Germany vs “Asset management Gmbh”, April 2013, Supreme Administrative Court, Case No I R 45/11

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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 transactions was a restriction on the freedom to provide (receive) services and thus contrary to EU community law.

The Supreme Tax Court rejected both contentions and declined bringing the case before the ECJ. The Court found no doubt as to the German transfer pricing documentation provisions. The Foreign Tax Act defines a related party relationship by shareholding at a capital share of more than one-quarter. There is no mention of voting rights or of restrictions on the right of a shareholder to act in respect of its investment. Other parts of the related party definition, such as a relationship by contract, complemented the shareholding criterion, but did not restrict it. Accordingly, an obligation not to set management policy for the German subsidiary against the wishes of the members of the fund did not eliminate a shareholding-based relationship. Even if such an obligation did exist, a breach would not invalidate the measure at issue; it would merely make the Luxembourg shareholder liable for damages. The court emphasised that the reason for the shareholding was also irrelevant; even if the shares were held in trust for the investors in the fund, the company remained the related party of the service provider and was subject to German transfer pricing documentation rules.

The court agreed that the application of the transfer pricing documentation rules to foreign relationships was restricting the freedom to provide services. However, this restriction was justified by the need to protect the public revenue from abuses to the tax system.

The court also pointed out that 26 of the 28 member states of the EU (Croatia and Cyprus being the exceptions) had introduced comparable rules into their own systems (though, it should be noted, not always exclusively in respect of foreign transactions) without apparent legal problems and that the European Commission had published its own summary explaining and supporting such schemes. Hence, transfer pricing documentation rules were to be regarded as generally acceptable.

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