A recent judgment of the German Federal Court of Finance (Bundesfinanzhof) ("BFH") (dated 19 January 2016 - XI R 38/12) may affect the deduction of input tax with regard to providing intercompany loans (for example by holding companies, financing companies or treasury companies). Often such companies receive paid services from third party companies which are subject to VAT and are used to provide loans to subsidiary companies. Applying the new judgment, there is a risk that the right to deduct input tax with regard to such services received from third party companies may be lost.
In the case noted above, the BFH ruled on a German holding company which provided a loan to a subsidiary company. In order to finance its own business activity the holding company itself received paid services from a third party which were subject to VAT. BFH qualified the loan to the subsidiary company as a service exempted from German VAT. Hence, the holding company was not allowed to deduct input tax with regard to the VAT paid to other companies in the light of the VAT exemption regarding the loan.
This new decision must be considered when structuring intercompany loans in Germany provided by holding companies, financing companies or treasury companies to ensure the right to deduct input tax is not lost. However, the new rulings do not apply in the following circumstances:
- Where the receiving subsidiary company is located outside the EU. In this case the German VAT Code regulates that the deduction of input tax is allowed.
- If the borrowing company is located in the EU, the German company providing the loan can opt to taxation of the loan. However, it must be considered that the BFH requires in such a case that the local law of the country where the borrowing company has its legal seat regulates that such a loan can be subject to an option to taxation. However note that only a small amount of the member states of the EU have such possibility included in their local VAT Codes.
- If the company providing the loan and the borrowing company are part of a tax group for VAT purposes (Umsatzsteuerliche Organschaft), the deduction of input tax is not limited. In a tax group for VAT purposes the loan qualifies as a non-vatable internal service which is part of the group internal liquidity management which in turn supports the business units of the borrowing company. Therefore, the services received by the company providing the loan are also allocated to the business units of the other group companies and therefore the input tax is fully deductible. However, such tax groups can only consist of companies that have their legal seat in Germany. This privilege therefore does not apply for cross border financing or cash managing.