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%, was a reliable CUP for setting the arm’s length interest rate of the controlled loan. The vendor loan was considered irrelevant as the 10 % interests could have been influenced by other factors.
With regard to the subordination of claims on the loan from Capital B.V., pursuant to Section 39 (1) (5) of the German Insolvency Act, neither the non-provision of collateral nor the subordination of the loans could justify a risk premium in the determination of the arm’s length interest. Implicit support within the group – at least for the loans from Capital B.V – was considered by the Court in this respect.
The appeal of A Investment GmbH was dismissed by the Court.
This decision is now appealed by A Investment GmbH to the Supreme Tax Court under file I R 62/17 and is pending.
Finanzgericht Köln, 10 K 771-16ORG