Germany: Loan guarantees by German parent company | KPMG | BE
Share with your friends

Germany: Loan guarantees by German parent company, for foreign subsidiaries

Germany: Loan guarantees by German parent company

A German court has referred a question to the Court of Justice of the European Union (CJEU) concerning application of the German transfer pricing rules with regards to loan guarantees made without any consideration having been paid for the guarantee or letter of comfort.


Related content

Specifically, the matter concerns whether the imputation of income with respect to loan guarantees made by a German parent company on behalf of its foreign subsidiaries, under the German transfer pricing rules, is compatible with the freedom of establishment under EU law. In particular, there is a question concerning whether it is possible for the taxpayer to present evidence of a commercial justification. The case is: Hornback-Baumarkt, C-382/16.


Germany’s transfer pricing rules provide for an adjustment to the taxable base of a German resident taxpayer, based on arm’s length principles, if that taxpayer’s base has been reduced as a result of a transaction / business relationship with a non-German related party on terms that would not have been agreed to between independent parties in similar circumstances. For transactions solely between German entities, there is no adjustment. In other words, the rules apply on cross-border transactions only, and not on solely domestic transactions.

In a prior CJEU case involving the Belgian transfer pricing rules (rules that contained similar adjustment provisions), the CJEU found that the Belgian rules amounted to a restriction on the right to the freedom of establishment, but that the Belgian rules were justified on the grounds of preserving the allocation of taxing rights between or among EU Member States and also for purposes of addressing tax avoidance.

In the instant case, the finance court of Rhineland-Palatia (FCR) noted that the German transfer pricing rules do not provide an explicit mechanism for taxpayers to prove application of an exception to the rules based on commercial justifications so as to prevent a transfer pricing adjustment, and that this treatment raised a question as to whether the German rules were compatible with EU law. The matter is now pending consideration and judgment by the CJEU.


Read an August 2016 report prepared by KPMG’s EU Tax Centre

<p>© 2018 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.</p>

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us


Request for proposal