The customs value declared by “Import GmbH” of the goods imported from related parties X, Y and Z was in dispute. In the course of a customs audit, the customs office (Hauptzollamt, HZA) found that Y had invoiced “Import GmbH” for subsequent debit amounts of EUR (…) for 2015, EUR (…) for 2016 and EUR (…) for 2017. These were based on a Distribution Agreement of (…) concluded between “Import GmbH” and Y, according to which “Import GmbH” undertook to purchase products from the latter and to sell them in the defined distribution area. With the 1st Supplementary Agreement of (…), supplies from affiliated companies of the group company were also included in this agreement and thus, inter alia, also the supplies from Z. With the second supplementary agreement of the same date, it was stipulated that “Import GmbH” should receive an “agreed margin” which ... Read more

The Finance Court had denied a timber trading group’s deduction of €4 million paid by one group company to a sister partnership as compensation for sawmill construction defects. The Finance Court had refused the deduction because no written agreement existed between the related parties, without assessing all relevant circumstances under the arm’s length principle. Judgment of the Federal Constitutional Court The Federal Constitutional Court annulled a judgment of the Finance Court. The Court found the approach of the Finance Court arbitrary and contrary to Article 3(1) of the Basic Law, as written form cannot be treated as an independent legal requirement. The case was sent back to the Finance Court for a full assessment, while other parts of the complaint were dismissed as inadmissible. Excerpts in English “(1) As the appellants have correctly pointed out, the Finance Court 50, contrary to the decision of the ... Read more

A Hungarian company had a permanent establishment (PE) in Germany. The PE provided installation and assembly services to third parties in Germany. Following an audit of the German PE for FY 2017 the German tax authorities issued an assessment of additional taxabel income calculated based on the cost-plus method, cf. section 32 of the BsGaV (German ordinance on allocation of profits to permanent establishments). Not satisfied with the assessment a complaint was filed by the taxpayer with the Tax Court, which later decided in favour of the PE and set aside the tax assessment. An appeal was then filed by the tax authorities with the Federal Tax Court. Judgment The Federal Tax Court upheld the decision of the Tax Court and ruled in favour of the PE. Excerpt in English “1. It already follows from the wording of Section 1(5) sentence 1 of the Foreign ... Read more

A Hungarian company had a permanent establishment (PE) in Germany. The PE carried out meat cutting work on the basis of work contracts dated 23 February 2017 with the Hungarian company Z Kft. The PE concluded a service agreement with A Kft. in which A Kft. undertook to provide administrative services in the area of support for employees in Germany and was to receive a fee calculated as a percentage of net sales in return. Following an audit of the PE the German tax authorities issued an assessment of additional taxabel income based on the German ordinance on allocation of profits to permanent establishments. In the assessment the service fee was instead determined using the cost plus method. Not satisfied with the assessment a complaint was filed by the PE with the Tax Court. In its complaint the PE argued that the tax authorities corrected ... Read more

A German taxpayer had established a partnership in London in September 2007 to conduct commercial gold trading. The partnership rented office space with two workstations, used business centre services and entered into financing arrangements with a Swiss bank. It also carried out a series of physical and securitised gold transactions, as well as hedging and currency transactions. Trading activity began at the end of October 2007 and had largely ceased by mid-January 2008. The business was sold in October 2008, after which the partnership was dissolved. The tax authorities took the position that the income from the gold trading activity was not attributable to a permanent establishment in the United Kingdom. They argued that, although office premises had been rented and business activities had been carried out there, the temporal requirement for a permanent establishment under the Germany-United Kingdom tax treaty had not been met ... Read more

A German group distributor (“A” GmbH) marketed its foreign parent’s original pharmaceuticals during 2006–2010. Under German health-care rules, domestic pharmacies must source part of their inventory from lower-priced parallel importers, so A’s promotional efforts on the German marked inevitably boosted the sales of those independent importers -and, indirectly, benefited the group -without A being compensated for this contribution. On audit the tax authorities treated this uncompensated contribution as a hidden profit distribution, increasing A’s taxable income by the estimated value of the economic advantage provided by A to the group. An appeal was filed with the Nuremberg Finance Court which in 2021 annulled the tax assessment, finding no proof that an independent distributor would have earned a higher margin under comparable circumstances. The tax authorities then filed an appeal with the Federal Fiscal Court (BFH). Judgment The BFH set aside the decision of the Finance ... Read more

