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

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. Judgement 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

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. Judgement 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. Judgement of the National Tax Court The National Tax Court found that a general reference to ... 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. Judgement 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

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

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 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

The German subsidiary of a Canadian group lent significant sums to its under-capitalised UK subsidiary. The debt proved irrecoverable and was written off in 2002 when the UK company ceased trading. At the time, such write-offs were permitted subject to adherence to the principle of dealing at arm’s length. In its determination of profits on October 31, 2002, the German GmbH made a partial write-off of the repayment claim against J Ltd. in the amount of 717.700 €. The tax authorities objected that the unsecured loans were not at arm’s length. The tax authorities subjected the write-down of the claims from the loan, which the authorities considered to be equity-replacing, to the deduction prohibition of the Corporation Tax Act. The authorities further argued that if this was not the case, then, due to the lack of loan collateral, there would be a profit adjustment pursuant ... Read more

C-GmbH was the sole shareholder of I-GmbH. In 2000, I-GmbH, together with another company, set up a US company for the development of the US market, H-Inc., in which the I-GmbH held 60 per cent of the shares. H-Inc. received equity from the two shareholders and also received a bank loan of approx. $ 1.5 million (USD), which the shareholders secured through guarantees. As of December 31, 2003, the balance sheet of H-Inc. showed a deficit not covered by equity of approx. 950,000 USD. On June 30 , 2004,  I-GmbH became the sole shareholder of H-Inc. Then the bank put the H-Inc. granted loans due. Since H-Inc. was not able to serve the bank loan, C-GmbH paid the bank. As of December 31, 2004, the balance sheet of H-Inc. showed a deficit not covered by equity of approx. $ 450,000 , which at December 31 , ... Read more

The Local Tax Court found that the arm’s-length principle requires a licence to be paid for the use of group name where the name/trademark has value in itself. The decision of the Local Court was later overturned by the Supreme Tax Court ruling in Case no. I R 22 14  Click here for English translation Click here for other translation ... Read more

The Supreme Tax Court has held that the costs incurred by a taxpayer in connection with a tax treaty mutual agreement proceeding are not costs of earning the relevant income, but has left open a possible deduction as “unusual expenses”. A US resident realised a gain on the sale of a share in a GmbH. The German tax office sought to tax the gain, but the taxpayer objected on the grounds that it was taxable in the US under the double tax treaty. This tax office did not accept this objection, so a mutual agreement proceeding was initiated in an effort to clear the issue. Ultimately, the two competent authorities agreed to split the taxing right in the ratio 60:40 in favour of Germany. However, the taxpayer had incurred various consultancy and legal costs in the course of the process and these should, he claimed, be ... Read more

Asset management Gmbh was a subsidiary of a Luxembourg investment fund management company. The German company paid substantial fees to a Luxembourg service company. Both companies in Luxembourg were wholly-owned by a Luxembourg holding company. Asset management Gmbh was obliged to follow the policies of the fund. These could only be revised by a two-thirds majority resolution of the investors. The German company argued that this restriction meant that its Luxembourg shareholder could not be forced to follow a common business policy with the service provider. Accordingly the two were not related parties within the meaning of the Foreign Tax Act and there was no requirement for it to furnish the extensive transfer pricing documentation in support of its transactions with associated enterprises as required by the Tax Management Act. In any case, the fact that these transfer pricing documentation requirements only applied to cross-border ... Read more

Spedition Gmbh entered a written agreement – at year-end – to pay management fees to its Dutch parent for services received during the year. The legal question was the relationship between arm’s-length principle as included in double tax treaties and the norms for income assessments in German tax law. The assessment of the tax office claiming a hidden distribution of profits because of the “retrospective” effect of the written agreement, was rejected by the Court. According to the Court the double tax treaty provisions bases the arm’s length standard on amount, rather than on the reason for, or documentation, of a transaction. Click here for English translation Click here for other translation ... Read more

The Bundesfinanzhof confirmed the statutory authority of the tax authorities to issue penalties where a taxpayer have not fulfilled transfer pricing documentation requirement. Click here for English translation Click here for other translation ... Read more

A German company on behalf of its Austrian Parent X-GmbH distributed products manufactured by the Austrian X-KG. By a contract of 28 May 1992, X-GmbH granted the German company the right to use the trade mark ‘X’ registered in Austria. According to the agreement the German company paid a license fee for the right to use the trade mark. In 1991, X-GmbH had also granted X-KG a corresponding right. By a contract dated 1 July 1992, X-KG was granted exclusive distribution rights for the German market. In the meantime, the mark ‘X’ had been registered as a Community trade mark in the Internal Market. The tax authorities dealt with the payment of royalties to X-GmbH for the years in question as vGA (hidden profit distribution). Click here for English translation Click here for other translation ... Read more

