lender is not resident in a jurisdiction on the StAbwV list (currently including Russia, Panama and Fiji)	15% withholding tax (§ 10 StAbwG), documentation duties (§ 12 StAbwG) and no treaty protection (§ 1(3) StAbwG)

The formalities matter as much as the conditions

The loan terms — amount, rate, term, ranking and repayment — are agreed in advance, in practice in writing, and then observed; otherwise interest paid to a controlling shareholder will be treated as a hidden profit distribution. A shareholder who is also the managing director is contracting with himself. This is permitted only if the articles or a shareholder resolution release him from the prohibition in § 181 BGB, and in a single-shareholder company the transaction must also be recorded in writing (§ 35(3) GmbHG). If the lender is a foreign company of the same group, the GmbH must show that it could service the loan over its entire term (§ 1(3d) AStG).

A loan lowers the tax, not the risk: in an insolvency the shareholder's claims rank behind those of the other creditors (§ 39(1) no. 5 InsO). Repayments made in the year before the insolvency petition can be clawed back (§ 135(1) no. 2 InsO). For the GmbH itself the interest is an expense: the interest barrier (Zinsschranke) applies only once net interest expense reaches €3 million a year (§ 4h EStG).

The German exemption ends at the German border

In the example in Part 11, the GmbH borrows €10.9 million at 3.0% and pays the investor €327,000 of interest a year. Compared with funding by equity alone, this saves about €68,000 of German tax a year. But if the country of residence taxes interest at 40%, the same €327,000 costs about €131,000 there — almost twice the German saving.

A move changes the answer. An investor who becomes resident in Germany pays tax on this interest in Germany. With a stake of 10% or more, it is taxed at progressive rates of up to 45%, not at the 25% flat rate on investment income (§ 32d(2) no. 1 lit. b EStG). Repayment of the loan principal is a return of capital and is not taxed.

Implications for investors

1. Agree the loan terms in writing before the money moves, and observe them. Otherwise interest paid to a controlling shareholder will be treated as a hidden profit distribution. A shareholder-director may sign the agreement with himself only if the articles or a shareholder resolution release him from the prohibition in § 181 BGB.

2. Calculate the tax in your country of residence before granting the loan. The German exemption ends at the German border, and a move to Germany changes the answer: with a stake of 10% or more, the interest is taxed at progressive rates of up to 45%.

3. Do not treat the loan as protection for your capital. In an insolvency the shareholder's claims rank behind those of the other creditors, and repayments made in the year before the insolvency petition can be clawed back.

What to check:
• the loan agreement is signed before the money is transferred: amount, rate, term, ranking and repayment;
• no security for the shareholder — neither first-ranking nor lower-ranking;
• the interest does not depend on the GmbH's profit;
• the arm's-length rate is supported by a calculation as at the date the loan is granted;
• the lender's tax residence is checked against the current StAbwV list, and the tax in the lender's country of residence is calculated before the loan is granted.

Sources: EStG §§ 4h, 32d, 43, 49(1) no. 5; KStG § 8(3); StAbwG §§ 1, 10, 12; StAbwV § 2; AStG § 1(3d); BGB § 181; GmbHG § 35; InsO §§ 39, 135; German Prime Retail series, Parts 9 and 11. Legal position as of 10 October 2026.

Photo: Jan-Philipp Thiele / Unsplash

This page is general information and not investment, legal or tax advice.

Ilya Gordon