Germany vs C-GmbH, December 2014, Bundesfinanzhof, Case No I R 23/13

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C-GmbH was the sole shareholder of I-GmbH.

In 2000, I-GmbH, together with another company, set up a US company for the development of the US market, H-Inc., in which the I-GmbH held 60 per cent of the shares.

H-Inc. received equity from the two shareholders and also received a bank loan of approx. $ 1.5 million (USD), which the shareholders secured through guarantees.

As of December 31, 2003, the balance sheet of H-Inc. showed a deficit not covered by equity of approx. 950,000 USD.

On June 30 , 2004,  I-GmbH became the sole shareholder of H-Inc. Then the bank put the H-Inc. granted loans due. Since H-Inc. was not able to serve the bank loan, C-GmbH paid the bank.

As of December 31, 2004, the balance sheet of H-Inc. showed a deficit not covered by equity of approx. $ 450,000 , which at December 31 , 2005 amounted to approx. $ 1.6 million, as at 31 December 2006 $ 2.5 million and at December 31, 2007 USD 3.5 million.

During the years 2004 to 2007, the I-GmbH granted its US subsidiary 5% interest-bearing, unsecured loans of € 261,756.22 (2004), € 1,103,140 (2005), € 158,553.39 (2006) and € 75,000 (2007) resulting from the liquidity of future profits of H-Inc. should be repaid. Loan receivables were subject to individual value adjustments already in the respective year of their commitment (2004: € 261,052, 2005: € 1,103,140, ​​2006: € 158,000, 2007: € 75,000).

In judgment of 17 December 2014, the German Tax Court stated, with reference to its judgment of 11 October 2012, IR 75/11, that the treaty principle of “dealing At arm’s length ” have a blocking effect on the so-called special conditions. The relevant test according to Article 9 (1) of the DTC-USA 1989, which corresponds in substance to Article 9 (1) of the OECD Model Agreement, could only include those circumstances that have an effect on agreed prices.

The concept of agreed conditions in Article 9 (1) of the OECD-Model Agreement should, in principle, include everything which is the subject of commercial and financial relations and therefore the subject of contractual exchange between affiliated undertakings, so that both the price and all other terms and conditions should be included.

Following these decisions, on 30 March 2016, the Federal Ministry of Finance issued a non-application decree stating that Article 9 of the OECD Model Tax Convention does not refer to a transfer price adjustment but to a profit adjustment. According to the decree the principles of the above decisions are not to be applied beyond the decided individual cases.

Se also the later decision from the German Tax Court I R 29/14.


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I R 23-13