The tax office responsible for B-AG informed the B GmbH in a letter dated 14 October 2009 that it intended to hold B GmbH liable for B-AG’s corporation tax debts pursuant to section 73 of the German Fiscal Code (AO). By way of an actual agreement, a proportionate liability amount for the corporation tax 2000 of B-AG i.L. of … € was agreed. A corresponding liability notice was issued on 17 June 2010. In its annual financial statements as at 31 December 2009, B GmbH formed a provision in the amount of … € due to the impending liability claim in accordance with § 73 AO. In its corporation tax return for the year in dispute (2009), it expressly pointed out that it considered the liability debts to be deductible under § 73 AO because they were not taxes within the meaning of § 10 No. 2 of the Corporation Tax Act (KStG). Following an audit, the tax authorities added the deferred amount back to B GmbH’s profit off-balance sheet in accordance with section 10 no. 2 KStG and amended the 2009 corporation tax assessment accordingly. An appeal was filed by B GmbH. Judgement of the BFH The BFH stated that expenses of a controlled company due to a liability claim for corporate tax debts of the controlling company pursuant to section 73 AO do not fall under the deduction prohibition of section 10 no. 2 KStG. They are to be qualified as vGA (hidden distribution of profits). Excerpts “17. a) In the case of a corporation, a vGA within the meaning of § 8 para. 3 sentence 2 KStG is to be understood as a reduction in assets (prevented increase in assets), which is caused by the corporate relationship, affects the amount of the difference pursuant to § 4 para. 1 sentence 1 EStG in conjunction with § 8 para. 1 KStG. § Section 8 (1) KStG (for trade tax in conjunction with Section 7 GewStG) and has no connection to an open distribution. For the majority of the cases decided, the senate has assumed that the inducement is due to the corporate relationship if the corporation grants its shareholder a pecuniary advantage which it would not have granted to a non-shareholder if it had exercised the diligence of a prudent and conscientious manager (constant case law of the senate, since the judgement of 16 March 1967 I 261/63, BFHE 89, 208, BStBl III 1967, 626). In addition, the transaction must be suitable to trigger an income for the beneficiary shareholder within the meaning of § 20, para. 1, no. 1, sentence 2 EStG (constant case law, e.g. Senate judgements of 7 August 2002 I R 2/02, BFHE 200, 197, BStBl II 2004, 131; of 8 September 2010 I R 6/09, BFHE 231, 75, BStBl II 2013, 186).” “20. aa) The prerequisite for a vGA is that the asset reduction is caused by the corporate relationship. The lower court correctly points out that the standard of the conduct of a prudent and conscientious manager of the corporation within the scope of the test of inducement merely serves to specify the main cases of application of § 8 para. 3 sentence 2 KStG, but other circumstances are not excluded from the scope of application of the vGA from the outset. As a result, when examining the inducement by the corporate relationship, the general dogmatics of the inducement principle must be applied (in this sense Weber, Ubg 2017, 206); according to established case law, it is sufficient for the facts of the vGA that the reduction in assets is partly caused by the corporate relationship (e.g. Senate rulings of 17 December 2017, p. 1). e.g. Senate judgements of 23 July 2003 I R 80/02, BFHE 203, 114, BStBl II 2003, 926; of 27 April 2005 I R 75/04, BFHE 210, 108, BStBl II 2005, 702; of 20 August 2008 I R 19/07, BFHE 222, 494, BStBl II 2011, 60). 21. bb) In the present case, the latter is to be seen in the fact that the plaintiff concluded a profit and loss transfer agreement with B-AG, which led to the establishment of the tax group relationship and thus also to the assumption of the liability risk under § 73 AO. The conclusion of a profit and loss transfer agreement with the controlling shareholder is always prompted by the corporate relationship. A prudent and conscientious manager of a corporation would not oblige the company vis-à-vis a third party outside the company to transfer its entire profit to the third party and, in addition, to assume the risk of being liable for the third party’s tax debts. The assumption of such an obligation by the controlled company can economically only be explained by the overriding group interest and consequently stems from the corporate relationship.” Click here for English translation Click here for other translation ...

