BFH v. 17.12.2014 - I R 23/13 BStBl 2016 II p. 261

Blocking effect of Art. 9, para. 1 DBA-USA 1989 on income adjustment pursuant to § 1, para. 1 AStG (old version) in the case of partial value depreciation as a result of a loan issued without collateralisation

Guiding principle

1. Partial write-downs on shareholder loans are not profit reductions that are not to be taken into account in the determination of profits within the meaning of section 8b(3) KStG 2002 in the version until the amendment by the JStG 2008 (confirmation of the Senate ruling of 14 January 2009, I R 52/08, BFHE 224, 132, BStBl II 2009, 674). 2.

2. The principle of "dealing at arm's length" according to Article 9, para. 1 OECD-MustAbk (here: according to Article 9, para. 1 DBA-USA 1989) only allows for an income correction according to the national provisions of the Contracting States (here according to § 1, para. 1 AStG in the version of the StVergAbG of 16 May 2003) if the price agreed between the affiliated companies (here: an interest rate on a loan) does not stand up to the arm's length standard in terms of its amount, i.e. its appropriateness. However, it does not allow for the correction of a write-down to be made (pursuant to section 6(1) no. 2 sentence 2 EStG 2002) on the partial value of the claim for repayment of the loan proceeds and on interest arrears because the domestic parent company issued the loan to its foreign (here: US) subsidiary in an unsecured manner that is not customary for an arm's length transaction (deviation from the BMF letter of 29 March 2011, BStBl I 2011, 277, para. 3). 3.

3. Whether the partial write-down of the repayment claims is justified due to the lack of collateralisation is (also) determined according to the standards of the so-called group retention (in this respect, confirmation of the BMF letter of 29 March 2011, BStBl I 2011, 277, there margin no. 13).

Laws: AStG (in the version of the StVergAbG of 16 May 2003) AStG (in the version of the StVergAbG of 16 May 2003) § 1 para. 1 and 4DBA USA 1989 Art. 9 para. 1Protocol to DBA USA 1989 No. 7 Protocol to DBA USA 1989 No. 7EStG 2002 § 6 para. 1 No. 2 sentence 2KStG 2002 (in the version of JStG 2008) § 8b para. 3

Instances: FG Berlin-Brandenburg of 30 January 2013 12 K 12056/12 (EFG 2013, 1560) BFH I R 23/13 (course of proceedings), BFH - I R 23/13, course of proceedings

Reasons

I.

1 The plaintiff and appellant (plaintiff), a limited liability company (GmbH), is the legal successor of C-GmbH by virtue of the merger on 31 December 2007. C-GmbH was the sole shareholder of I-GmbH and affiliated to it as the controlling company within the framework of a tax group relationship pursuant to §§ 14 et seq. of the Corporation Tax Act 2002 (Körperschaftsteuergesetz 2002 - KStG 2002) and § 2 para. 2 sentence 2 of the Trade Tax Act 2002 (Gewerbesteuergesetz 2002 - GewStG 2002).

2 In 2000, I-GmbH, together with another company, founded a US corporation, H-Inc., in which I-GmbH held 60 per cent of the shares, in order to open up the US market. H-Inc. was provided with equity capital by the two shareholders. It also received a bank loan of approximately 1.5 million US dollars (USD), which the partners secured by guarantees. As of 31 December 2003, the balance sheet of H-Inc. showed a deficit not covered by equity in the amount of approximately USD 950,000. On 30 June 2004, the other shareholder withdrew; since then, I-GmbH was the sole shareholder of H-Inc. The bank then called in the loan granted to H-Inc. As the latter was not in a position to service the bank loan, C-GmbH paid on the loan claim. As at 31 December 2004, the balance sheet of H-Inc. then showed a deficit not covered by equity in the amount of approximately USD 450,000, which increased to approximately USD 1.6 million as at 31 December 2005, to approximately USD 2.5 million as at 31 December 2006 and to approximately USD 3.5 million as at 31 December 2007.