“Auto Harnesses GmbH” had granted interest-free, unsecured loans to its foreign subsidiaries in Romania and Hungary. The loan to the Romanian subsidiary was for the purchase of land and the construction of a factory building. The loan to the Hungarian subsidiary was to settle VAT debts. The tax authorities found that these interest-free loans did not comply with the arm’s length principle and issued a tax assessment in which “Auto Harnesses GmbH”‘s income was increased by 6% interest income on the loans. “Auto Harnesses GmbH” appealed, arguing that the interest-free loans were granted for commercial reasons, to support the activities of its subsidiaries, reduce costs and strengthen its own competitiveness. Judgment of the Court The Court held that the interest-free and unsecured loans were justified on commercial grounds and annulled the assessment. Excerpts in English “The court was not convinced by the plaintiff’s argument that ... Read more

In 2005, Steel Construction GmbH and a Polish subsidiary agreed on a debt write-off, which Steel Construction GmbH deducted for tax purposes. However, the tax authorities issued an assessment denying the write-off as a tax-deductible expense. According to the tax authorities, independent third parties would have agreed to some form of security, and the absence of this was a violation of the arm’s length principle. “Steel Construction GmbH” brought the assessment to court, and in February 2019 the Federal Fiscal Court (I R 73/16) ruled that the tax authorities’ assessment was lawful. This decision was appealed to the Constitutional Court, where Steel Construction GmbH alleged a violation of the general principle of equality, as well as a violation of its fundamental procedural rights. Decision The Constitutional Court ruled that the complaint was inadmissible because it lacked the necessary constitutional substantiation. According to the court the ... Read more

“Consulting GmbH” sold consulting services in Russia and Romania, where it also had fixed places of business. The income from these permanent establishments was declared as exempt under the double tax treaties with Russia and Romania. The tax authority, did not grant the tax relief under the exemption method. It found that German activity reservations applied to the income, due to the involvement of a person with unlimited tax liability in Germany in the activities of the PE’s. An appeal was filed with the Administrative Court, which later ruled in favour of the tax authorities. Judgment The Supreme Administrative Court confirmed the decision of the Administrative Court and upheld the decision of the tax authorities. Click here for English translation Click here for other translation ... Read more

A domestic general partnership (OHG) was the sole shareholder of an Italian corporation (A). OHG had unsecured interest bearing claims against A. During the years of the dispute, the partnership waived part of its claims against A in return for a debtor warrant. Following an audit an adjustment to the taxable income of OHG was issued by the tax authorities. The assessment was later set aside by the administrative court but on appeal by the tax authorities the BFH in 2019 upheld the assessment. A constitutional complaint was lodged against this ruling. Judgment of the Federal Constitutional Court The Court upheld the complaint and overturned the BFH judgment and referred the case back to the BFH. Click here for English translation Click here for other translation ... Read more

Hornbach-Baumarkt AG operates DIY stores in Germany and abroad. Through its domestic subsidiary, it indirectly held 100% of the shares in several companies in other EU countries and in third countries. It had issued guarantees and letters of comfort to various lenders for these foreign companies without charging the subsidiaries any fees for the guarantees. The tax authorities increased Hornbach-Baumarkt AG’s taxable income with fees determined by application of the German arm’s length provision in Section 1 (1) AStG. An appeal was then filed by Hornbach-Baumarkt AG with the Tax Court. Judgment The court referred the following question to the European Court of Justice – Is an income adjustment in accordance with Section 1 AStG in the event of a gratuitous benefit being granted within a group in another EU country in accordance with EU law (TEFU Art. 49 and 54)? In 2018 the European ... Read more

Due to the economic situation of automotive suppliers in Germany in 2006, “Cutting Tech GMBH” established a subsidiary (CB) in Bosnien-Herzegovina which going forward functioned as a contract manufacturer. CB did not develop the products itself, but manufactured them according to specifications provided by “Cutting Tech GMBH”. The majority of “Cutting Tech GMBH”‘s sales articles were subject to multi-stage production, which could include various combinations of production processes. In particular, “Cutting Tech GMBH” was no longer competitive in the labour-intensive manufacturing processes (cut-off grinding, turning, milling) due to the high wage level in Germany. Good contribution margins from the high-tech processes (adiabatic cutting, double face grinding) increasingly had to subsidise the losses of the labour-intensive processes. Individual production stages, however, could not be outsourced to external producers for reasons of certification and secrecy. In addition, if the production had been outsourced, there would have been ... Read more

