A German corporation,”G Corp” held interests in domestic and foreign companies in the year in dispute (2005). G Corp granted loans to various subordinate companies – resident in France and the USA. These loans were mainly at fixed interest rates; instead of a fixed interest rate, an annual participation of 12.5% in the balance sheet profit of the subordinate company, limited to a maximum amount of 25% of the loan volume, was agreed as consideration for one loan. No collateral was provided. In the year in dispute, G Corp wrote off these loans against taxable profits. G Corp also transferred assets at book value to a Maltese subsidiary company, of which it was the sole shareholder, and contributed the shares in this company, pursuant to section 23(4) of the Reorganisation Tax Act applicable in the year in dispute, also at book value, to another Malta-based company in the context of a capital increase against the granting of company rights. Finally, in the year in dispute, G Corp and its controlled companies earned interest income from loan claims against various foreign subordinated companies totalling … €. The tax authorities issued an assessment where the taxable income related to a partial value write-downs on unsecured loan receivables issued within the group and a book value transfer of assets to foreign subsidiaries had been adjusted. In 2017 the regional tax court issued its decision concluding that the adjustment was not possible under the relevant German arm’s length provision. This decision was then appealed to the Federal tax court by both parties. Judgment of the Court (Bundesfinanzhof) The Federal tax court found the appeal well-founded and referred the case back to the regional fiscal court. Click here for English translation Click here for other translation ...

In 2010, “Write-Down KG” granted a loan to its Turkish subsidiary (“T”). The loan bore interest at 6% per annum but was unsecured. In 2011, Write-Down KG decided to liquidate T. Write-Down KG therefore wrote off its loan and interest receivable from T and claimed the write-off as a tax deduction. The German tax authorities disallowed the deduction because the loan had been unsecured which was considered not to be at arm’s length. An appeal was lodged with the local tax court, which upheld the tax authorities’ position. An appeal was then made to the Federal Tax Court. Judgement of the Court The court ruled that the waiver of security for a shareholder loan may not be at arm’s length. Such a deviation from the arm’s length principle may lead to a write-off of the loan receivable and thus to a reduction in income. This reduction in income may be reversed on the basis of the arm’s length principle contained in Section 1 of the German Foreign Tax Act. Furthermore, article 9 OECD-MTC does not prohibit such an income adjustment. Excerpts “28. (2) The loan relationship between the plaintiff and T Ltd, who are related parties within the meaning of § 1, para. 2, no. 1 AStG, is a foreign business relationship within the meaning of § 1, para. 5 AStG, the conditions of which include the non-security of the claims. In order to avoid repetitions, reference is made to the statements in the Senate’s ruling in BFHE 263, 525, BStBl II 2019, 394. The plaintiff’s objection at the oral hearing that the transactions were ultimately purely domestic commercial transactions is not comprehensible in view of the loan agreement with T Ltd, which is domiciled in Turkey. 29. (3) Furthermore, the Regional Court bindingly determined (§ 118 (2) FGO) that a third party would not have granted the loan to T Ltd. without providing collateral. 30. Even if the FG did not explicitly extend its findings to the interest claims resulting from the loan, it seems impossible on the basis of the further circumstances established that a lender not affiliated with T Ltd. would not have secured these claims. In particular, it must be taken into account that T Ltd was a newly founded company that did not have any significant fixed assets and that the collateralisation was not dispensable from the point of view of the so-called group retention (cf. again the Senate’s decision in BFHE 263, 525, BStBl II 2019, 394, as well as the Senate’s subsequent decisions in BFH/NV 2020, 183; of 19.06.2019 – I R 54/17, juris; of 14.08.2019 – I R 14/18, juris). In this situation, there is no need to refer the case back to the Fiscal Court for further clarification of the facts. 31. (4) The reduction in income within the meaning of section 1(1) sentence 1 AStG occurred due to (“as a result of”) the lack of collateralisation. In this respect, the Senate also refers to its ruling in BFHE 263, 525, BStBl II 2019, 394. 32. (5) Nor does Article 9(1) of the Agreement between the Federal Republic of Germany and the Republic of Turkey for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion in the Field of Taxes on Income of 19 September 2011 (BGBl II 2012, 527, BStBl I 2013, 374) – DBA-Türkei 2011 -, which is applicable as of 1 January 2011, preclude the correction of income.” “34. (6) Finally, Union law does not conflict with an income adjustment under section 1, paragraph 1, sentence 1 AStG. Since Turkey is not a Member State of the European Union, reference is made in this respect to the statements in the Senate rulings of 27 February 2019 – I R 51/17 (BFHE 264, 292) and of 14 August 2019 – I R 14/18 (juris). 35. The freedom of movement of capital, which is in principle also protected in dealings with third countries (Article 63 of the Treaty on the Functioning of the European Union in the version of the Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European Community, Official Journal of the European Union 2008, no. C 115, 47 –AEUV–) is superseded by the freedom of establishment, which has priority in this respect (Senate judgements of 6 March 2013 – I R 10/11, BFHE 241, 157, BStBl II 2013, 707; of 19 July 2017 – I R 87/15, BFHE 259, 435, BStBl II 2020, 237). Moreover, it would not be applicable – despite the amendments to Article 1(1) AStG made by the UntStRefG 2008 – also because of the so-called standstill clause of Article 64(1) TFEU (cf. Senate judgment in BFHE 264, 292). Click here for English translation Click here for other translation ...