3 In the years in dispute 2004 to 2007, I-GmbH granted its US subsidiary unsecured loans of € 261,756.22 (2004), € 1,103,140 (2005), € 158,553.39 (2006) and € 75,000 (2007) with an annual interest rate of 5%, which were to be repaid from the liquidity of future profits of H-Inc. Already in the respective year of their granting, the loan receivables were individually value adjusted (2004 in the amount of € 261,052, 2005 in the amount of € 1,103,140, 2006 in the amount of € 158,000, 2007 in the amount of € 75,000).

4 The tax office responsible for the taxation of I-GmbH recognised the value adjustments of the loan receivables on the merits, but, with reference to the letter of the Federal Ministry of Finance (BMF) of 29 March 2011 (BStBl I 2011, 277) - in the years 2004 to 2006 in each case in the full amount, in 2007 in the amount of € 30. 800 - to the income pursuant to § 1 of the Act on the Taxation of Foreign Relations (Foreign Tax Act) in the version of the Act on the Reduction of Tax Concessions and Exemptions (Tax Concession Reduction Act -StVergAbG-) of 16 May 2003 (Federal Law Gazette I 2003, 660, Federal Tax Gazette I 2003, 321) -AStG a.F.- that was decisive for the years in dispute. The defendant and appellant (Finanzamt -FA-) issued corresponding notices on corporation tax and trade tax assessment amounts to the plaintiff as the legal successor of the former controlling company, C-GmbH.

5 The subsequent action was unsuccessful. The Berlin-Brandenburg Fiscal Court (Finanzgericht, FG) dismissed it as unfounded in its ruling of 30 January 2013 12 K 12056/12. The judgement is printed in Entscheidungen der Finanzgerichte (EFG) 2013, 1560.

6 The plaintiff bases its appeal on a violation of substantive law. It requests that the judgement of the Fiscal Court be set aside and that the contested notices be amended to the effect that the addition of income pursuant to § 1 AStG old version in the amount of €261,052 in 2004, in the amount of €1,103,140 in 2005, in the amount of €158,000 in 2006 and in the amount of €30,800 in 2007 is waived.

7 The FA requests that the appeal be rejected.

8 The Federal Ministry of Finance joined the appeal proceedings. It agrees with the FA on the merits, but does not file an application.

II.

9 The appeal is well-founded. It leads to the annulment of the contested judgement of the Fiscal Court and to the remittal of the case to the Fiscal Court. The FA and the tax court were wrong in their conclusion that a partial write-off of the repayment claims from the issued loans and the claims due to the interest arrears as a result of the failure to provide collateral triggers an income adjustment pursuant to § 1 (1) of the old version of the German Income Tax Act (AStG) aimed at reversing the write-off. However, further clarification of the facts is required, on the one hand, as to whether the agreed interest rate was appropriate, on the other hand, as to whether the corresponding loan and interest receivables should be capitalised as such and, if so, whether the write-offs to the lower partial values were justified. Without these findings of the court of facts, it cannot be recognised.

10 1 The parties involved agree that C-GmbH and I-GmbH were affiliated in the years in dispute (pursuant to § 14 KStG 2002, § 2 para. 2 sentence 2 GewStG 2002). The senate has no reason to question the underlying factual circumstances and the legal effects based thereon. 11 2.

11 2. on 31 December of each of the years in dispute, I-GmbH capitalised repayment claims against H-Inc. arising from the loans issued to it and then at the same time wrote down the partial value of these claims in accordance with § 6 (1) no. 2 sentence 2 in conjunction with § 6 (1) no. 1 sentence 2 of the Trade Tax Act 2002. § Section 6 (1) no. 1 sentence 3 of the Income Tax Act 2002 (EStG 2002), here in conjunction with Section 8 (1) KStG. § 8 section 1 KStG 2002 and in accordance with § 7 sentence 1 GewStG 2002. The parties involved disagree (again in the meantime) as to whether the write-downs to the going-concern value were justified. The court left this unanswered because a corresponding (off-balance sheet) income adjustment was not required under § 8b, para. 3 KStG 2002 in the version until the amendment by the Annual Tax Act 2008 of 20 December 2007 (BGBl I 2007, 3150, BStBl I 2008, 218), but at least under § 1, para. 1 AStG, old version, and the effects of the partial write-downs were thus to be reversed. The latter is not to be agreed with in principle. However, further clarification of the facts is required.

