German tax authorities are not entitled to deny the current-value depreciation of intragroup loans to a foreign subsidiary if a German parent company gave a loan at arm’s length interest rate to a foreign subsidiary which was not secured under consideration of arm’s length principles.
By judgements of 17.12.14 and of 24.06.2015 the German Federal Fiscal Court stated supremacy of the arm’s length principle in the meaning of art. 9 sec. 1 OECD Model Convention to the national law acts. Rescission of the current-value depreciation by the tax office is not allowed if the intragroup loan was not secured under arm’s length conditions. The court stated that denying the depreciation based on Sec. 1 para. 1 German Foreign Tax Act is not applicable in the case at hand.
In reaction to the decisions of the German Federal Tax Court the German Federal Ministry of Finance has issued a non-application decree. German Federal Ministry of Finance considers the supremacy of the arm’s length principle pursuant to sec. 1 para. 1 German Foreign Tax Act. Accordingly only secured loans at arm’s length interest could be depreciated.
Therefore it is advisable in similar cases to file an appeal and to make a court proceeding. Tax courts, in principle, should allow the current-value deprecation of unsecured intragroup loan to the foreign subsidiary based on the mentioned decisions.