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.

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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.

Summary

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

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