Germany: Interest-free loans between foreign subsidiaries

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Germany: Interest-free loans between foreign subsidiaries

schnitger.jpg

tranacher.jpg

Arne Schnitger


Philipp Tranacher

Interest-free loans can be found in group finance structures worldwide. In Germany, such loans are in principle not subject to transfer pricing adjustments as long as they are not granted cross-border. German tax law has few regulations on how the benefits from such interest-free loans are to be treated for German tax purposes. The Grand Senate of the Supreme Tax Court held on October 26 1987 (GrS 2/86) that the benefit from an interest-free loan between two foreign subsidiaries was a hidden distribution by the lender to the (German) parent company. The cost, though, was not an additional investment in the borrower but rather a tax deductible expense of the parent. This court decision was based on the former corporation tax imputation system.

The Supreme Tax Court confirmed in its decision of February 4 2014 (I R 32/12) that these principles still apply under the tax regime of the income exemption taxation method in force since 2001. The court's decision relates to the tax treatment of interest-free loans between German subsidiaries of the same German parent. Accordingly, the parent continues to be entitled to a deduction in the amount of the interest waived, while the benefit is a (largely tax-free) hidden distribution from the lender.

Although the facts and circumstances of the court case were domestic, the same principles should apply to investments abroad. Naturally, the foreign tax implications will also call for consideration.

Arne Schnitger (arne.schnitger@de.pwc.com) and Philipp Tranacher (philipp.tranacher@de.pwc.com)

PwC

Tel: +49 30 2636 5466 and +49 30 2636 4052

Website: www.pwc.com

more across site & shared bottom lb ros

More from across our site

The US’s GILTI regime will not be forced upon American multinationals in foreign jurisdictions, Bloomberg has reported; in other news, Ropes & Gray hired two tax partners from Linklaters
APAs should provide a pragmatic means to agree to an arm's-length outcome for an Australian entity and for the ATO, the tax authority said
Overall revenues and average profit per partner also increased in the UK, the ‘big four’ firm revealed
Increasingly complex reporting requirements contributed towards the firm’s growth in tax, it said
Sector-specific business taxes, private equity tax treatment reform and changes to the taxation of non-residents are all on the cards for the UK, authors from Herbert Smith Freehills Kramer predict
The UK’s Labour government has an unpopular prime minister, an unpopular chancellor and not a lot of good options as it prepares to deliver its autumn Budget
Awards
The firms picked up five major awards between them at a gala ceremony held at New York’s prestigious Metropolitan Club
The streaming company’s operating income was $400m below expectations following the dispute; in other news, the OECD has released updates for 25 TP country profiles
Software company Oracle has won the right to have its A$250m dispute with the ATO stayed, paving the way for a mutual agreement procedure
If the US doesn't participate in pillar two then global consensus on the project can’t be a reality, tax academic René Matteotti also suggests
Gift this article