Tag: Lack of collateralisation

Germany vs OHG, November 2023, Bundesverfassungsgericht, Case No 2 BvR 1079/20

Germany vs OHG, November 2023, Bundesverfassungsgericht, Case No 2 BvR 1079/20

A domestic general partnership (OHG) was the sole shareholder of an Italian corporation (A). OHG had unsecured interest bearing claims against A. During the years of the dispute, the partnership waived part of its claims against A in return for a debtor warrant. Following an audit an adjustment to the taxable income of OHG was issued by the tax authorities. The assessment was later set aside by the administrative court but on appeal by the tax authorities the BFH in 2019 upheld the assessment. A constitutional complaint was lodged against this ruling. Judgment of the Federal Constitutional Court The Court upheld the complaint and overturned the BFH judgment and referred the case back to the BFH. Click here for English translation Click here for other translation Germany Nov 2023 Bundesverfassungsgericht 2 BvR 1079-20 ... Read more
Czech Republic vs Hanácká zemědělská společnost Jevíčko, a.s., December 2022, Regional Court , 52 Af 19/2022-82

Czech Republic vs Hanácká zemědělská společnost Jevíčko, a.s., December 2022, Regional Court , 52 Af 19/2022-82

In the course of the income tax audit conducted on Hanácká, the tax authorities found that interest expenses had been in its calculation of taxable income, corresponding to a rate of 8.5%. The tax authorities determined the arm’s length interest rate to be 2.46% and an adjustment was issued amounting to the difference between the interest deducted (8,5%) and the interest calculated (2,46%). The adjustment was later upheld in court where the court agreed with the tax authority’s conclusion – Hanácká had not discharged the burden of proof under Article 92(3) of the Tax Code by failing to prove, in response to a request for the removal of doubts, that the interest in the two tax periods in question, amounting to CZK 6 040 000, which represented the difference between the interest on the 8,5 % bonds subscribed by persons associated with the applicant within the meaning of Article 23(3) of the Tax Code and the interest on the bonds ... Read more

TPG2022 Chapter X paragraph 10.58

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

TPG2022 Chapter X paragraph 10.56

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
Germany vs "HQ Lender GmbH", January 2022, Bundesfinanzhof, Case No IR 15/21

Germany vs “HQ Lender GmbH”, January 2022, Bundesfinanzhof, Case No IR 15/21

“HQ Lender GmbH” is the sole shareholder and at the same time the controlling company of A GmbH. The latter held 99.98% of the shares in B N.V., a corporation with its seat in Belgium. The remaining shares in B N.V. were held by HQ Lender GmbH itself. A GmbH maintained a clearing account for B N.V., which bore interest at 6% p.a. from 1 January 2004. No collateralisation was agreed in regards of the loan. In the year in dispute (2005), the interest rate on a working capital loan granted to the plaintiff by a bank was 3.14%. On 30 September 2005, A GmbH and B N.V. concluded a contract on a debt waiver against a debtor warrant (… €). The amount corresponded to the worthless part of the claims against B N.V. from the clearing account in the opinion of the parties to the contract. Although it was deducted from the balance sheet of A GmbH to reduce ... Read more
Germany vs "G-Corp GmbH", June 2021, Bundesfinanzhof, Case No I R 32/17

Germany vs “G-Corp GmbH”, June 2021, Bundesfinanzhof, Case No I R 32/17

A German corporation,”G Corp” held interests in domestic and foreign companies in the year in dispute (2005). G Corp granted loans to various subordinate companies – resident in France and the USA. These loans were mainly at fixed interest rates; instead of a fixed interest rate, an annual participation of 12.5% in the balance sheet profit of the subordinate company, limited to a maximum amount of 25% of the loan volume, was agreed as consideration for one loan. No collateral was provided. In the year in dispute, G Corp wrote off these loans against taxable profits. G Corp also transferred assets at book value to a Maltese subsidiary company, of which it was the sole shareholder, and contributed the shares in this company, pursuant to section 23(4) of the Reorganisation Tax Act applicable in the year in dispute, also at book value, to another Malta-based company in the context of a capital increase against the granting of company rights. Finally, ... Read more
Germany vs "Write-Down KG", February 2020, Bundesfinanzhof, Case No I R 19/17

Germany vs “Write-Down KG”, February 2020, Bundesfinanzhof, Case No I R 19/17

In 2010, “Write-Down KG” granted a loan to its Turkish subsidiary (“T”). The loan bore interest at 6% per annum but was unsecured. In 2011, Write-Down KG decided to liquidate T. Write-Down KG therefore wrote off its loan and interest receivable from T and claimed the write-off as a tax deduction. The German tax authorities disallowed the deduction because the loan had been unsecured which was considered not to be at arm’s length. An appeal was lodged with the local tax court, which upheld the tax authorities’ position. An appeal was then made to the Federal Tax Court. Judgement of the Court The court ruled that the waiver of security for a shareholder loan may not be at arm’s length. Such a deviation from the arm’s length principle may lead to a write-off of the loan receivable and thus to a reduction in income. This reduction in income may be reversed on the basis of the arm’s length principle contained ... Read more
Germany vs OHG, August 2019, Bundesfinanzhof,  I R 34/18

Germany vs OHG, August 2019, Bundesfinanzhof, I R 34/18

A German general partnership (OHG) was the sole shareholder of an Italian corporation (A). In 2002, there was an unsecured claim against this company from a current account overdraft in the amount of approx. … million was outstanding. The receivable bore interest at 4.57 % (1st half of 2002), 4.47 % (2nd half of 2002), 3.14 % (1st half of 2004) and 3.13 % (2nd half of 2004). On 31 December 2002, OHG waived part of this claim in the amount of … € against a debtor warrant. Subsequently, the claim against A rose again by the end of 2004 to approx. …..€. OHG then again waived part of this claim (… €) against a debtor warrant. The amounts corresponded to what the parties to the contract considered to be the worthless part of the claims against A from the overdraft facility. Although these were derecognised in OHG’s balance sheet to reduce profits, the tax authorities neutralised the reduction in ... Read more