The German operating companies (W, X, Y and Z) manufactured products using a licence provided by B and sold these products to customers in Germany. The Group decided to move these activities to Switzerland which according to the German tax authorities constituted a taxable transfer of functions. Judgment of the Finanzgericht According to the court neither assets nor other business opportunities were transferred from WXYZ GmbH to the Swiss company. In addition, there was no transfer of a function that was previously exercised by the german operating companies and is now exercised by the Swiss company and thus no causal link between the transfer of assets or other benefits and the transfer of the ability to exercise a function. An appeal against the judgment is pending before the BFH under case no. I R 54/23. Click here for English translation Click here for other translation ... Read more

A Hungarian company had a permanent establishment (PE) in Germany. The PE carried out meat cutting work on the basis of work contracts dated 23 February 2017 with the Hungarian company Z Kft. The PE had concluded a service agreement with A Kft. in which A Kft. undertook to provide administrative services in the area of support for employees posted to Germany and was to receive a fee calculated as a percentage of net sales in return. Following an audit of the PE the German tax authorities issued an assessment of additional taxabel income based on the German ordinance on allocation of profits to permanent establishments. Not satisfied with the assessment a complaint was filed by the PE with the Tax Court. In its complaint the PE argued that the tax authorities corrected all of the PE’s sales in Germany without a corresponding legal basis ... Read more

“Z Pipeline” is a limited partnership which operates a network of pipelines. The network runs through Germany, Belgium and the Netherlands. During the year in question, “Z Pipeline”‘s administrative HQ was in Germany. Operational control of the pipeline was exercised by an ‘operations centre’ located in the Netherlands. It was not disputed that the pipeline constituted permanent establishments in Germany, Belgium and the Netherlands and that the profits should be allocated between the tree countries. The question was how the profits should be allocated. The tax authorities came to the conclusion that the profit should predominantly be allocated to the German permanent establishments. In accordance with the low functions and risks, only a low profit was to be allocated to the respective permanent establishments in Belgium an the Netherlands. The profit allocation was calculated using a cost-plus 30% due to industry and company-specific features. “Z ... Read more

Z is the head of a globally operating group. At group level it was decided to discontinue production at subsidiary “X-BR GMBH” at location A and in future to carry out production as far as possible at location B by group company Y. The production facilities were sold by “X-BR GMBH” to sister companies. The closure costs incurred in the context of the cessation of production were borne by Y. No further payments were made as compensation for the discontinuation of production in A. The tax authorities found that “X-BR GMBH” had transferred functions and thus value to group company Y and issued an assessment of taxable profits. Judgment of the Court of Appeal The Court decided in favour of “X-BR GMBH” and set aside the assessment. According to the court there is no transfer of functions if neither economic assets nor other benefits or ... Read more

The transaction concerned activities within the A Group in the 2008 tax year, involving two sister partnerships with identical ownership and management. T KG acted as the strategic head office of the group and was responsible for planning and constructing a new production plant operated by its sister partnership, C KG. No written contract governed the construction of the plant. Following significant planning errors and implementation deficiencies, the parties concluded a compensation agreement in October 2008 under which T KG agreed to bear substantial start-up losses and pay damages to C KG. T KG treated both the compensation payment and the assumed start-up losses as tax deductible operating expenses. The tax authorities refused to recognise the deduction of the compensation payment and the start-up losses. They held that, between related parties, such expenses could only be deductible if based on clear, civil law valid, arm’s ... Read more

It is disputed between the parties whether the A Corp. resident in the USA – a so-called S corporation – or its shareholders are entitled to full exemption and reimbursement of the capital gains tax with regard to a profit distribution by a domestic subsidiary of A Corp. (S-Corporation). A Corp. (S-Corporation) is a corporation under US law with its registered office in the United States of America (USA). It has opted for taxation as an “S corporation” under US tax law and is therefore not subject to corporate income tax in the USA; instead, its income is taxed directly to the shareholders resident in the USA (Subchapter S, §§ 1361 to 1378 of the Internal Revenue Code (IRC)). The shareholders of A Corp. (S-Corporation) are exclusively natural persons resident in the USA as well as trusts established under US law and resident in the ... Read more

