Tax tip: Revocation of loan agreements

The Düsseldorf Fiscal Court has taken a position on the income tax liability of compensation for use in the context of a reversal of revoked loan agreements.

Those who had taken out a loan were able to successfully revoke the contract in past years due to faulty revocation instructions and obtain more favourable interest rates by taking out new loans. There was talk of the "revocation joker".

If a loan agreement is revoked, it must be reversed. The borrower must then refund the loan amount received. In addition, the bank can demand interest from the borrower. On the other hand, the bank must repay the interest and repayments already paid. Furthermore, according to the former legal situation, the bank had to compensate the borrower for the fact that the repayments and interest paid could be used by the bank during the term.

Until now, the majority of tax offices and tax courts have regarded such payments as taxable interest, which must be taxed accordingly for the borrower. The reasoning behind this was that the bank received money in the form of repayments and interest, which is subject to interest.

The Düsseldorf Fiscal Court contradicted this factual situation in a ruling dated 29 September 2022 (Ref.: 11 K 314/20E). The decision was based on the revocation of two loan agreements for two flats by the borrowers.  The court ruled that the compensation payments received were not taxable interest income. According to the court, the borrowers did not leave any money to the bank. However, if the loan was used to finance a rented flat, the compensation should be taxable as rental income, because the amounts paid by the borrower were previously recognised as income-related expenses and their reimbursement is considered income. 

The tax office has appealed. Taxpayers whose compensation was treated as taxable interest should therefore keep their tax assessments open by filing an appeal until clarification by the Federal Fiscal Court (Ref.: VIII R 16/22).