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 judge.
Decision of the Constitutional Court
The Federal Constitutional Court decided in favour of A GmbH and found the constitutional complaint well-founded.
“…the decision of the Federal Fiscal Court violates the complainant’s fundamental procedural right to the lawful judge (Article 101.1 sentence 2 of the Basic Law) due to the way it chooses to handle its obligation to make a reference pursuant to Article 267.3 TFEU.”
BFH 4 march 2021