The customs value declared by “Import GmbH” of the goods imported from related parties X, Y and Z was in dispute. In the course of a customs audit, the customs office (Hauptzollamt, HZA) found that Y had invoiced “Import GmbH” for subsequent debit amounts of EUR (…) for 2015, EUR (…) for 2016 and EUR (…) for 2017. These were based on a Distribution Agreement of (…) concluded between “Import GmbH” and Y, according to which “Import GmbH” undertook to purchase products from the latter and to sell them in the defined distribution area. With the 1st Supplementary Agreement of (…), supplies from affiliated companies of the group company were also included in this agreement and thus, inter alia, also the supplies from Z. With the second supplementary agreement of the same date, it was stipulated that “Import GmbH” should receive an “agreed margin” which ... Read more

H-Customs GmbH – the applicant and appellant – is a subsidiary of H, Japan. In the period at issue, from 17 October 2009 to 30 September 2010, H-Customs GmbH imported more than 1,000 consignments of various goods from H, which it had cleared for free circulation under customs and tax law at the defendant HZA (Hauptzollamt – German Customs Authorities). H-Customs GmbH declared the prices invoiced to it by H Japan as the customs value. Some of the imported articles were duty-free; for the articles that were not duty-free, the HZA imposed customs duties of between 1.4 % and 6.7 % by means of import duty notices. In 2012, H-Customs GmbH applied to the HZA for a refund of customs duties for the goods imported during the period at issue in the total amount of… €. It referred to an Advance Pricing Agreement (APA) concluded ... Read more

A Hungarian company had a permanent establishment (PE) in Germany. The PE provided installation and assembly services to third parties in Germany. Following an audit of the German PE for FY 2017 the German tax authorities issued an assessment of additional taxabel income calculated based on the cost-plus method, cf. section 32 of the BsGaV (German ordinance on allocation of profits to permanent establishments). Not satisfied with the assessment a complaint was filed with the Tax Court. Judgment of the Tax Court The Court decided in favour of the PE and set aside the tax assessment. Excerpt (English translation) “Pursuant to Section 1 para. 1 sentence 1 AStG, the following applies: If a taxpayer’s income from a business relationship abroad with a related party is reduced by the fact that the taxpayer bases its income calculation on different conditions, in particular prices (transfer prices), than would ... Read more

In 2014 a profit transfer agreement was effectively concluded between the plaintiff, C GmbH (controlled company), and its sole shareholder A. The profits to be transferred and interest to be paid for the disputed years 2009-2011 were subsequently booked to a “liabilities to shareholders” clearing account, but counterclaims or lump sum payments were not booked. The tax Authorities did not recognize the profit transfer agreement for 2009-2011 on the grounds that the agreement had not actually been implemented before 2014. Merely posting a liability to the clearing account is not sufficient. An appeal was filed by C GmbH. Judgment of the FG The FG dismissed the appeal. The court agreed with the tax authorities and concluded that the 2014 profit transfer agreement had not actually been carried out for 2009-2011. Click here for English translation Click here for other translation ... Read more

The transaction concerned activities within the A Group in the 2008 tax year, involving two sister partnerships with identical ownership and management. T KG acted as the strategic head office of the group and was responsible for planning and constructing a new production plant operated by its sister partnership, C KG. No written contract governed the construction of the plant. Following significant planning errors and implementation deficiencies, the parties concluded a compensation agreement in October 2008 under which T KG agreed to bear substantial start-up losses and pay damages to C KG. T KG treated both the compensation payment and the assumed start-up losses as tax deductible operating expenses. The tax authorities refused to recognise the deduction of the compensation payment and the start-up losses. They held that, between related parties, such expenses could only be deductible if based on clear, civil law valid, arm’s ... Read more

Z-Group had been subject to a joint transfer pricing audit by the tax administrations of Belgium, France, Italy, Spain, Austria and Germany in order to examine the appropriateness of the franchise fee charged between the group companies. Z Group filed a complaint where it disputed the German tax administration’s entitlement to cooperate in a coordinated cross-border external tax audit and, in this context, to exchange information with the other tax administrations. Judgment of the Tax Court The Court dismissed the complaint filed by Z Group. Excerpt “118 The defendant does not violate the principle of subsidiarity by agreeing on or conducting a coordinated examination as planned in the present case with Belgium, France, Italy, Spain and Austria. With reference to the findings of the domestic tax audit, the defendant understandably points out that the audit serves to further clarify the facts, which is not possible ... Read more

“HQ Lender GmbH” is the sole shareholder and at the same time the controlling company of A GmbH. The latter held 99.98% of the shares in B N.V., a corporation with its seat in Belgium. The remaining shares in B N.V. were held by HQ Lender GmbH itself. A GmbH maintained a clearing account for B N.V., which bore interest at 6% p.a. from 1 January 2004. No collateralisation was agreed in regards of the loan. In the year in dispute (2005), the interest rate on a working capital loan granted to the plaintiff by a bank was 3.14%. On 30 September 2005, A GmbH and B N.V. concluded a contract on a debt waiver against a debtor warrant (… €). The amount corresponded to the worthless part of the claims against B N.V. from the clearing account in the opinion of the parties to ... Read more

