Appendix 1 –
German draft guidance Financial transactions
Unofficial English Translation
3.121 The principles of Chapter X of Annex 1 are to be applied in accordance with Section 1 (3d) and Section 1 (3e) AStG when examining the deferral of income in the case of financing relationships between related parties.
3.122 As with other intra-group business relationships, the proper delineation of transactions in connection with financing activities must be based on a functional and risk analysis.
3.123 The following explanations relate to the tax deductibility of expenses for financing with borrowed capital. Whether and to what extent a relevant financing relationship exists must be analysed in light of the respective circumstances in relation to the actual business transaction (Chapter X, points 10.4, 10.6, 10.8 and 10.11 of Appendix 1).
3.124 The key criteria are the credible expectation that the debtor will be able to service the debt (in particular in the form of interest and amortisation payments) and the serious agreement to provide capital for a certain period of time (Section 1 para. 3d sentence 1 no. 1 letter a) AStG). In particular, it must therefore be determined whether sufficient assets or cash flows can be expected from the outset to satisfy the lender; i.e. the assets acquired with the transferred capital or other assets of the debtor can be included in the assessment. The transfer of the capital is not unusual for third parties simply because follow-up financing becomes necessary. This must be assessed in the overall view of the circumstances. Further indicators are the existence of a fixed repayment date (see also BFH of 6 November 2003 IV R 10/01, BStBl. II 2004, 416 and BFH of 17 December 2014 I R 23/13, margin no. 26, BStBl. II 2016, 261), the obligation and modalities for the payment of interest, the right to enforce the payment of principal and interest and the ability of the recipient of the financial resources to take out loans under comparable conditions from independent third parties (Chapter X, para. 10.12 of Annex 1).
3.125 This does not exclude the possibility that particularly risky financing relationships, such as those that are customary in the market for start-up financing, are at arm's length. For example, financing is provided in the early stages of companies when their risks, but also their growth opportunities, are particularly high.
3.126 The financing must also have been economically necessary (Section 1 para. 3d sentence 1 no. 1 letter b) AStG). A prudent and conscientious manager will not borrow capital on the market [when financing an investment] if there is not at least a reasonable prospect of a return that covers the financing costs. In principle, an after-tax analysis must be assumed, unless the analysis is carried out uniformly in the group of companies on the basis of pre-tax figures. A prudent and conscientious manager would also analyse what realistic alternative courses of action are available to the borrower.
3.127 The use of borrowed capital must also be in line with the purpose of the company. A prudent and conscientious manager will endeavour to use the capital for the purpose of the company.. An investment in an overnight money account or a deposit in an internal cash pool, especially if no higher return is expected, is generally not compatible with the company's core business. Borrowing for the purpose of distributing profits does not generally contradict the purpose of the company.
3.128 The economic need and the utilisation of the capital are regularly interrelated. For example, if a company raises capital from a related party in order to finance an acquisition, it will generally be customary to plan with a capital buffer and invest this in the short term, for example in the group's internal cash pool.
3.129 The taxpayer must fulfil the cumulative requirements set out in Section 1 para. 3d sentence 1 no. 1 AStG. To establish credibility, the specific circumstances must be substantiated and presented in a conclusive manner. It is therefore sufficient that it is more likely than not that the criteria are met. The taxpayer must therefore demonstrate this,
• whether and how the debt service can be provided (e.g. on the basis of a forecast, which may also include follow-up financing),
• that the debt service is performed as agreed and
• the purpose pursued with the capital provided and how the capital is utilised.
3.130 Insofar as the taxpayer cannot credibly demonstrate fulfilment of the requirements, the financing relationship does not comply with the arm's length principle in accordance with Section 1 para. 3d sentence 1 no. 1 AStG. Pursuant to Section 1 (1) AStG, the reduction in income caused by the financing relationship must be reversed in the amount of the non-arm's length portion (see para. 10.13 of Annex 1).
3.131 § Section 41 AO remains unaffected.
3.132 When calculating the remuneration for a capital transfer (interest rate), the specific debt risk of the borrower (creditworthiness) in particular must be taken into account in addition to other factors such as the purpose of the loan, regulatory framework conditions, term, currency risks, ESG risks, loan volume or collateralisation (see also Chapter X, points 10.88-10.108 of Appendix 1).
3.133 In accordance with Section 1 (3d) sentence 1 no. 2 AStG, the creditworthiness of the corporate group is generally decisive, unless the creditworthiness of the borrower in question is better. The creditworthiness of the corporate group reflects the (credit default) risk that exists in a corporate group and that a market player assumes when providing capital to one or more companies in a corporate group. In principle, the interest rate to be determined is therefore based on the creditworthiness of the entire group of companies.
3.134 The rating of the corporate group is primarily based on the financial statements of the corporate group and the planning for the corporate group. The rating of the Group is synonymous with the rating of the corporate group.
3.135 If the group of companies has a rating in accordance with Article 2 (1) of Regulation (EC) No 1060/2009, as amended, this rating shall be used. Private ratings that are issued by rating agencies on the basis of an individual order and passed on exclusively to the person who issued the order and that are not intended for public disclosure or for passing on to subscribers are to be used subordinately for this purpose. A rating can can also be prepared using standard market rating software. In this case, however, the taxpayer must document how qualitative factors were properly taken into account in the rating.
3.136 If the corporate group does not have a rating, an existing rating of the ultimate group company can also be used as a basis. If the ultimate group company does not have a rating, it can be accepted for reasons of simplification that a corporate group rating is determined at the time the loan is granted on the basis of the corporate group's financing costs vis-à-vis third parties.