12 a) The expenses from the partial write-downs (assumed here to be in conformity with the rules) are indeed not to be added off balance sheet to increase income pursuant to § 8b (3) KStG 2002, old version. The facts are missing. The Senate refers - in this respect also in agreement with the parties involved and in order to avoid repetitions - to its judgement of 14 January 2009 I R 52/08 (BFHE 224, 132, BStBl II 2009, 674), which the X. Senate of the Federal Fiscal Court (Bundesfinanzhof, BFHE 224, 132, BStBl II 2009, 674) followed. Senate of the Federal Fiscal Court (Bundesfinanzhof, BFH) in its ruling of 18 April 2012 X R 5/10 (BFHE 237, 106, BStBl II 2013, 785) for the parallel regulatory situation in this respect under section 3c(2) sentence 1 EStG 2002.

13 b) Whether and to what extent § 1 AStG old version leads to an income correction cannot be conclusively answered at present.

14 aa) If a taxpayer's income from business relations with a related party is reduced because, in the context of such business relations with a foreign country, the taxpayer agrees terms and conditions that differ from those that would have been agreed by unrelated third parties under the same or similar circumstances, his income is to be assessed according to § 1, para. 1 AStG old, irrespective of other provisions, as it would have been under the terms and conditions agreed between unrelated third parties. According to § 1, para. 2, no. 1 AStG old, a person is related to the taxpayer if, among other things, the person has a direct or indirect interest (significant interest) in the taxpayer or can directly or indirectly exercise a controlling influence on the taxpayer or, conversely, the taxpayer has a significant interest in the person or can directly or indirectly exercise a controlling influence on this person. A business relationship within the meaning of paragraphs 1 and 2 is, according to § 1 (4) AStG old version, any relationship under the law of obligations on which the income is based, which is not an agreement under the articles of association and which is part of an activity either with the taxpayer or with the related person to which §§ 13, 15, 18 or § 21 of the Income Tax Act are applicable or, in the case of a foreign related person, would be applicable if the activity were carried out in Germany (in this respect, deviating from the previous version of the regulations, cf. in this respect, in relation to shareholder loans, Senate ruling of 23 June 2010, I R 37/09, BFHE 230, 156, BStBl II 2010, 895, with further references).

15 bb) In the case in dispute, it is controversial among the parties in several respects whether the conditions of § 1(1) AStG old version triggering the correction, as determined here, exist and, if so, whether they comply with higher-ranking law: Firstly, whether the lack of collateralisation of the loan issued by I-GmbH to the US-American H-Inc. is a condition within the meaning of the law; secondly - if the answer is affirmative - whether the lack of collateralisation and the consequently triggered partial value depreciation pursuant to § 6 para. 1 no. 2 sentence 2 EStG 2002 is causal ("as a result") for the reduction in income as a shift of profits abroad, and thirdly, whether this complies with the principle of equal taxation in terms of both constitutional and EU law (cf. Court of Justice of the European Union, judgment of 21 January 2010 C-311/08, SGI, [2010] ECR I-487). In some cases, these questions are answered in the affirmative (e.g. - in line with the previous instance - by the Thuringian Tax Court, judgement of 29 January 2014 3 K 43/13, EFG 2014, 1401), in some cases in the negative (e.g. by the Düsseldorf Tax Court, judgement of 28 March 2014 6 K 4087/11 F.). March 2014 6 K 4087/11 F, EFG 2014, 1275; also e.g. von Ditz/ Quilitzsch, Internationale Steuer-Rundschau -ISR- 2014, 109, 113; Ditz in Schönfeld/Ditz, DBA, Art. 9 OECD-MA Rz 18 et seq, 19, and von Andresen, Internationales Steuerrecht -IStR- 2014, 207, in each case with further references).

