International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

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

Germany: Deduction of foreign partner’s interest expense



Dr Thomas Schänzle

Christian Birker

On September 26 2014, the Finance Ministry revised its comprehensive circular on the treatment of partnerships under the tax treaties. Of particular interest are its remarks on partners' interest costs incurred in connection with their partnership holdings. The fundamental principle behind the German computation of partnership income is that all income flowing to a partner is deemed to be part of that partner's profit share and thus does not reduce the partnership's profit as a business expense (loan interest, service fees and so on) and that all expenses incurred by a partner in respect of his investment or activities in the partnership are deductible from his share of the partnership income. This principle is reaffirmed by a treaty override provision in the Income Tax Act which applies unless the treaty explicitly states otherwise.

The revised circular now seems to be casting doubt on the continued application of the general principle, in particular in respect of loan interest incurred by a foreign partner. It states that such interest may only be deducted from the German source partnership income if it is effectively connected with that income. It then mentions the financing cost of an interest-free loan to the partnership as an example of a lack of the necessary connection. However, it is silent as to whether the same applies in cases where the partner's equity is refinanced.

Deduction of a partner's financing costs for the acquisition of a partnership share is a fundamental building block of many inbound partnership structures. Although it is and continues to be based on German partnership taxation principles, recourse to the courts may now be necessary.

Dr Thomas Schänzle ( and Christian Birker (


Tel: +49 69 9585 6477 and +49 69 9585 6061


more across site & bottom lb ros

More from across our site

Lawmakers have up to 120 days to decide the future of Brazil’s unique transfer pricing rules, but many taxpayers are wary of radical change.
Shell reports profits of £32.2 billion, prompting calls for higher taxes on energy companies, while the IMF has warned Australia to raise taxes to sustain public spending.
Governments now have the final OECD guidance on how to implement the 15% global minimum corporate tax rate.
The Indian company, which is contesting the bill, has a family connection to UK Prime Minister Rishi Sunak – whose government has just been hit by a tax scandal.
Developments included calls for tax reform in Malaysia and the US, concerns about the level of the VAT threshold in the UK, Ukraine’s preparations for EU accession, and more.
A steady stream of countries has announced steps towards implementing pillar two, but Korea has got there first. Ralph Cunningham finds out what tax executives should do next.
The BEPS Monitoring Group has found a rare point of agreement with business bodies advocating an EU-wide one-stop-shop for compliance under BEFIT.
Former PwC partner Peter-John Collins has been banned from serving as a tax agent in Australia, while Brazil reports its best-ever year of tax collection on record.
Industry groups are concerned about the shift away from the ALP towards formulary apportionment as part of a common consolidated corporate tax base across the EU.
The former tax official in Italy will take up her post in April.