FEDERAL FINANCIAL COURT Judgment of 27.2.2019, I R 73/16 ECLI:DE:BFH:2019:U.270219.IR73.16.0

Income adjustment in accordance with Article 1 (1) AStG in the event of profit-reducing derecognition of a loan receivable issued unsecured within the Group

Guiding Principles

The distinction between loans for business purposes and contributions for company purposes must be made on the basis of all the objective circumstances. Individual criteria of the arm's length comparison are not to be attributed to the quality of indispensable elements of the facts (confirmation of the Senate's judgment of 29 October 1997 I R 24/97, BFHE 184, 482, BStBl II 1998, 573, under II.2.)

The issue of the so-called group retention merely describes the legal and economic framework of the inter-company relationship and expresses the customary practice of not securing credit claims within a group of companies as is the case with third parties (in this respect, contrary to Senate rulings of 24 June 2015 I R 29/14, BFHE 250, 386, BStBl II 2016, 258, and of 29 October 1997 I R 24/97, BFHE 184, 482, BStBl II 1998, 573, under II.3.d).

3. the lack of loan collateral is generally one of the "conditions" not customary for third parties within the meaning of § 1 (1) AStG The same applies to Article 9, para. 1 OECD-MustAbk (here: Article 9 DBA-Belgium 1967).

4. Article 9, para. 1 OECD-MustAbk (here: Article 9 DBA-Belgium 1967) does not limit the scope of correction of § 1 para. 1 AStG to so-called "conditions" price adjustments, but also enables the neutralisation of the profit-reducing derecognition of a loan claim or a write-down to its going-concern value (contrary to Senate rulings of 24 June 2015 I R 29/14, BFHE 250, 386, BStBl II 2016, 258, and of 17 December 2014 I R 23/13, BFHE 248, 170, BStBl II 2016, 261).

5. Whether a correction under section 1(1) of the AStG conflicts with the principle of proportionality of Union law is determined by an overall assessment of the circumstances of the individual case. In doing so, the economic self-interest and financing responsibility on the one hand and the structural proximity to equity capital resources and the change in the asset and liquidity status of the lender on the other must be taken into account.

Tenor

On appeal by the defendant, the judgment of the Düsseldorf Finance Court of 10 November 2015 6 K 2095/13 K is set aside.

The action is dismissed.

Orders the applicant to pay the costs of the entire proceedings.

Facts of the case

I.

1 The parties are in dispute as to the lawfulness of a correction of income under Paragraph 1 of the Law on the Taxation of Foreign Relations (Außensteuergesetz), as amended by the Law on the Reduction of Tax Benefits and Exemptions (Steuervergünstigungsabbaugesetz --StVergAbG--) of 16 May 2003 (BGBl I 2003, 660, BStBl I 2003, 321) --AStG--.

2 The plaintiff and respondent in the appeal (plaintiff), a domestic limited liability company (GmbH), is the sole shareholder and at the same time the controlling company of the domestic A GmbH. The latter held a 99.98% interest in B N.V., a limited liability company based in Belgium. The applicant held the remaining shares in B N.V.

1 A GmbH maintained a clearing account for B N.V., which bore interest at 6% p.a. from January 2004. On September 30, 2005, A GmbH and B N.V. agreed to waive claims against debtor warrant in the amount of ... EUR. This amount corresponded to the part of the receivables from the clearing account which the parties to the agreement considered to be worthless. Although it was derecognised in the balance sheet of A GmbH with a profit-reducing effect, the defendant and plaintiff in the appeal (the tax office --FA--) neutralised the profit reduction by means of an off-balance sheet addition, taking into account the lack of collateralisation of the claim in accordance with § 1 (1) AStG.

3 The action brought against this was successful (judgment of the Finance Court --FG-- Düsseldorf of 10 November 2015 6 K 2095/13 K, decisions of the Finance Courts --EFG-- 2017, 553).

4 In its appeal, the FA criticises the infringement of substantive law and requests that the judgment under appeal be set aside and the action dismissed.

