Tag: Prudent and diligent business manager

According to German tax law, if no comparable data exists a hypothetical arm’s length comparison has to be conducted in compliance with the so–called prudent and diligent business manager principle, and based on the functional analysis and internal projections, to establish a range of “hypothetical” arm’s length prices.

Luxembourg vs SA, October 2007, Administrative court, Case No 23053

Luxembourg vs SA, October 2007, Administrative court, Case No 23053

The question in this case was if a loan had been granted in accordance with the arm’s length principle. In it’s judgament the court relied on the principles that should drive a prudent and diligent business manager. “.. its behavior is to be qualified by reference to the medium-prudent and diligent creditor acting on the market in that the latter would have undeniably sought to have a clause allowing a reduction in the cost of its financing.” The principle of qualifying dealings based on a “ordentlicher und gewissenhafter Geschäftsleiter” can be attributed to the German origins of the tax system in Luxembourg. Click here for translation 23053C ... Continue to full case
Germany vs Clothing Distribution Gmbh, October 2001, BFH Urt. 17.10.2001, IR 103/00

Germany vs Clothing Distribution Gmbh, October 2001, BFH Urt. 17.10.2001, IR 103/00

A German GmbH distributed clothing for its Italian parent. The German tax authorities issued a tax assessment based on hidden profit distribution from the German GmbH in favor of its Italien parent as a result of excessive purchase prices, which led to high and continuous losses in Germany.  The tax authorities determined the arm’s length price based on purchase prices, which the German GmbH had paid to external suppliers. However, these purchases accounted for only 5% of the turnover. The German Tax Court affirmed in substance a vGA (hidden profit distribution) as the tax authorities had provided no proff of deviation from arm’s length prices. If a hidden profit distribution is to be accepted, the profit shall be increased by the difference between the actually agreed price and the price agreed by independent contractual parties under similar circumstances – the arm’s length price. Where a range of arm’s length prices is produced, there are no legal basis for adjustment to the ... Continue to full case
Germany vs GmbH, February 1993, Bundesfinanzhof, Case No I R 3/92

Germany vs GmbH, February 1993, Bundesfinanzhof, Case No I R 3/92

The decision is about a German distribution company of international groups, which is in a continual overall loss position. This case established an important principle that: ‘… an orderly and diligent manager will, for the corporation managed by him, introduce to the market and distribute a new product only if he can expect, based on a prudent and pre-prepared economic forecast, a reasonable overall profit within a foreseeable period of time with due consideration to the predictable market development’. This decision covered the market introduction of a new product by an already established company and stated that typically a market introduction phase, losses should not be accepted for longer than three years. A later Bundesfinanzhof decision from 15 May 2002 stated that a start-up loss phase can be substantially longer on a case-by-case basis. Click here for translation Germany vs GmbH Feb 1993 ... Continue to full case