In 2011 a permanent establishment (PE) of a Danish company was established for income tax purposes in Germany in the form of an offshore wind farm. The PE had no employees of its own either in Germany or in Denmark. The technical and commercial management was carried out by two German service and management companies on the basis of management and service contracts. In 2013 the tax authorities issued an assessment related to taxation of assets which, according to allocation principles in the new AOA (significant people functions), would no longer be allocated to Germany. The tax authorities held that allocation of assets to the permanent establishment is determined on the basis of personnel functions exercised in the permanent establishment. If no personnel functions were carried out in the permanent establishment no assets were to be allocated to it. In the tax authorities view, this ... Read more

“Shipping Investor Cyprus” was a limited liability company domiciled in Cyprus. In the financial years 2010 and 2011 it received interest income from convertible bonds subject to German withholding tax. “Shipping Investor Cyprus” had no substance itself, but an associated company, also domiciled in Cyprus, had both offices and employees. The dispute was whether “Shipping Investor Cyprus” was entitled to a refund of the German withholding tax and whether this should be determined under the old or the new version of Section 50d(3) of the German Income Tax Act (EStG). The court of first instance concluded that “Shipping Investor Cyprus” claim for a refund was admissible because the old version of the provisions in Section 50d (3) EStG was contrary to European law. The tax authorities appealed this decision. Judgment of the National Tax Court The National Tax Court found that a general reference to ... Read more

A German group distributor (“A” GmbH) marketed its foreign parent’s original pharmaceuticals during 2006–2010. Under German health-care rules, domestic pharmacies must source part of their inventory from lower-priced parallel importers, so A’s promotional efforts on the German marked inevitably boosted the sales of those independent importers -and, indirectly, benefited the group -without A being compensated for this contribution. On audit the tax authorities treated this uncompensated contribution as a hidden profit distribution, increasing A’s taxable income by the estimated value of the economic advantage provided by A to the group. An appeal was filed with the Nuremberg Finance Court which annulled the tax assessment, finding no proof that an independent distributor would have earned a higher margin under comparable circumstances. Click here for English translation Click here for other translation ... Read more

At issue in this case was the choice of transfer pricing method for determining the arm’s length price of a intra-group loan. Lender GmbH is held by a Dutch holding company. The holding company is also the sole shareholder of Lender GmbH’s sister company, which is also domiciled in the Netherlands. The Dutch sister company acts as a financing company within the group. It extended various loans to Lender GmbH. The interest rate was determined by application of the CUP method. The tax office disagreed with the transfer price method and the appropriateness of the interest rate determined by the group. The tax office determined the interest rate on the basis of the cost-plus method and qualified the difference as a hidden profit distribution (vGA). In its ruling of 7 December 2016 (13 K 4037/13), the Münster Regional Tax Court held in favour of the ... Read more

A German corporation,”G Corp” held interests in domestic and foreign companies in the year in dispute (2005). G Corp granted loans to various subordinate companies – resident in France and the USA. These loans were mainly at fixed interest rates; instead of a fixed interest rate, an annual participation of 12.5% in the balance sheet profit of the subordinate company, limited to a maximum amount of 25% of the loan volume, was agreed as consideration for one loan. No collateral was provided. In the year in dispute, G Corp wrote off these loans against taxable profits. G Corp also transferred assets at book value to a Maltese subsidiary company, of which it was the sole shareholder, and contributed the shares in this company, pursuant to section 23(4) of the Reorganisation Tax Act applicable in the year in dispute, also at book value, to another Malta-based ... Read more

Lender GmbH acquired all shares in T GmbH from T in 2012 (year in dispute) for a purchase price of … €. To finance the purchase price of the shares, Lender GmbH took out a loan from its sole shareholder, D GmbH, a loan in the amount of … €, which bore interest at 8% p.a. (shareholder loan). The interest was not to be paid on an ongoing basis, but only on expiry of the loan agreement on 31.12.2021. No collateral was agreed. D GmbH, for its part, borrowed funds in the same amount and under identical terms and conditions from its shareholders, among others from its Dutch shareholder N U.A. In addition Lender GmbH received a bank loan in the amount of … €, which had an average interest rate of 4.78% p.a. and was fully secured. Finally Lender GmbH also received a vendor ... Read more