5 The applicant claims that the appeal should be dismissed.

6 The Federal Ministry of Finance (BMF) has joined the proceedings (§ 122 paragraph 2 of the Finance Court Rules --FGO--). It supports, without filing its own motion, the appeal of the FA.

Reasons for the decision

II.

7 The appeal is well-founded. The contested judgment must be set aside and the action dismissed (§ 126 (3), first sentence, no. 1, FGO). The lower court wrongly assumed that the income of the A GmbH is not to be corrected.

8 1 According to the findings of the lower court, a fiscal unity under corporation tax law existed between the A GmbH (as a controlled company) and the applicant (as controlling company) in the year of the dispute. Pursuant to § 14 (1) sentence 1 in conjunction with § 17, first sentence, of the Körperschaftsteuergesetz (KStG - German Corporation Tax Act) in the version applicable in the year of the dispute, the result is that the income of the A GmbH is attributable to the applicant and the objections to the amount of the attributed income are to be raised by the applicant (as the controlling company) in appeal proceedings against the corporation tax assessment addressed to it. In this respect, the tax assessment notice concerning the controlled company is not a fundamental notice (see Senate decision of 6 July 2016 I R 25/14, BFHE 254, 326, BStBl II 2018, 124).

9 2 The FG did not make sufficient findings to be able to decide whether the clearing account was a loan of A GmbH initiated by the company and thus to be recognised under tax law or whether this account shows contributions to the assets of B N.V. initiated by the company relationship and thus subsequent acquisition costs to the amount of the claim on the investment valuation of A GmbH (hereinafter referred to as "3.) This can, however, remain open, as in both cases the reduction in assets must be adjusted off-balance sheet (see 4. below).

10 According to the case law on contracts between relatives, the distinction between private and business reasons must be made on the basis of the totality of the objective circumstances following the decisions of the Federal Constitutional Court of 7 November 1995 2 BvR 802/90 (BStBl II 1996, 34, under B.I.2.) and of 15 August 1996 2 BvR 3027/95, with the proviso that not every deviation of individual circumstances from what is customary in the marketplace in the sense of an absolute factual element precludes recognition of the contractual relationship for tax purposes. Rather, the individual criteria of the arm's length comparison are to be assessed within the framework of the necessary overall consideration (cf. most recently judgment of the Federal Court of Finance --BFH-of 10 October 2018 X R 44-45/17, BFHE nn, m.w.N.). Nothing else can apply to contractual relationships between companies and their shareholders and thus to the question of whether a transfer of capital is to be assigned to the company's own operational sphere or to that of the corporate relationship (here: participation of the A GmbH in the B N.V.).

11 a) Accordingly, when assessing the transfer of capital between affiliated companies, it is also necessary to distinguish whether the transferred capital was to be transferred permanently to the assets of the receiving company and whether repayment was not intended (BFH judgement of 6 January 2007 in the BFH case). November 2003 IV R 10/01, BFHE 204, 438, BStBl II 2004, 416) or whether the parties involved -- in the sense of a serious agreement -- assumed the transfer of capital on a temporary basis and could assume that the loan agreement would be carried out and, in particular, that the loan would be repaid (Senate Judgment of 17 December 2014 I R 23/13, BFHE 248, 170, BStBl II 2016, 261, Rz 26). Admittedly, this delimitation can only be based on objectively verifiable circumstances and must be based on the conditions customary in foreign countries for the granting of a loan (so-called arm's length principle). However, even in this respect, the quality of indispensable preconditions cannot be attributed to individual criteria of arm's length settlement. Rather, these are --whereupon the Senate expressly pointed out in its judgment of 29 October 1997 I R 24/97 (BFHE 184, 482, BStBl II 1998, 573, under II.2.) - to be assessed on an indicative basis (cf. BFH judgment of 16 October 2014 IV R 15/11, BFHE 247, 410, BStBl II 2015, 267, Rz 24 et seq.)

