German Federal Fiscal Court verdict on shareholder or group loans
The amount of interest for a shareholder or group loan repeatedly leads to discussions with the tax authorities. Now the Federal Fiscal Court (Bundesfinanzhof, BFH) has provided clarity (decision of 18 May 2021, I R 4/17):
Interest on loans must be calculated according to the so-called arm’s length principle, i.e. interest on loans is only recognised in the amount that would also have been agreed between unrelated, uninvolved third parties.
BFH: Price comparison method preferable
The BFH has now clarified that the “price comparison method” is to be preferred to the “cost-plus method” for assessing arm’s length loan interest rates. In doing so, it opposes the view of the tax authorities, according to which the interest rate is to be determined according to the cost-plus method.
According to the ruling, the arm’s length nature of the agreed interest rate must first be determined by comparing the agreed interest rate with the interest rate agreed in comparable transactions between independent third parties or between one of the group companies and an independent third party (price comparison method). Only if such a price comparison is not possible can the so-called cost-plus method be applied, in which the lender’s cost price is determined and increased by an appropriate profit mark-up.
International loans
In foreign cases, the taxpayer is subject to increased and extensive duties of disclosure and documentation vis-à-vis the tax authorities. In addition to the presentation of the business transaction underlying the loan as well as the legal and economic framework conditions, the determination of a sufficient comparative price basis must be recorded. The documentation should be prepared in parallel with the conclusion of the loan, because the tax authorities can demand the submission of the documentation within 60 days.
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Alexander Lehnen, lawyer, tax consultant, tax law specialist
Veit Kachelmann, lawyer, tax consultant, tax law specialist