The German court concludes that a Cash Pool agreement must be clear and unambiguous both in substance and amount. If only a minimum and maximum interest rate has been agreed the arm’s length standard is not met. Click here for English translation Click here for other translation ...

C-GmbH was the sole shareholder of I-GmbH. In 2000, I-GmbH, together with another company, set up a US company for the development of the US market, H-Inc., in which the I-GmbH held 60 per cent of the shares. H-Inc. received equity from the two shareholders and also received a bank loan of approx. $ 1.5 million (USD), which the shareholders secured through guarantees. As of December 31, 2003, the balance sheet of H-Inc. showed a deficit not covered by equity of approx. 950,000 USD. On June 30 , 2004,  I-GmbH became the sole shareholder of H-Inc. Then the bank put the H-Inc. granted loans due. Since H-Inc. was not able to serve the bank loan, C-GmbH paid the bank. As of December 31, 2004, the balance sheet of H-Inc. showed a deficit not covered by equity of approx. $ 450,000 , which at December 31 , 2005 amounted to approx. $ 1.6 million, as at 31 December 2006 $ 2.5 million and at December 31, 2007 USD 3.5 million. During the years 2004 to 2007, the I-GmbH granted its US subsidiary 5% interest-bearing, unsecured loans of € 261,756.22 (2004), € 1,103,140 (2005), € 158,553.39 (2006) and € 75,000 (2007) resulting from the liquidity of future profits of H-Inc. should be repaid. Loan receivables were subject to individual value adjustments already in the respective year of their commitment (2004: € 261,052, 2005: € 1,103,140, ​​2006: € 158,000, 2007: € 75,000). In judgment of 17 December 2014, the German Tax Court stated, with reference to its judgment of 11 October 2012, IR 75/11, that the treaty principle of “dealing At arm’s length ” have a blocking effect on the so-called special conditions. The relevant test according to Article 9 (1) of the DTC-USA 1989, which corresponds in substance to Article 9 (1) of the OECD Model Agreement, could only include those circumstances that have an effect on agreed prices. The concept of agreed conditions in Article 9 (1) of the OECD-Model Agreement should, in principle, include everything which is the subject of commercial and financial relations and therefore the subject of contractual exchange between affiliated undertakings, so that both the price and all other terms and conditions should be included. Following these decisions, on 30 March 2016, the Federal Ministry of Finance issued a non-application decree stating that Article 9 of the OECD Model Tax Convention does not refer to a transfer price adjustment but to a profit adjustment. According to the decree the principles of the above decisions are not to be applied beyond the decided individual cases. Se also the later decision from the German Tax Court I R 29/14. Click here for English translation Click here for other translation ...

In this case the Korean Supreme Court concluded that the tax authorities had used transactions with different terms and conditions to price the controlled transactions. According to Article 5 (1) of the National Development and Reform Act in Korea, the TNM method can be applied only when the normal price can not be calculated by a conventional transfer pricing method, e.g. due to lack of comparable transactions. In addition, there was no proper way to adjust for the significant differences between the controlled transaction and transaction. Taxation based on the conventional transfer pricing methods may later be performed by the tax referee or the court. In fact, some cases have admitted the unlawfulness of tax disposition on the grounds of unreasonable selection of comparable transactions or lack of rational adjustment. However, if the tax assesssment is canceled in court, there will be cases where the taxation can no longer be carried out due to statues of limitations. Click here for English translation ...