Financial Aspects of the New German GmbH-legislation - Germany

The law to modernize the legal framework of the German corporation with limited liability (GmbH), enacted on November 1, 2008, has a substantial impact for the corporate finance strategy in Germany. This applies especially for the jurisdiction and legislation of the so-called equity substituting shareholders loans. Under these long-lasting rules a shareholders loan is re-classified if it is granted during a financial crisis of the debtor. As a result any repayment and interest payment is forbidden. Although the loan is handled similar to any equity amount, is has to be treated for balance sheet and tax purposes as debt.
Under the new legislation the legal concept of an equity substituting shareholders loan is no longer existing. The prohibition to repay shareholders loans through the crisis is therefore abolished. The same rules apply for acts and agreements which are comparable to shareholders loans. These reliefs are compensated by a change of the German insolvency law, above all by an extended possibility to contest certain shareholders activities if the company goes bankruptcy.
Other changes apply for upstream loans, this means a credit by the affiliate company to its shareholder entity. This is relevant especially in the case of a cash-pooling model which is more and more common for inter-group financing structures. Up to now the acceptance had to be determined in accordance with the very strict rules to maintain the registered capital at all time. Under this traditional rule any payment to the shareholder, which would reduce the assets to a value below the registered share capital, is a strict no-go. Under the new rules, explained very simplified, such credit payment will be possible, if the claim for repayment can be classified as a valuable receivable.
Tax wise any upstream loan has to be reviewed under the aspect of a hidden profit distribution, which would have negative tax consequences. The new legislation will certainly have a great impact on the tax handling. However, the specific consequences will have to be discussed in the next months.
The new GmbH legislation is a big bang for an all-embracing adjustment of the corporate financing in Germany. The impacts - especially in the days of an overall financial crisis - will be significant. The chances and any need for specific action have to be individually evaluated on a case-by-case basis.
ABOUT THE AUTHOR: Dr. Ulrich Eder
Dr. Ulrich Eder studied German law at Friedrich-Alexander-Universitt in Erlangen, Bavaria and Westflische-Wilhelms-Universitt in Mnster, North-Rhine Westphalia. He received his Dr. jur. in 1990 from Westflische-Wilhelms-Universitt in Mnster. Dr. Eder is a German lawyer (Rechtsanwalt) and a member of the Dsseldorf Bar Association (Rechtsanwaltskammer). He is also admitted within the Federal Republic of Germany to practice as tax advisor (Steuerberater) and is a member of the Tax Bar Association (Steuerberaterkammer) of Dsseldorf.