At issue in this case was the choice of transfer pricing method for determining the arm’s length price of a intra-group loan.
Lender GmbH is held by a Dutch holding company. The holding company is also the sole shareholder of Lender GmbH’s sister company, which is also domiciled in the Netherlands. The Dutch sister company acts as a financing company within the group. It extended various loans to Lender GmbH. The interest rate was determined by application of the CUP method.
The tax office disagreed with the transfer price method and the appropriateness of the interest rate determined by the group. The tax office determined the interest rate on the basis of the cost-plus method and qualified the difference as a hidden profit distribution (vGA). In its ruling of 7 December 2016 (13 K 4037/13), the Münster Regional Tax Court held in favour of the tax office, arguing that there was no hierarchy between the transfer pricing methods. Rather, it was up to the tax office to determine the most appropriate method in each case. The cost-plus method was applicable in the present case. Only where there were essentially identical transactions could the CUP method be considered the most appropriate method.
Judgement of the Supreme Administrative Court
The Court referred to price determination on stock markets, which was also not entirely comprehensible. The Court commented on the specific application of the cost-plus method by the tax office and the Münster Regional Court. It was unusual for an appropriate interest rate to be recalculated annually by including variable parameters (here: equity ratio), so that the interest rate changed annually. This was contrary to the fixed interest rate. The Court also pointed out that the group as a whole had to be taken into account. However, neither a group group view nor a “stand-alone view” was to be used. Rather, it required a case-by-case consideration.
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BUNDESFINANZHOF Urteil vom 27-2-2019, I R 81-17