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Germany: Interest-free loans between foreign subsidiaries



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 ( and Philipp Tranacher (


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


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