Local tax court of Düsseldorf rules on tax-effective write down of receivable derived from sale of shares

The local tax court of Düsseldorf (case reference: 17 K 4146/09) recently ruled that if a receivable derived from the sale of shares has to be written down in a year after the sale, the write-down qualifies as part of the tax-exempt capital gain from the sale of the shares. As a result, it does not lead to a tax deductible expense.

The case involved a German KG (with a GmbH as a 100 % limited partner) that realized a tax-exempt capital gain from the sale of shares in a subsidiary in 2002. In 2004, the KG treated the write-down of the remaining receivable due to the sale of the shares as a tax deductible expense. The taxpayer took the position that, based on a 2009 decision of the Federal Tax Court (BFH, case reference I R 52/08), write-downs of shareholder loans effected before 2008 were tax deductible and only write-downs related to shareholdings were nondeductible. Following a change in the law that became effective on 1 January 2008 (see GTLN 3/2009 and GTLN Special Edition 11/2007), business expenses/losses resulting from the write-down of loans granted by a substantial (i.e. more than 25 %) shareholder or related party are disallowed unless the borrower can demonstrate that it could have obtained the loan under the same conditions from an unrelated third party.

The local tax court rejected the taxpayer’s arguments because the tax exemption for capital gains refers to the actual capital gain which also takes retroactive increases or decreases of the capital gain into account, e.g. in the case of purchase price adjustments provided for in the sale and purchase agreement. According to the court, the write-down of the receivable due to the sale of shares leads to a reduction in the tax-exempt capital gain.

The local tax court left open the question whether the change in the capital gain had to be considered in the year of the sale of the shares or in the year of the write-down of the receivable.

The case is pending before the BFH (case reference: I R 58/10).

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