The Bundesfinanzhof confirmed that losses incurred by a simpel distribution entity over a longer period of time trigger a rebuttable presumption in Germany that transfer prices have not been at arm’s length. A German company, Loss Distributor GmbH, imported goods from their Swiss sister company S-AG and had made continious losses over a period of time. The tax authorities found that the purchase prices paid to the S-AG had increased since 1989 and that the German company could not fully pass on the increased purchase price to its customers. Since at the same time the price of the Swiss franc had fallen since 1989, the purchase prices paid to the S-AG in the years of the dispute had been inflated and currency gains had been transferred to Switzerland in this way. A tax assessment was therefor issued. The German company appeal the assessment to the Bundesfinanzhof. The Federal Tax Court ruled ... Read more

A German GmbH distributed clothing for its Italian parent. The German tax authorities issued a tax assessment based on hidden profit distribution from the German GmbH in favor of its Italien parent as a result of excessive purchase prices, which led to high and continuous losses in Germany.  The tax authorities determined the arm’s length price based on purchase prices, which the German GmbH had paid to external suppliers. However, these purchases accounted for only 5% of the turnover. The German Tax Court affirmed in substance a vGA (hidden profit distribution) as the tax authorities had provided no proff of deviation from arm’s length prices. If a hidden profit distribution is to be accepted, the profit shall be increased by the difference between the actually agreed price and the price agreed by independent contractual parties under similar circumstances – the arm’s length price. Where a range ... Read more

A German group company’s payment for use of the group name was not found to be deductible under German transfer pricing regulations. Guidance on payments for use of the group name has been provided in the Transfer Pricing Guidelines 6.81 – 6.85 and 7.12. As a general rule, no payment should be recognised for transfer pricing purposes for simple recognition of group membership or the use of the group name merely to reflect the fact of group membership. However, where one member of the group is the owner of a trademark or other intangible for the group name, and where use of the name provides a financial benefit to members of the group other than the member legally owning such intangible, it is reasonable to conclude that a payment for use would have been made in arm’s length transactions. In determining the amount of payment ... Read more

The decision is about a German distribution company of international groups, which is in a continual overall loss position. This case established an important principle that: ‘… an orderly and diligent manager will, for the corporation managed by him, introduce to the market and distribute a new product only if he can expect, based on a prudent and pre-prepared economic forecast, a reasonable overall profit within a foreseeable period of time with due consideration to the predictable market development’. This decision covered the market introduction of a new product by an already established company and stated that typically a market introduction phase, losses should not be accepted for longer than three years. A later Bundesfinanzhof decision from 15 May 2002 stated that a start-up loss phase can be substantially longer than 3 years based on facts and circumstances. Click here for English translation Click here ... Read more

In 1964, B KG had waived claims totalling … against B S.A. in France, in which it held an 88% interest. In the course of an audit of B KG’s profits for 1964, the tax authorities did not regard the waiver as a commercial transaction. Instead, they found that the amount waived was a contribution under company law, resulting in additional acquisition costs for the shareholding. A partial write-off of the investment itself was out of the question. B KG’s appeal to the Fiscal Court was dismissed the appeal. The Fiscal Court held that, under Article 5 of the DTC of 21 July 1959 between Germany and France, the reduction in profits resulting from the waiver of the claims could not be taken into account for tax purposes in Germany due to lack of business purpose. B KG appealed against that decision, alleging an infringement ... Read more

The sales company … – (GmbH) was the managing general partner of the plaintiff and defendant, a limited partnership – “Sales KG” – in the years in dispute. The GmbH had a 10/11 share in the capital of “Sales KG”. The limited partner was the Dutchman G. Shareholders of the GmbH with a share of 99% were the … NV (NV) and the … in The Hague (NV L-V). “Sales KG” engaged in wholesale trade in …, which it purchased almost exclusively from NV. It granted its customers rebates, bonuses and discounts in the years in dispute (1962 – 1964). According to the findings of the tax authorities (FA), “Sales KG” had to pay interest on its goods liabilities after 90 days from 1963. It did not charge its customers corresponding interest. The tax authorities increased the profit of “Sales KG” mainly by adding profits ... Read more

A hidden distribution of profit presupposes that a corporation grants its shareholder a pecuniary advantage outside the distribution of profits under company law which it would not have granted to a non-shareholder — under otherwise identical circumstances — if the diligence of a prudent and conscientious manager had been applied. It should be noted that a director must be allowed a certain degree of commercial discretion. 1) As was stated in the judgment of the Senate in Case I R 21/68, a hidden profit distribution presupposes that a corporation grants its shareholder a pecuniary advantage outside the distribution of profits under company law which it would not have granted to a non-shareholder — under otherwise identical circumstances — if the diligence of a prudent and conscientious manager had been applied. This means that it is not the diligence of the managing director in the event ... Read more