Germany: German Federal Tax Court rules disallowance of write-down for related-party debt violates OECD model treaty
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

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

Germany: German Federal Tax Court rules disallowance of write-down for related-party debt violates OECD model treaty

Linn-Alexander-100
Braun-Thorsten-100

Alexander Linn

Thorsten Braun

The German Federal Tax Court (Bundesfinanzhof, BFH) issued a decision (case ref. I R 29/14) on September 9 2015, in which it held that the domestic transfer pricing rules may not be applied to disallow a write-down of an impaired related-party debt in a case where a relevant tax treaty includes the arm's-length standard provisions of Article 9 of the OECD model treaty.

Until 2007, German multinationals could claim a deduction for bad debts on loans granted to subsidiaries if the subsidiary did not perform as planned and the debt was impaired. As from 2008, write-downs of related-party loans are non-deductible under specific rules in the German Corporate Tax Act, unless it can be demonstrated that the loan was granted in line with (a very narrow interpretation of) the arm's-length principle.

In an effort to extend the general presumption of non-deductibility to the years before 2008, the German tax authorities challenged a 2002 write-down of a substantial unsecured debt owed by an undercapitalised UK subsidiary of a German entity of a Canadian group. The tax authorities argued that the German transfer pricing rules disallowed the write-down because either the loan was not granted on arm's-length terms, or the loan was not impaired because the subsidiary still could rely on the financial backing from its group, as long as it paid its third-party lenders.

The BFH confirmed a previous decision (case ref. I R 23/13) and emphasised that it may be in line with the arm's-length principle not to require collateral from a group subsidiary when granting a loan, and that it still may be possible to consider such a debt to be impaired if the subsidiary experiences financial difficulties. The BFH also confirmed that, where a tax treaty includes Article 9, paragraph 1 of the OECD model (as is the case with most German tax treaties), the domestic transfer pricing provisions may not disallow the write-down, since Article 9 permits only income adjustments relating to the conditions of the loan (for example, the interest rate); it does not permit the disallowance of a write-down. It is unclear if the same reasoning may be applied to years from 2008, where the deduction for a write-down is generally disallowed for reasons unrelated to the transfer pricing framework.

Alexander Linn (allinn@deloitte.de) and Thorsten Braun (tbraun@deloitte.de)

Deloitte

Tel: +49 89 29036 8558 and +49 69 75695 6444

Website: www.deloitte.de

more across site & bottom lb ros

More from across our site

Despite the relief, Brazil’s government has also presented a bill which seeks to re-impose a tax burden on companies’ payroll, one local tax specialist told ITR
Jeremy Brown arrives at the firm after a near 16-year career with Deloitte
PwC could elect a woman into the senior leadership position for the first time; in other news, KPMG Australia has extended its CEO’s term
The Senate report into PwC’s scandal is titled ‘The cover up worsens the crime’
Law firms that are conscious of their role in society are more likely to win work, according to a survey of over 23,000 in-house professionals
The firm’s tax business generated a quarter of HLB’s overall revenues in 2023
While successful pillar two implementation will require collaboration across all units, a combination of internal and external tax advice is at the centre of the effort
Binance has also been accused of manipulating foreign exchange rates via currency speculation and rate-fixing
Six individuals should have raised questions over information they received but did not breach professional standards, according to the firm
The partnership of KPMG UK has installed Holt for a second term as CEO and senior partner; in other news, a Baker McKenzie partner has sued the IRS
Gift this article