16 cc) The Senate leaves this aside. It agrees with the plaintiff, at least in principle, with regard to the question of the lack of collateralisation for a different reason. Even if all the requirements of § 1, para. 1 of the old version of the German Income Tax Act (AStG) were fulfilled, a correction of income due to the lack of collateralisation of the loan would have to be ruled out because it would not be compatible with the relevant treaty situation in the case at issue in accordance with Article 9, para. 1 of the Convention between the Federal Republic of Germany and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital and Certain Other Taxes of 29 August 1989 (Federal Law Gazette II 1991, 355, Federal Tax Law Gazette I 1991, 95) - DTA-USA 1989 - and with the arm's length standard specified therein.

17 aaa) Article 9, para. 1 DBA-USA 1989 corresponds to Article 9, para. 1 of the Model Convention of the Organisation for Economic Cooperation and Development - OECD Model Convention (OECD-MustAbk) - and contains profit adjustment provisions comparable in content to § 1, para. 1 AStG old. and contains profit adjustment provisions comparable in content to section 1 (1) AStG old for enterprises associated with one another ("dealing at arm's length"): If an enterprise of a Contracting State directly or indirectly participates in the management, control or capital of an enterprise of the other Contracting State, or if the same persons directly or indirectly participate in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State, and in these cases the two enterprises are bound in their commercial or financial relations by agreed or imposed conditions which differ from those which independent enterprises would agree with each other, the profits which one of the enterprises would have earned without these conditions but did not earn because of these conditions may be attributed to the profits of this enterprise and taxed accordingly.

18 bbb) As such, the agreement provision does constitutively determine the arm's length standard. However, it requires a domestic legal basis which, for its part, enables the adjustment of profits in accordance with Article 9, para. 1 DBA-USA 1989; the provision - as a provision under treaty law - serves to delimit profits, but not to (directly) adjust profits (no so-called "self-executing effect"). Article 9, para. 1 DBA-USA 1989 thus only defines the "framework" and the conditions under treaty law for the profit adjustments to be made. At the same time, the provision has a limiting effect as a manifestation of the so-called "barrier effect" of the treaty: even if Article 9, para. 1 DBA-USA 1989 does not create correction possibilities for the state applying the treaty, it does "block" more far-reaching, domestically permissible correction possibilities of that state for its scope of application. Only in this way - by means of a uniform and binding assessment standard for both contracting states - can it be achieved that the objectionable prices and price components are not recorded twice in the individual states (see Eigelshoven in Vogel/Lehner, DBA, 6th edition, Art. 9 margin no. 18 ff., 20).

19 ccc) In its ruling of 11 October 2012, I R 75/11 (BFHE 239, 242, BStBl II 2013, 1046), the Senate recognised that the principle of "dealing at arm's length" under treaty law has a blocking effect in the case of associated companies in relation to the so-called special conditions to which controlling companies are subject in the context of the income adjustment under section 8(3) sentence 2 KStG 2002 when a hidden profit distribution is assumed. The main consideration of this decision is that the relevant standard of comparison in Art. 9 para. 1 OECD-MustAbk only those (factual) circumstances are included which have an effect on the said "economic or financial conditions", i.e. which affect the appropriateness (amount) of what has been agreed; a profit adjustment which not only extends to the appropriateness (amount) of what has been agreed, but - in a two-stage procedure - also to its "reason" (customary nature of the conditions, seriousness), is alien to the comparative standards of "dealing at arm's length" as the subject of the appropriateness test. These standards of comparison are - if only to prevent the threat of double taxation in both the one and the other contracting state in the absence of a corresponding counter-correction - subject to a treaty-specific and thus uniform understanding of the term, which precludes domestic modifications of the arm's length concept ex ante. In order to avoid repetitions, reference is made to the reasons of the judgement, which the Senate adheres to.

