Germany vs “B KG”, January 1981, Bundesfinanzhof, Case No IR 153/77

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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 of substantive law.

Judgment of the Federal Fiscal Court

The Court referred the case back to the lower court for reconsideration.

The Court held that Article 5 of the then French-German DBA (which is similar in content to Article 9 of the current Model Tax Convention), which allows for an adjustment of taxable profits in favour of one or other Contracting State in the case of a cross-border grouping of enterprises, does not directly create a tax liability. It merely authorises the legislature of each Contracting State to tax profits transferred to the other State under domestic law.

With regard to formalities, the Court stated that a judgment of the tax court must contain a clear, complete and self-contained picture of the subject-matter of the dispute, even if it is brief, with emphasis on the submissions of the parties. Where reference is made to pleadings and other documents, they and the subject of the reference must be described with sufficient precision. General references to files and documents are not admissible.

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Bundesfinanzhof I R 153-77 ORG

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