Hornbach-Baumarkt AG operates DIY stores in Germany and abroad. Through its domestic subsidiary, it indirectly held 100% of the shares in several companies in other EU countries and in third countries. It had issued guarantees and letters of comfort to various lenders for these foreign companies without charging the subsidiaries any fees for the guarantees. The tax authorities increased Hornbach-Baumarkt AG’s taxable income with fees determined by application of the German arm’s length provision in Section 1 (1) AStG. An appeal was then filed by Hornbach-Baumarkt AG with the Tax Court. Judgment The court referred the following question to the European Court of Justice – Is an income adjustment in accordance with Section 1 AStG in the event of a gratuitous benefit being granted within a group in another EU country in accordance with EU law (TEFU Art. 49 and 54)? In 2018 the European Court of Justice ruled (C-382/16) that although the German arm’s length provision in Section 1 ... Read more

By providing an explicit guarantee the guarantor is exposed to additional risk as it is legally committed to pay if the borrower defaults. Anything less than a legally binding commitment, such as a “letter of comfort” or other lesser form of credit support, involves no explicit assumption of risk. Each case will be dependent on its own facts and circumstances but generally, in the absence of an explicit guarantee, any expectation by any of the parties that other members of the MNE group will provide support to an associated enterprise in respect of its borrowings will be derived from the borrower’s status as a member of the MNE group. For this purpose, whether a commitment from one MNE group member to another MNE group member to provide funding to meet its loan obligations, constitutes a letter of comfort or a guarantee depends on all the facts and circumstances, including whether the commitment provides the creditor relevant legal rights to enforce ... Read more

This section elaborates on the effect of group membership on determining the arm’s length price of financial guarantees, building upon the principles laid out in Section C.1.1 ... Read more

By providing an explicit guarantee the guarantor is exposed to additional risk as it is legally committed to pay if the borrower defaults. Anything less than a legally binding commitment, such as a “letter of comfort” or other lesser form of credit support, involves no explicit assumption of risk. Each case will be dependent on its own facts and circumstances but generally, in the absence of an explicit guarantee, any expectation by any of the parties that other members of the MNE group will provide support to an associated enterprise in respect of its borrowings will be derived from the borrower’s status as a member of the MNE group. For this purpose, whether a commitment from one MNE group member to another MNE group member to provide funding to meet its loan obligations, constitutes a letter of comfort or a guarantee depends on all the facts and circumstances, including whether the commitment provides the creditor relevant legal rights to enforce ... Read more

This section elaborates on the effect of group membership on determining the arm’s length price of financial guarantees, building upon the principles laid out in Section C.1.1 ... Read more

The tax scheme in the Ben Nevis-case involved land owned by the subsidiary of a charitable foundation being licensed to a group of single purpose investor loss attributing qualifying companies (LAQC’s). The licensees were responsible for planting, maintaining and harvesting the forest through a forestry management company. The investors paid $1,350 per hectare for the establishment of the forest and $1,946 for an option to buy the land in 50 years for half its then market value. There were also other payments, including a $50 annual license fee. The land had been bought for around $580 per hectare. This meant that the the investors, if it wished to acquire the land after harvesting the forest, had to pay half its then value, even though they had already paid over three times the value at the inception of the scheme. In addition to the above payments, the investors agreed to pay a license premium of some $2 million per hectare, payable ... Read more

“Guarantee Co. Ltd.” owned all the shares of G, a company located in the Netherlands, and had provided financial guarantees for loans – in the form of so called “keep well agreements” and guarantee agreements. The main issue in this case is whether or not it was possible to calculate an arm’s length price for the consideration for the guarantee issued. Judgement of the National Tax Tribunal The Tax Tribunal came to the conclusion that the price for the guarantees could be determined based on the CUP method and set at 0,10% of the guaranteed amounts. Excerpt “Therefore, a comparative study of the conclusion of each of the Keep Well Agreements, etc. in question and the Bank Guarantee Transactions in question shows that, as stated in (a) of (b) above, the conclusion of each of the Keep Well Agreements, etc. in question is found to have a function substantially equivalent to a guarantee, although there are differences in the contract ... Read more