20 ddd) What was said in that judgement on the relationship between Article 9, para. 1 OECD-MustAbk and § 8, para. 3, sentence 2 KStG 2002 applies to the same extent to the relationship between Article 9, para. 1 OECD-MustAbk and § 1, para. 1 AStG old version; there are no indications which could justify a different assessment in principle here, and this principle aims to correlate the reduction in profit suffered with the conditions imposed or agreed. Here, too, an income adjustment can therefore only be considered if the agreed price does not stand up to the arm's length standard in terms of its amount, i.e. its appropriateness. Admittedly, the term "agreed conditions" in Art. 9 (1) OECD-MustAbk basically covers everything that is the subject of commercial and financial relations and thus the subject of the exchange of services under the law of obligations between the associated enterprises, so that all other terms and conditions are included in addition to the price (cf. e.g. Ditz in Schönfeld/Ditz, loc. cit, Art. 9 OECD-MA, marginal no. 47; Wassermeyer, DBA, MA Art. 9, marginal no. 62; Wolff, same, USA Art. 9, marginal no. 28; Oestreicher in Endres/Jacob/Gohr/Klein, DBA Germany/USA, 2009, Art. 9, marginal no. 21, see also marginal no. 13 et seq.) It remains the case, however, that the agreement conditions only have an effect before the principle of the standard of review laid down in Art. 9 (1) OECD-MustAbk insofar as their "quality" influences the interest rate level "upwards" or "downwards" in an arm's length comparison (likewise e.g. Ditz/Quilitzsch, ISR 2014, 109, 113; Ditz in Schönfeld/Ditz, loc.cit., Art. 9 OECD-MA marginal no. 18 ff, 19, 46 f.; Andresen, IStR 2014, 207, both with further references; see also Oestreicher in Endres/Jacob/Gohr/Klein, ibid.); in this respect, the conditions always (only) form the basis for the review of transfer prices (see Eigelshoven in Vogel/Lehner, loc. cit, Art. 9 margin no. 50 f.; unclear and possibly different Wassermeyer in Flick/Wassermeyer/Baumhoff/Schönfeld, Außensteuerrecht, § 1 AStG margin no. 107 ff. on the one hand, margin no. 98 ff. and 117 on the other).

21 eee) Contrary to the assumption of the FA and (presumably also) of the BMF, which joined the proceedings, the DBA-USA 1989 applicable in casu and in this case its Article 9, para. 1 as well as No. 7 of the Protocol of 29 August 1989 (BGBl II 1991, 378, BStBl I 1991, 107), which was agreed on, do not change this. According to this Protocol, each Contracting State may apply the provisions of its domestic law according to which income, deductible amounts, tax credits or allowances are to be apportioned or allocated between associated persons in order to apportion or allocate deductible amounts, tax credits or allowances according to the general principles of Article 9, para. 1 DBA-USA 1989. Art. 9 DBA-USA 1989 is not to be interpreted as restricting a Contracting State in the apportionment of income between persons who are connected with each other in a manner other than by direct or indirect participation within the meaning of para. 1 (for example, by commercial or contractual relationships resulting in controlling influence); however, the apportionment must otherwise comply with the general principles of Art. 9, para. 1 DBA-USA 1989.

