In its decision dated 17 December 2014, I R 23/13, the Federal Tax Court (BFH) defined its opinion on the barrier effect of Article 9 of the double taxation treaty (DTT) with the USA in cases involving the arm’s length principle more precisely. It also commented for the first time on the controversial Federal Ministry of Finance (BMF) publication dated 29 March 2011, Federal Tax Gazette I 2011, p. 277 regarding the recognition of current value depreciation on intercompany loans. The case pertained to the tax recognition of the current value depreciation by a German GmbH on unsecured loan receivables relating to a US subsidiary. The decision should have far-reaching consequences for tax practice. We summarize the essential points in the following. 1. When a shareholder provides a cross-border loan, the shareholder position and the group support replace the securities that would be agreed by third parties. An unsecured shareholder loan should not have a higher interest rate than a secured shareholder loan. According to the BFH, this should also apply for cross-border loans provided by group companies that are not shareholders. It is unclear yet whether this also applies to purely domestic loans. 2. The tax recognition of current value depreciation on shareholder loans and intercompany loans will likely become more difficult. According to the court, it should be tested whether the value of the loan receivable is expected to be permanently reduced. It cannot be ruled out that the tax authorities – wrongly – try to incorporate the creditworthiness of the shareholder or the group into this. They would thereby use the same creditworthiness in the impairment test as that of the group or of the shareholder. Such an approach would also apply to domestic cases and shareholder loans from individuals or families to GmbHs. For cross-border loans, the test criteria of the tax authorities particularly include whether the debtor has met its obligations in its relations with third parties. In such cases, the tax authorities assume that the support from the shareholder or from the group is still valid. Tax Germany March 2015 Our Expertise Tax Law 2 Hot Topics 3. If current value depreciation of the cross-border shareholder or intercompany loan is permitted, the tax authorities have regularly tried to adjust it according to Art. 1 Foreign Tax Act (AStG). In cases where there is a double taxation treaty, the tax authorities can no longer perform adjustments according to Art. 1 AStG; the current value depreciation is therefore still recognized for tax purposes. This can only not be the case where the profit allocation clause of the relevant double taxation treaty (abnormally) does not correspond to Art. 9 of the OECD Model Tax Treaty. 4. Correspondingly, an adjustment of current value depreciation on a crossborder shareholder or group loan according to Art. 8 Para. 3 Sent. 4-8 Corporate Tax Act (KStG) 2008 is also not valid. 5. It remains the case that in treaty law, an adjustment of fee payments or transactions between shareholders and entities is ruled out for purely formal reasons. This can only not be the case where the profit allocation clause of the relevant double taxation treaty (abnormally) does not correspond to Art. 9 of the OECD Model Tax Treaty. 6. For all German double taxation treaties where the profit allocation clause corresponds to Art. 9 of the OECD Model Tax Treaty (i.e. almost all German double taxation treaties), the question of whether there is a material deviation in the terms of the commercial and financial relationships between the group entities or between the shareholder and the entity is decisive. Only where the terms of the commercial or financial relationships deviate from the arm's length principle in a manner relevant to the prices is an adjustment of the transfer prices or the profits permitted. 7. The analysis of whether the intercompany transactions within the group are appropriate must therefore be based on the actual commercial or financial relationships between the group entities. Formal criteria without influence on the prices, interest rates etc. are to be ignored. The tax authorities cannot adjust profits by assuming fictive commercial or financial relationships. In particular, in cases where a German subsidiary suffers losses over many years, the tax authorities may not assume that the subsidiary (profitably) provides a service to the parent company. For further information, please contact: Dr. Stephan Schnorberger E-Mail: Stephan.Schnorberger@bakermckenzie.com Dr. Juliane Sassmann E-Mail: Juliane.Sassmann@bakermckenzie.com 3 Hot Topics Baker & McKenzie - Partnerschaft von Rechtsanwälten, Wirtschaftsprüfern und Steuerberatern mbB Berlin Friedrichstrasse 88 / Unter den Linden 10117 Berlin Tel.: +49 (0) 30 2 20 02 81 0 Fax: +49 (0) 30 2 20 02 81 199 Frankfurt / Main Bethmannstrasse 50-54 60311 Frankfurt/Main Tel.: +49 (0) 69 2 99 08 0 Fax: +49 (0) 69 2 99 08 108 Dusseldorf Neuer Zollhof 2 40221 Dusseldorf Tel.: +49 (0) 211 3 11 16 0 Fax: +49 (0) 211 3 11 16 199 Munich Theatinerstrasse 23 80333 Munich Tel.: +49 (0) 89 5 52 38 0 Fax: +49 (0) 89 5 52 38 199 www.bakermckenzie.com Get Connected: This client newsletter is prepared for information purposes only. The information contained therein should not be relied on as legal advice and should, therefore, not be regarded as a substitute for detailed legal advice in the individual case. 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Foundation of arm's length analysis and write-offs on intercompany loans
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