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 on the blocking effect of Art. 9 OECD-MA. However, at the same time, the tax court increased the interest rate on the outstanding receivable to 10.5%.
This decision was appealed to the Bundesfinanzhof by the tax authorities.
Judgement of the Bundesfinanzhof
The Court found that Art. 9 (1) OECD-MA does not limit arm’s length adjustments within the scope of Sec. 1 (1) AStG to so-called price adjustments, but also allowed for tax adjustments based on non-recognition of a loan receivable or a partial write-downs.
The Court considers that lack of collateral can be at arm’s length, depending on facts and circumstances of the transaction in question.
The case was referred back to the tax court, as it had not been sufficiently clarified whether a independent party would have waived collateral in the specific case, e.g. in order to avoid the bankruptcy of a functionally important company.
BUNDESFINANZHOF Urteil vom 27-2-2019, I R 51-17