Germany: Heat turned up on intra-group financing

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Germany: Heat turned up on intra-group financing

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Yu Tao

Jobst Wilmanns

Captive financing entities and other vehicles for centralising a group's funding arrangements have long been objects of suspicion for the tax auditors. However the scope for negative findings is being progressively curtailed. The 2008 Annual Tax Act effectively disallowed loan losses on intra-group finance and the interest limitation (basically to 30% of EBITDA) of 2009 significantly reduced the scope for withdrawing profits through financing charges. On the other hand, Cadbury Schweppes (ECJ case C-196/04 of September 12, 2006) now prevents a tax auditor from declaring an EU group financing centre abusive, merely because it enjoys a favourable tax regime. The tax authority's attention is now increasingly directed at the interest rate, an area unbounded by hard and fast rules. The interest rate must be at arm's length. Arm's length is undefined, but should lie somewhere between the borrowing and lending rate typically on offer from banks. Third-party comparisons often assume there to be little or no loan risk, not least in reflection of the free-of-charge "group backing" featuring in the transfer pricing rules. This, though, has prompted an intention of changing towards rating a borrower within a group at the group rating rather than on its own financial standing. Unfortunately, attempts to reach a consensus on a rating formula have all foundered on the unanswered question of a parent's ability to strip a subsidiary of assets, and thus to shift the credit risk, at will. The same problem is also felt by members of international cash pools. Frequently, many still take a broad approach of basing the pool interest rates on EONIA or EURIBOR with a discount or premium of, say 20 or 30 basis points to cover the cost of running the pool. However, tax auditors are ever more searching in their demand to know which entity takes the risk and to impute income or disallow expense accordingly.

Yu Tao (yu.tao@de.pwc.com)

Tel: +49 69 9585 6408
Jobst Wilmanns (jobst.wilmanns@de.pwc.com)

Tel: +49 69 9585 5835

PwC

Website: www.pwc.de

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