A GmbH provided funding in the form of a clearing account to its Belgian subsidiary. The account was unsecured and carried an interest of 6% p.a. In 2005, A GmbH and the Belgian company agreed on a debt write-off which was deducted for tax purposes. The tax authorities issued an assessment where the write-off was denied as a tax deductible expense. According to the tax authorities, independent third parties would have agreed on some kind of security. The lack thereof was a violation of the arm’s length principle. A GmbH brought the assessment to court. The Federal Fiscal Court (I R 73/16) found the assessment of the tax authorities to be lawful. This decision was then appealed to the Constitutional Court by  A GmbH, alleging violation of the general principle of equality as well as a violation of its fundamental procedural right to the lawful ... Read more

In 2010, “Write-Down KG” granted a loan to its Turkish subsidiary (“T”). The loan bore interest at 6% per annum but was unsecured. In 2011, Write-Down KG decided to liquidate T. Write-Down KG therefore wrote off its loan and interest receivable from T and claimed the write-off as a tax deduction. The German tax authorities disallowed the deduction because the loan had been unsecured which was considered not to be at arm’s length. An appeal was lodged with the local tax court, which upheld the tax authorities’ position. An appeal was then made to the Federal Tax Court. Judgment of the Court The court ruled that the waiver of security for a shareholder loan may not be at arm’s length. Such a deviation from the arm’s length principle may lead to a write-off of the loan receivable and thus to a reduction in income. This ... Read more

Due to the economic situation of automotive suppliers in Germany in 2006, “Cutting Tech GMBH” established a subsidiary (CB) in Bosnien-Herzegovina which going forward functioned as a contract manufacturer. CB did not develop the products itself, but manufactured them according to specifications provided by “Cutting Tech GMBH”. The majority of “Cutting Tech GMBH”‘s sales articles were subject to multi-stage production, which could include various combinations of production processes. In particular, “Cutting Tech GMBH” was no longer competitive in the labour-intensive manufacturing processes (cut-off grinding, turning, milling) due to the high wage level in Germany. Good contribution margins from the high-tech processes (adiabatic cutting, double face grinding) increasingly had to subsidise the losses of the labour-intensive processes. Individual production stages, however, could not be outsourced to external producers for reasons of certification and secrecy. In addition, if the production had been outsourced, there would have been ... Read more

A request for mutual agreement and arbitration procedure between Spain and Germany was denied due to highly punishable violation of tax regulations committed by the taxpayer. The mutual agreement procedure according to the EU Arbitration Convention is of a mandatory nature and therefore leads to the elimination of double taxation if the requirements are met. However, if it is determined through legal or administrative proceedings that one of the companies involved has committed a highly punishable violation of tax regulations that result in a profit adjustment, then there is no obligation to carry out the mutual agreement and arbitration proceedings. Rather, the competent authority then has to decide on the implementation of the procedure at its due discretion. When assessing whether there has been a serious punishable violation, the person responsible for the company must be taken into account. But whether this person was actually ... Read more

A German general partnership (OHG) was the sole shareholder of an Italian corporation (A). In 2002, there was an unsecured claim against this company from a current account overdraft in the amount of approx. … million was outstanding. The receivable bore interest at 4.57 % (1st half of 2002), 4.47 % (2nd half of 2002), 3.14 % (1st half of 2004) and 3.13 % (2nd half of 2004). On 31 December 2002, OHG waived part of this claim in the amount of … € against a debtor warrant. Subsequently, the claim against A rose again by the end of 2004 to approx. …..€. OHG then again waived part of this claim (… €) against a debtor warrant. The amounts corresponded to what the parties to the contract considered to be the worthless part of the claims against A from the overdraft facility. Although these were ... Read more

G-Lender GmbH, owned 50% of Austrian company A GmbH. The remaining 50% of the shares in A GmbH were held by non related shareholders, who at the same time acted as managing directors of A GmbH. G-Lender GmbH granted A GmbH a total of five loans. These loans each carried an interest rate of  5.5% pa. Assets owned by A GmbH  were assigned as collateral. On 22 January 2002 and 16 June 2002, A GmbH made a partial payments on the loans to G-Lender. By a contract dated 9 April 2003, G-Lender GmbH provided a guarantee to an independent bank for a EUR 800,000 loan to A GmbH and at the same time declared subordination of its loan claims against A GmbH. Due to negative development in A GmbH, G-Lender GmbH on 31 December 2003, booked a partial depreciation on the loan in the amount ... Read more