12 b) On the basis of this, the failure to secure the debt balance from the settlement account that characterises the dispute is, on the one hand, a circumstance that is not customary in the banking industry, since a lender not affiliated with B N.V. would have insisted on a security customary in banking. Nor can anything to the contrary be inferred from the topos of the (so-called) group retention, since it merely expresses the legal and economic framework of the corporate integration and the customary practice within a group of companies not to secure credit claims as is the case with third parties (e.g. Greil, Jahrbuch der Fachanwälte für Steuerrecht 2018/2019, 947, 963 et seq.) Insofar as the judgments of the Senate of 24 June 2015 I R 29/14 (BFHE 250, 386, BStBl II 2016, 258) as well as in BFHE 184, 482, BStBl II 1998, 573, under II.3.d, state otherwise, this is not adhered to. On the other hand, however, this does not exclude - as explained - the assumption of a serious, i.e. operationally induced loan agreement in terms of income tax law (Senate ruling in BFHE 184, 482, BStBl II 1998, 573, on II.2.). Within the framework of the necessary overall assessment, in addition to the fact that the securing of claims is not customary within the group (Senate judgement of 21 December 1994 I R 65/94, BFHE 176, 571), the other circumstances surrounding the conclusion of the contract (e.g. The court was unable to assess whether, in addition to the fact that the collateral security was not customary for the group (Senate judgement of 21 December 1994 I R 65/94, BFHE 176, 571), the other circumstances of the conclusion of the contract (e.g. justified earnings expectations of the borrower, influence of the lender on the borrower's business activities, fundamental willingness to support the borrower company externally in its business dealings) were indicative of whether, despite the non-standard waiver of the granting of a valuable security for the loan claims, the parties involved assumed that the capital would be made available for a limited period of time and thus, in particular, that the loan capital would be repaid, and could assume this on objective assessment.

13 c) The FG did not carry out such an overall assessment. Nor can it be done subsequently by the review body.

14. In the event of a dispute, however, the delimitation is not relevant to the decision, since the reduction in profit associated with the write-off of the claim is to be corrected off-balance-sheet irrespective of whether A GmbH made a capital contribution to the assets of B N.V. as a result of the corporate relationship (participation relationship) (hereinafter referred to as a) or granted an operationally induced loan (hereinafter referred to as b and c).

15 a) In the event of a capital contribution, the acquisition costs of A GmbH would have increased in this respect to the interest in B N.V. A profit-reducing write-down to the going-concern value of this investment would be excluded in accordance with Article 8b (3) sentence 3 of the Corporation Tax Act.

16 b) In the event that an operationally induced loan claim were to be derecognised, however, the reduction in the tax balance sheet profit would have to be neutralised in accordance with § 1 (1) AStG - with the same result and as represented by the FA.

17 aa) The profit-reducing derecognition of the loan claim is not prevented by the so-called group retention and thus also by the fact that A GmbH was the controlling shareholder of B N.V. Insofar as the previous Senate rulings have shown that the controlling shareholder's ability to influence the borrower alone is to be regarded as a security for the repayment claim in the sense of an active obligation to pay, the Board of Management does not adhere to this - as already explained - (in this respect, contrary to the Senate ruling in BFHE 176, 571). Accordingly, the so-called group retention does not rule out the possibility that a loan may become worthless and thus be written down to the lower going-concern value, nor does it mean that the waiver of the loan claim, which is being assessed in the pending proceedings, will be offset by the recognition of a hidden contribution in the amount of the nominal value of the loan waiver (cf. Senate rulings in BFHE 250, 386, BStBl II 2016, 258; of 12 April 2017 I R 36/15, BFH/NV 2018, 58, margin note 22). Rather, the value of the contribution is determined according to the partial value of the share of the claim that was waived, and in the event of a dispute, therefore -- according to the findings of the previous instance -- to zero EUR (see decision of the Grand Senate of the Federal Court of Finance of 9 April 2017 I R 36/15, BFH/NV 2018, 58, margin no. 22). June 1997 GrS 1/94, BFHE 183, 187, BStBl II 1998, 307; and subsequent Senate rulings of 15 October 1997 I R 23/93, BFH/NV 1998, 826; I R 58/93, BFHE 184, 432, BStBl II 1998, 305; I R 103/93, BFH/NV 1998, 572; of 28 November 2001 I R 30/01, BFH/NV 2002, 677).