22 Art. 9, para. 1 DBA-USA 1989 therefore "does not have a 'blocking effect' with regard to the manner of adjustments between associated enterprises and the adjustment of income between enterprises or persons that are associated in a manner other than according to the criteria specified in Art. 9, para. 1" (Wolff in Wassermeyer, loc. cit., USA Art. 9, marginal no. 42). The provision is aimed at correcting the income of a business relationship between related parties that is not remunerated at arm's length and thus allows, for example, a profit correction in Germany (also) under the conditions of § 1 para. 2 no. 3 AStG old. However, it remains the case that such a correction is only permissible if it is made in accordance with the arm's length principle in the sense described above. The "blocking effect" triggered by Article 9, para. 1 DBA-USA 1989 in this respect is therefore not influenced or cancelled (likewise e.g. Ditz in Schönfeld/Ditz, loc. cit., Art. 9 OECD-MA marginal no. 186; Eigelshoven in Vogel/Lehner, loc. cit., Art. 9 marginal no. 146), and this then also applies to corrections in accordance with § 1, para. 1 AStG old version.

23 dd) Conditions that have been agreed within the scope of a business relationship between associated enterprises can therefore, in accordance with the correction standard permissible under treaty law, as a rule only have an effect on the income correction to be made in accordance with § 1, para. 1 AStG, old version, if they have an actual influence on the amount of the performance conditions. In individual cases, this also includes the risks resulting from a lack of loan collateralisation. However, the situation may be different under the circumstances of the so-called group retention, which is also relevant in principle in the case in dispute, and which describes all advantages of a company that result solely from belonging to the group of companies. In the case of such retention, compensation through the agreed interest rate may be unnecessary as long as the controlling shareholder ensures the solvency of the company, i.e. as long as it meets its external obligations. Also according to the BMF (in the aforementioned letter in BStBl I 2011, 277), the group retention is to be recognised as an arm's length security for the examination of the interest rate and the absence of an agreed security should not lead to an adjustment of the interest rate; the group retention in itself represents sufficient security (cf. on this also e.g. Benz/Böing, Die Unternehmensbesteuerung 2012, 440; Looks/Birmans/Persch, Der Betrieb 2011, 2110; Roser, GmbH-Rundschau 2011, 841; Nientimp/Langkau, Internationale Wirtschafts-Briefe 2011, 351; V. Schmidt, Neue Wirtschafts-Briefe, Beilage 33/2011, 3; Wassermeyer in Flick/Wassermeyer/ Baumhoff/Schönfeld, loc. cit, § 1 AStG margin no. 108).

24 ee) Whether this is the case in the case in dispute and in what comprehensible manner the agreement on the interest came about at all was not established by the Fiscal Court. It did take up the concerns of the FA (now also shared by the Federal Ministry of Finance), but then left this aside. The clarification of the facts must be made up for on this point, which is why the ruling of the lower court, which essentially held a different legal opinion than the Senate, must be set aside and the case referred back to the Fiscal Court.

25 c) Either way, an income correction made possible by § 1 (1) AStG old version can only relate to those amounts that are caused by an interest rate that is not in line with the arm's length principle and is too low, as a result of the above-mentioned relevance to treaty law; a correction is therefore ruled out to the extent of the write-downs to the going-concern value. 26 3.

26 3 However, under the circumstances of the dispute, the latter does not necessarily have to remain the case:

The opening of the second instance gives the tax court the opportunity, on the one hand, to investigate the question of whether the loans issued by I-GmbH can be understood as such at all and, in this context, can be regarded as seriously meant; at first glance, one may well have doubts about this according to the findings made by the court so far regarding the precarious economic situation of H-Inc. at the time the loans were granted. Should this doubt prove to be true, the provision of the "loan" proceeds would have to be qualified as (hidden) contributions of I-GmbH to H-Inc. from the outset, which would at the same time raise doubts about a partial value depreciation identical to the period (see e.g. BFH ruling of 7 May 2014 X R 19/11, BFH/NV 2014, 1736). If the answer is in the negative, there is another opportunity to examine whether the write-downs to the going-concern value made by I-GmbH in accordance with section 6(1) no. 2 sentence 2 EStG 2002 are supported by the actual circumstances. This is (also) connected with whether a group reserve initially existed when the loan was issued, but such a reserve would have ceased to exist later - at the time of the write-offs.