Waiver KG had an outstanding (non-interest-bearing and unsecured) trade receivable of EUR 2,560,000 from a wholly-owned subsidiary in China related to deliveries made in FY 2004 and 2005. Waiver KG had first issued a partial waiver (EUR 560,000) on the receivable and then a complete waiver in December 2008, after a partial write-down had previously been made in the commercial balance sheet. The initial partial write-down had not been given effect to the taxable income, but in the course of a tax audit Waiver AG requested that the partial write-off be taken into account for tax purposes as well. The tax office refused to do so and instead applied an interest rate of 3% on the outstanding receivable. A complaint was then filed by Waiver KG to the tax court. The tax court issued a decision in favour of Waiver KG with reference to German jurisprudence ... Read more

C A GmbH managed an unsecured clearing account for a Belgian subsidiary. After financial difficulties in the Belgian subsidiary, C A GmbH waived their claim from the clearing account and booked this in their balance sheet as a loss. However, the tax office disallowed the loss according to § 1 Abs. 1 AStG. Up until now, the Bundesfinanzhof has assumed for cases that are subject to a double taxation agreement (DTA), that Art. 9 para. 1 OECD was limited to so-called price corrections, while the non-recognition of a loan claim or a partial depreciation was excluded (so-called Blocking effect). The Bundesfinanzhof overturned the previous judgment of the FG. According to the court it was not necessary to determine whether it was really a tax credit or a contribution of equity to the Belgian subsidiary. However, this could be left out, since the profit-reducing waiver by C A ... Read more

The case concerned a UK-based aircraft engineer who performed aircraft maintenance work in Germany as a subcontractor between 2008 and 2010. He carried out this work in a hangar rented by the main contractor at a German airport, where he was provided with a locker for storing the tools he was contractually required to supply himself. Remuneration was paid in connection with this maintenance activity. However, the tax authorities treated the remuneration as income attributable to a fixed base in Germany. They took the view that the engineer had a permanent establishment in Germany, as defined in the Germany-United Kingdom tax treaty, because he had a place permanently available to him for business purposes: the locker used exclusively to store his work equipment. The taxpayer challenged this, arguing that only third-party premises was used and that a locker used to store tools could not constitute ... Read more

The tax office responsible for B-AG informed the B GmbH in a letter dated 14 October 2009 that it intended to hold B GmbH liable for B-AG’s corporation tax debts pursuant to section 73 of the German Fiscal Code (AO). By way of an actual agreement, a proportionate liability amount for the corporation tax 2000 of B-AG i.L. of … € was agreed. A corresponding liability notice was issued on 17 June 2010. In its annual financial statements as at 31 December 2009, B GmbH formed a provision in the amount of … € due to the impending liability claim in accordance with § 73 AO. In its corporation tax return for the year in dispute (2009), it expressly pointed out that it considered the liability debts to be deductible under § 73 AO because they were not taxes within the meaning of § 10 ... Read more

The Bundesfinanzhof confirmed prior case law according to which the provisions on hidden deposits and hidden profit distributions must be observed in the context of the additional taxation. On the question of economic activity of the controlled foreign company, the Bundesfinanzhof refers to the ruling of the European Court of Justice concerning Cadbury-Schweppes from 2006. According to paragraphs §§ 7 to 14 in the Außensteuergesetz (AStG) profits from controlled foreign companies without business activity can be taxed in Germany. In the case at hand the subsidiary was located in a rented office in Cyprus and employed a resident managing director. Her job was to handle correspondence with clients, to carry out and supervise payment transactions, manage business records and keep records. She was also entrusted with obtaining book licenses to order these sub-licenses for the benefit of three of Russia’s and Ukraine’s affiliates, which distributed ... Read more

The German court concludes that a Cash Pool agreement must be clear and unambiguous both in substance and amount. If only a minimum and maximum interest rate has been agreed the arm’s length standard is not met. Click here for English translation Click here for other translation ... Read more

A Investment GmbH, acquired all shares of B in May 2012. To finance the acquisition, A Investment GmbH took up a bank loan (term: 5 years; interest rate: 4.78%; secured; senior), a vendor loan (term: 6 years; interest rate: 10%; unsecured; subordinated) and a shareholder loan (term: 9 to 10 years; interest rate: 8%; unsecured; subordinated). The 8 % interest rate on the shareholder loan was determined by A Investment GmbH by applying the CUP method based on external comparables. The German tax authority, found that the interest rate of 8 % did not comply with the arm’s length principle. An assessment was issued where the interest rate was set to 5% based on the interest rate on the bank loan (internal CUP). A Investment GmbH filed an appeal to Cologne Tax Court. The court ruled that the interest rate of the bank loan, 4.78%, ... Read more