18 bb) However, the reduction in profits resulting from this is subject in full to the correction under § 1 (1) AStG.

19 If a taxpayer's income from business relations with a person closely associated with him is reduced by the fact that, in the context of such business relations with a foreign country, he agrees terms and conditions which differ from those which independent third parties would have agreed under the same or similar circumstances, his income is to be assessed as it would have been under the terms and conditions agreed between independent third parties, notwithstanding other provisions pursuant to § 1 (1) AStG. According to § 1 (4) AStG, a business relationship in this sense is any relationship under the law of obligations on which the income is based that is not an agreement under company law and which, either with the taxpayer or with the related party, is part of an activity to which §§ 13, 15, 18 or 21 of the Income Tax Act apply or, in the case of a foreign related party, would apply if the activity were carried out in Germany.

20 (1) The loan relationship between A GmbH and B N.V. is such a business relationship, the conditions of which include the non-collateralisation of claims (still left open in the Senate ruling in BFHE 248, 170, BStBl II 2016, 261, margin note 15). Although the term "condition" is not defined by law, in normal business transactions - in addition to agreements on the term, manner of repayment and the amount and timing of interest payments - agreements on the collateral to be provided are usually also to be included (cf. No. 13 GTC banks, No. 22 GTC savings banks). This view is also shared by case law (e.g. Senate judgement of 7 September 2016 I R 11/14, BFH/NV 2017, 165, Rz 21, in connection with a "on-lent group loan" and Section 8a (1) KStG 2002 (new version); BFH judgements of 16 December 1998 X R 139/95, BFH/NV 1999, 780, and of 28 November 1990 X R 109/89, BFHE 163, 264, BStBl II 1991, 327).

21 (2) The non-collateralisation deviates - as already explained - from the usual foreign practice because a foreign creditor would have made the granting of a loan (in this case a clearing account) dependent on the granting of valuable security interests. It cannot be objected to the assumption that there is no foreign customary practice that the agreement underlying the debt balance is regarded as a loan for tax purposes. The latter is based - as also explained above - on the assessment of the overall agreement, which, despite the absence of individual indications that are not customary in the market (in this case: no collateralisation), can lead to the assumption that the capital is not paid out on the basis of the company relationship (participation relationship) but on the basis of a loan. However, this does not mean that the contract as a whole corresponds to what foreigners would agree to. On the contrary, the qualification of the parts of the contract concerned which deviate from what is customary in the market (banking practice) as not being customary for third parties is maintained. Nothing else results from § 1 AStG. On the contrary: this provision also distinguishes, according to its structure (facts and legal consequences), the "business relationship" with the foreign country -- here the loan to be recognised for tax purposes -- from the individual "terms and conditions" which are not customary with regard to foreigners, with the further consequence that only the reductions in income caused by this - i.e. the lack of customary terms and conditions with regard to foreigners (here: lack of collateralisation) - are subject to the correction order of the norm.

22 (3) The reduction in income has also occurred within the meaning of § 1 AStG by ("thereby") the lack of collateralisation (still left open in Senate rulings in BFHE 250, 386, BStBl II 2016, 258, margin note 16, and in BFHE 248, 170, BStBl II 2016, 261, margin note 15). The decisive factor here is -- in the sense of the principle of causation (Senate decision of 18 April 2018 I R 37/16, BFHE 261, 166, BStBl II 2019, 73, margin no. 23) -- the "triggering moment" of the profit-reducing write-off of the receivable. In the valuation analysis required for this purpose, the insolvency of B N.V. is not to be taken into account, but rather the waiver of security as a matter of priority, because A GmbH has linked its claim to repayment of the loan to the economic development of its subsidiary through this waiver and such a "mixing of asset risks" would not have occurred if valuable security rights had been granted.