A Investment GmbH, acquired all shares of B in May 2012. To finance the acquisition, A Investment GmbH took up a bank loan with a interest rate of 4.78%, a vendor loan with an interest rate of 10% and a shareholder loan with an interest rate 8% from its parent company, Capital B.V. The 8 % interest rate on the shareholder loan was determined by A Investment GmbH by applying the CUP method based on external comparables. The German tax authority, found that the interest rate of 8 % did not comply with the arm’s length principle. An assessment was issued where the interest rate was set to 5% based on the interest rate on the bank loan (internal CUP). A Investment GmbH filed an appeal to Cologne Fiscal Court. The court ruled that the interest rate of the bank loan, 4.78%, was a reliable CUP for setting the arm’s length interest rate of the controlled loan. The vendor loan was considered irrelevant as the 10 % interests could have been influenced by other factors. With regard to the subordination of claims on the loan from Capital B.V., pursuant to Section 39 (1) (5) of the German Insolvency Act, neither the non-provision of collateral nor the subordination of the loans could justify a risk premium in the determination of the arm’s length interest. Implicit support within the group – at least for the loans from Capital B.V – was considered by the Court in this respect. The appeal of A Investment GmbH was dismissed by the Court. This decision is now appealed by A Investment GmbH to the Supreme Tax Court under file I R 62/17 and is pending. Click here for English translation Click here for other translation ...

Spedition Gmbh entered a written agreement – at year-end – to pay management fees to its Dutch parent for services received during the year. The legal question was the relationship between arm’s-length principle as included in double tax treaties and the norms for income assessments in German tax law. The assessment of the tax office claiming a hidden distribution of profits because of the “retrospective” effect of the written agreement, was rejected by the Court. According to the Court the double tax treaty provisions bases the arm’s length standard on amount, rather than on the reason for, or documentation, of a transaction. Click here for English translation Click here for other translation ...

A German company on behalf of its Austrian Parent X-GmbH distributed products manufactured by the Austrian X-KG. By a contract of 28 May 1992, X-GmbH granted the German company the right to use the trade mark ‘X’ registered in Austria. According to the agreement the German company paid a license fee for the right to use the trade mark. In 1991, X-GmbH had also granted X-KG a corresponding right. By a contract dated 1 July 1992, X-KG was granted exclusive distribution rights for the German market. In the meantime, the mark ‘X’ had been registered as a Community trade mark in the Internal Market. The tax authorities dealt with the payment of royalties to X-GmbH for the years in question as vGA (hidden profit distribution). Click here for English translation Click here for other translation ...

A German GmbH distributed clothing for its Italian parent. The German tax authorities issued a tax assessment based on hidden profit distribution from the German GmbH in favor of its Italien parent as a result of excessive purchase prices, which led to high and continuous losses in Germany. The tax authorities determined the arm’s length price based on purchase prices, which the German GmbH had paid to external suppliers. However, these purchases accounted for only 5% of the turnover. The German Tax Court affirmed in substance a vGA (hidden profit distribution) as the tax authorities had provided no proff of deviation from arm’s length prices. If a hidden profit distribution is to be accepted, the profit shall be increased by the difference between the actually agreed price and the price agreed by independent contractual parties under similar circumstances – the arm’s length price. Where a range of arm’s length prices is produced, there are no legal basis for adjustment to the median value. The assessment must instead be based on the best value for the taxpayer. Distributors incurring losses for more than three years: The Senate understands its ruling in BFHE 170, 550, BStBl II 1993, 457 to say that whenever a distribution company sells products of an affiliate company and suffers significant losses for more than three years, a rebuttable presumption is triggered that the agreed transfer price has not been at arm’s length. The assumption of a rebuttable presumption means that the taxpayer can explain and prove why the actually agreed transfer price is nevertheless appropriate. This applies if the articles purchased exceeds 95% of the total turnover. The taxpayer may, For example, explain why the actual development is either due to mismanagement or other reasons that were not foreseen and, above all, that timely adaptation measures have been taken. Losses can be accepted over a period of more than three years if the corresponding proof is provided. It may be necessary to extend the period within which profit must be achieved. If proof is not provided and the taxpayer does not take any adaptive measures, a reasonable profit can be estimated and spread over the years. Click here for English translation Click here for other translation ...