X Sub GmbH is a German subsidiary of a multinational group. The parent company Y Par B.V. and the financial hub of the group Z Fin B.V. – a sister company to the German subsidiary – are both located in the Netherlands. In its function as a financial hub, Z Fin B.V granted several loans to X Sub GmbH. The interest rate on the loans had been determined by the group based on the CUP method. The German tax authority considered that the amount of interest on the inter-company loans paid by X Sub GmbH to Z Fin B.V. was too high. An assessment was issued where the interest rate was instead determined based on the cost-plus method. The differences in the calculated interest amounts was added to the taxable income of the German GmbH as a hidden profit distribution (vGA). X Sub GmbH filed ... Read more

Tax depreciation for wind turbines presupposes economic ownership of the asset. A change in economic ownership requires that any risks are transferred to the purchaser/customer. The German Supreme Tax Court held that economic ownership of an asset is not transferred at the time it generates income but rather when the risk of accidental destruction and accidental deterioration of the asset passes to the buyer. The contractual agreements to that effect are crucial. A German partnership (KG) operated a wind farm consisting of five wind turbines. Each wind turbine on a farm is a separate asset which is to be depreciated, or amortised, separately. In December 2003 the KG entrusted a GmbH with the turnkey construction of the turbines. The purchase price was payable in installments. The GmbH in turn engaged another company with delivery and installation of the wind turbines and also to take them into ... Read more

The Supreme Tax Court has held that a parent company cannot be deemed to have earned income from allowing its Polish subsidiary to register locally in the group name. A German business was active in a field of patented technology associated with its own firm name, “B”. It allowed its Polish subsidiaries to register in that name, “B Sp.z.o.o.”, but made an appropriate charge for the use of the technology. It also did not authorise the Polish companies to use its logo, but left it up to them to design their own. The tax office maintained that the group name was a valuable intangible and demanded an income adjustment to reflect its use by foreign subsidiaries. However, the Supreme Tax Court has now confirmed its previous case law in holding that the mere use of the group name in the company registration of a subsidiary ... Read more

There are a number of exceptions to the German interest limitation rule essentially limiting the annual interest deduction to 30% of EBITDA as shown in the accounts. One of these is the equity ratio rule exempting a subsidiary company from the interest limitation provided its equity ratio (ratio of shareholder’s equity to the balance sheet total) is no more than two percentage points lower than that of the group and no more than 10% of its net interest cost was paid to any one significant shareholder (a shareholder owning more than 25% of the share capital). A loss-making company paying slightly less than 10% of its total net interest cost to each of two significant shareholders claimed exemption from the interest limitation as its equity ratio was better than that of the group. The tax office applied the limitation as the two significant shareholders together ... Read more

A German company resolved a share capital reduction of €16 m in preparation for a capital repayment to avoid an IFRS consolidation requirement for its sole shareholder, a public utility. It took the reduction to capital reserve, waited as required by the German Company Act for one year after a public announcement to it’s creditors, reported the reduction to the German trade registry and repaid an amount of €4 m to the shareholder. This repayment was sufficient to reduce the assets below the level for the consolidation requirement. The tax administration recharacterised the payment to a “dividend distribution” subject to withholding tax under the German Corporate Tax Act provision to the effect that payments to shareholders are deemed to be made from retained earnings unless unambiguously specified as repayments of share capital. The Supreme Tax Court concluded that the unambiguous specification need not be solely ... Read more

The Supreme Tax Court has requested the Constitutional Court to rule on the conformity of the interest limitation with the constitutional requirement to tax like circumstances alike. The interest limitation disallows net interest expense in excess of 30% of EBITDA. However, the rule does not apply to companies with a total net annual interest cost of no more than €3 m or to those that are not part of a group. There are also a number of other exemptions, but the overall effect is to render the actual impact somewhat arbitrary. In particular, the asserted purpose of the rule – prevention of profit shifts abroad through deliberate under-capitalisation of the German operation – seemed somewhat illusory to the Supreme Tax Court in the light of the relatively high threshold and of the indiscriminate application to cases without foreign connotations. The court also pointed out that ... Read more