23 cc) The correction of income in accordance with § 1 para. 1 AStG which this entails is not excluded by Article 9 of the Convention between the Federal Republic of Germany and the Kingdom of Belgium for the Avoidance of Double Taxation and for the Settlement of Various Other Questions relating to Taxes on Income and Property, including Trade Tax and Property Taxes, of 11 April 1967 (BGBl II 1969, 18, BStBl I 1969, 39) --DBA-Belgium 1967-- (abandonment of previous Senate case law).

24 (1) Art. 9 DBA-Belgium 1967 provides, inter alia, that where an enterprise of a Contracting State participates directly or indirectly in the management, control or financing of an enterprise of the other Contracting State and where conditions are agreed or imposed between the two enterprises in respect of their commercial or financial relations which differ from those which would be agreed between independent enterprises, the profits which one of the enterprises would have made in the absence of those conditions but has not made because of those conditions may be included in the profits of that enterprise and taxed.

25 (2) If one bases the determination of the regulatory content of an international treaty on the Vienna Convention on the Law of Treaties of 23 May 1969 --WÜRV-- (Federal Law Gazette II 1985, 927) (Senate decision of 11 July 2018 I R 44/16, BFHE 262, 354), such a treaty must be interpreted in good faith in accordance with the ordinary meaning given to its provisions in their context and in the light of its object and purpose (Art. 31 (1) WÜRV).

26 (3) The wording of the treaty and the "customary meaning" of the terms used are therefore decisive. Accordingly, the lack of collateral is a matter of "agreed terms" between A GmbH and B N.V. which - as shown - deviate from the usual terms of third parties. Although the Senate has so far limited the characteristic of the condition in the case of the granting of a loan solely to the agreed interest rate --i.S. of a price correction-- (Senate rulings in BFHE 250, 386, BStBl II 2016, 258, and in BFHE 248, 170, BStBl II 2016, 261). However, this case law is not upheld. However, the principles of the Senate's ruling of 11 October 2012 I R 75/11 (BFHE 239, 242, BStBl II 2013, 1046) remain unaffected. The so-called special condition to be assessed in this ruling in the form of a "clear agreement made in advance, effective under civil law and actually implemented", to which dominant companies are subject in the context of the income adjustment pursuant to section 8 (3) sentence 2 KStG (so-called formal arm's length settlement), is still not to be counted towards the conditions within the meaning of Article 9 (1) of the Model Agreement of the Organisation for Economic Cooperation and Development (OECD Model Agreement --OECD-MustAbk--).

27 (4) This understanding is confirmed by the purpose of Art. 9 DBA-Belgium 1967. The regulation is aimed at the delimitation of income in cross-border business relationships on the basis of the arm's length principle based on territoriality and cause (Schwenke/Greil in Wassermeyer MA Art. 9 margin note 2). It also aims to ensure a level playing field between independent and affiliated companies.

28 (5) It also follows from the above and the principle of consistency with the comments on § 1 AStG that the Senate is not required to reach a final decision on whether the interpretation of Article 9 DBA-Belgium 1967 should be based on the principles of the WÜRV or, in accordance with Article 3, para. 2 DBA-Belgium 1967 (the so-called lex fori clause), on the law of the user state (cf. WÜRV: Erhard in Flick/Wassermeyer/Kempermann, Double Taxation Agreement Germany-Switzerland, Art. 3 margin no. 155; Oellerich in Gosch, AO § 2 margin no. 34; Schaumburg/Häck in Schaumburg, International Tax Law, 4th ed., margin no. 19.67; Strunk/Kaminski in Strunk/Kaminski/Köhler, AStG/DBA, Art. 3 OECD-MA margin no. 5.1; Wassermeyer in Wassermeyer MA Art. 3 margin no. 77).

29 c) Finally, Union law does not contradict a correction of income under § 1 AStG.

