A German GmbH granted interest-free, unsecured loans to its subsidiaries in Romania and Hungary to fund factory construction and settle VAT debts. The German tax authority increased the company's income by 6% deemed interest, citing a breach of the arm's length principle. The FG Saarland annulled the assessment in 2024, finding the loans were commercially justified and supported the subsidiaries' operations and the parent's competitiveness ... Read more

A German general partnership (OHG) waived part of its unsecured interest-bearing claims against its Italian subsidiary in exchange for a debtor warrant. The tax authorities adjusted OHG's taxable income, a position upheld by the BFH in 2019. The Federal Constitutional Court in 2023 upheld a constitutional complaint, overturned the BFH judgment, and remanded the case back to the BFH for reexamination ... Read more

A Czech agricultural company deducted interest at 8.5% on bonds subscribed by associated persons, which the tax authority reduced to an arm's length rate of 2.46%. The company failed to discharge its burden of proof that the excess interest was incurred to secure taxable income. The Regional Court dismissed the appeal in December 2022, upholding the tax authority's adjustment of CZK 6,040,000 in excess interest expenses ... Read more

Borrowers seek to optimise their weighted average cost of capital and to have the right funding available to meet both short-term needs and long-term objectives. When considering the options realistically available to it, an independent business seeking funding operating in its own commercial interests will seek the most cost effective solution, with regard to the business strategy it has adopted. For example in respect of collateral, in some circumstances, assuming that the business has suitable collateral to offer, this would usually be secured funding, ahead of unsecured funding, recognising that a business’s collateral assets and its funding requirements may differ over time, e.g. because collateral is finite, the decision to pledge collateral on a particular borrowing precludes the borrower from pledging that same collateral on a subsequent borrowing. Therefore, an MNE pledging collateral would take into account its options realistically available regarding its overall financing (e.g. possible subsequent loan transactions) ... Read more

In the case of a loan from the parent entity of an MNE group to a subsidiary, the parent already has control and ownership of the subsidiary, which would make the granting of security less relevant to its risk analysis as a lender. Therefore, in evaluating the pricing of a loan between associated enterprises it is important to consider that the absence of contractual rights over the assets of the borrowing entity does not necessarily reflect the economic reality of the risk inherent in the loan. If the assets of the business are not already pledged as security elsewhere, it will be appropriate to consider under Chapter I analysis whether those assets are available to act as collateral for the otherwise unsecured loan and the consequential impact upon the pricing of the loan ... Read more

A German parent company maintained an uncollateralised clearing account bearing 6% interest for its Belgian subsidiary, later waiving the debt. The tax authority disallowed the profit reduction under section 1 AStG due to lack of collateralisation. The Bundesfinanzhof remanded the case to the FG Düsseldorf in 2022 to determine whether the arrangement constituted a recognisable loan or a disguised equity transfer by the shareholder ... Read more

A German corporation granted unsecured subordinated loans to French and US subsidiaries and transferred assets at book value to Maltese subsidiaries. The German tax authority adjusted taxable income by disallowing partial value write-downs on uncollateralised loan receivables. The regional tax court ruled against the adjustment, but the Bundesfinanzhof remanded the case for reexamination in June 2021 ... Read more

A German partnership granted an unsecured loan to its Turkish subsidiary at 6% interest, then wrote off the receivable upon liquidating the subsidiary in 2011. The German tax authorities disallowed the deduction, arguing the absence of collateral was not arm's length. The Federal Tax Court upheld the disallowance in 2020, confirming that waiving security on a shareholder loan can trigger an income adjustment under Section 1 of the German Foreign Tax Act ... Read more

A German general partnership waived portions of an unsecured current account claim against its Italian subsidiary, derecognising the amounts as profit-reducing in its balance sheet. The German tax authority neutralised the reductions via off-balance sheet additions under Section 1 AStG. The Bundesfinanzhof upheld the adjustment in 2019, applying its established case law on income correction for unsecured intra-group loans, ruling in favour of the tax authority ... Read more