30 aa) According to the case-law of the Court of Justice of the European Union (formerly the European Court of Justice), a rule such as that laid down in Section 1(1) of the Coreper Act constitutes a restriction on the freedom of establishment justified in order to safeguard the balanced distribution of taxation powers between Member States (Article 43 of the Treaty establishing the European Community, as amended by the Treaty of Nice amending the Treaty on European Union, the Treaties establishing the European Communities and certain related acts, Official Journal of the European Communities 2002, No C 325, 1) (now Article 49 of the Treaty on the Functioning of the European Union as amended by the Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European Community, Official Journal of the European Union 2008, No C 115, 47; ECJ judgment Hornbach-Baumarkt of 31 May 2018 C-382/16, EU:C:2018:366, Supreme Financial Court --HFR-- 2018, 580).

31 bb) To the extent that the ECJ, in the latter ruling in favour of the free assumption of guarantee and patronage commitments, recognised in the context of its considerations on proportionality that the economic self-interest of the group parent company in its affiliated companies and the certain responsibility as a shareholder in financing these companies justify ("declare") business transactions under conditions that are not at arm's length and can therefore stand in the way of an adjustment pursuant to § 1 AStG, this restriction does not apply in the present case.

32 (1) It must be assumed here that the economic reasons mentioned (here: "certain" financing responsibility of the A GmbH for B N.V.; participation in its success e.g. through profit distribution) do not lead to an automatic suppression of the protection of the territorial taxation rights of the Member States (throughout) according to the ECJ ruling Hornbach-Baumarkt (EU:C:2018:366, HFR 2018, 580). On the contrary, the wording of the judgment (cf. paragraphs 54, 56 f: "may") makes it clear beyond doubt that the national court must take account of reasons of this kind and thus, within the framework of a weighing procedure, must measure them against the weight with which the respective deviation from the standard of what is customary in the foreign market to be assessed encroaches on the territoriality principle and the allocation of taxation rights based on this (cf. Graw, Der Betrieb --DB-- 2018, 2655, 2657; Rasch/Chwalek/Bühl, Internationale Steuer-Rundschau 2018, 275, 279; Schreiber/Greil, DB 2018, 2527, 2534; BMF letter of 6 December 2018, BStBl I 2018, 1305).

33 (2) According to this, in the event of a dispute, a restriction of the correction under § 1 AStG is not possible.

34 It is true that the A GmbH -- in contrast to third parties outside the company -- had the choice of providing the B N.V. with either debt or equity capital. However, if the provision of debt capital compensates for an insufficient equity capital base and is thus at the same time a prerequisite for the company receiving the loan to (continue to) fulfil the economic function intended for it, this is not only structurally close to an injection of equity capital (cf. in each case on § 1 AStG (old version) Senate judgements of 23 June 2010 I R 37/09, BFHE 230, 156, BStBl II 2010, 895; of 27 August 2008 I R 28/07, BFH/NV 2009, 123; cf. also § 8b (3) sentence 4 et seq. KStG n.v.), but also has the consequence that different treatment of contributions (see 4.a) and loan waivers is excluded, taking into account the right to the accrual of profits in accordance with the conditions customary in the market for third-party shares, which is also recognised under EU law.

35 What further developments result from this for free guarantee and comfort letters, which are not subject to the ECJ ruling Hornbach-Baumarkt (EU:C:2018: 366, HFR 2018, 580) does not require further discussion in the present case because obligations of the latter type are not associated with any change in the asset and liquidity status of the companies concerned, whereas the waivers to be assessed in the pending proceedings - equivalent to the payment of a capital contribution - were aimed at a loss of capital until the better fortune scenario occurred, but in any case at a transfer of capital. In the context of the necessary weighing up - as has been shown - this too must be given the weight it deserves, with the result that freedom of establishment under Union law does not preclude a correction of income under Paragraph 1 of the AStG.

36 5. it follows from the foregoing that the judgment of the FG must be set aside and the action dismissed.

37 6) The decision on costs is based on Paragraph 135(2) of the FGO.

See also: press release no. 29/19 of 15.5.2019