3.137 Only if the taxpayer can prove that a rating derived from the corporate group rating complies with the arm's length principle can this be used to determine the interest rate. Accordingly, the credit assessment, including the usual external quantitative and qualitative factors, as well as the effects of the existence of the corporate group (group backing, see margin no. 3.138) must be presented.
3.138: = include 3.126 of the current version here (explanation of the Group's retention)
3.139 The following aspects in particular must be taken into account when analysing the Group's retention:
• The economic significance of the company for the Group;
• The economic and strategic importance of the project to be financed for the group of companies;
• The probability that the company will be sold within the next 12 months;
• Does the company make a significant economic contribution to the Group?
• Does the company use the name and/or brand of the group of companies;
• Does the company make a significant contribution to the Group's overall profit?
• Is the company entrusted with products and/or services of the corporate group that generate the highest sales revenues within the corporate group; and
• Does the company operate in important geographical markets for the Group?
3.140 The borrower's function and risk profile must also be taken into account when assessing creditworthiness.
3.141 The result of the analysis is the determination of whether and to what extent the company is strategically important for the group of companies. This has a corresponding effect on the rating of the specific company.
|
Strategic importance of the borrower for the corporate group |
Explanation of the (strategic) significance |
Potential creditworthiness of the borrower |
|
Top-down approaches |
||
|
Core area |
An integral part of the Group's current identity and future strategy. The company Group, this company will probably be under |
Approximately corresponds to the Group's credit rating |
|
|
support all foreseeable circumstances. |
|
|
Very strategic |
Almost an integral part of the Group's current identity and future strategy. The Group is likely to support these units. tion. |
Generally one notch below
the credit rating of the corporate group |
|
Bottom-up approaches |
||
|
Strategically important |
Less integral part of the group than highly
strategic units. The rest of the group is likely to
provide additional liquidity or capital to support it. However, some factors
cast doubt on the scope of the sub support from the group
of companies |
Generally
three notches above the borrower's individual rating; limited to the corporate group rating. |
|
Moderate /less
strategic |
Not important enough to justify
an additional transfer of liquidity, capital or risk by the rest of the group. There
is still the possibility of some support by the group of companies |
Generally one level above
the individual rating |
|
Non-strategic |
No
strategic importance for the Group. These
companies could be sold in the short to medium term become |
As a rule, the individual rating of the company |
3.142 With regard to the preparation of the rating, margin no. 3.135 applies accordingly. In order for the taxpayer to be able to provide evidence, it is necessary that
• qualitative and quantitative factors are appropriately included in the rating for the specific borrower;
• distortions caused by transactions with related parties are eliminated and therefore only arm's length figures are used;
• the rating is comprehensible and reproducible, and
• the standard market rating methodology is applied at the time the loan is granted.
3.143-3.144: = include 3.127-3.128 of the current version here (knowledge advantage + collateralisation)
3.145 If the corporate group consistently applies the rating of the corporate group in relation to all financing relationships with Germany (both inbound and outbound), a remuneration for increased creditworthiness (see old margin no. 3.129 [new 3.150]) is also not to be recognised in relation to the intra-group financing relationships.
3.146 § Section 1 (3d) does not apply to expenses based on financing relationships that were agreed under civil law before 1 January 2024 and whose actual implementation began before 1 January 2024. This does not apply if the continuing obligation is significantly changed after 31 December 2023 or is continued beyond 31 December 2024.
3.147 The determination of an arm's length price for the transfer of debt capital between related parties is generally based on the price comparison method (BFH, 18 May 2021, I R 4/17 BStBl II 2023 XXX). Decisive comparability factors for this are listed in margin no. 3.132. If a group-affiliated financing company that does not have the ability and authority to control or bear the risk of this financing transaction is interposed, it is only entitled to a risk-free return as remuneration for brokering, providing or passing on the capital and the associated low-function, low-risk service (points 1.100, 1.103, 1.108 to 1.116, 10.25 of Annex 1). Accordingly, if the granting of the loan and the actual control of the associated functions or risks diverge, there is a further transaction between the financing company and the company that exercises the actual control of the functions or risks associated with the granting of the loan (BFH, 18 May 2021, I R 4/17 BStBl II 2023 XXX). The risk associated with the capital transfer is decisive for this assessment. If the latter company is a domestic company, the remuneration to be allocated to it must be examined. In principle, this is determined by the difference between the arm's length interest rate and the risk-free return. The add-back taxation of a controlled foreign financing company (BMF letter dated 22 December 2023, BStBl. 2023 I Special No. 1 p. 2) as well as the documentation obligations (Section 90 (3) AO, GAufzV, BMF letter dated 3 December 2020, BStBl I 2020 p. 1325) and the exchange of information in the context of international administrative cooperation (BMF letter dated 17 August 2017, BStBl I 2017 p. 1228).
3.148 Section 1 para. 3e AStG does not change the approach described in para. 3.147. § Section 1 para. 3e AStG merely describes that the activities mentioned therein, such as the activities of a financing company, are generally to be regarded as a low-function and low-risk service (para. 10.45, 10.46, 10.130 of Annex 1). Financing functions generally represent support functions for the value- adding core business (para. 10.45 of Annex 1). The situation is different if the financing function is a primary function and therefore a core component of the value creation model, such as in the banking or insurance sector (para. 10.47 of Appendix 1). The transfer pricing provision follows the system set out in particular in Section 1 (3) AStG.
3.149 If one of the activities listed in Section 1 (3e) AStG is carried out in Germany, this does not mean that the competent tax authority must assume a low-function and low-risk service for the transfer pricing determination. It can also use a functional and risk analysis to prove that the specific activity is not a low-function, low-risk service; the documentation requirements remain unaffected by this. The requirements for proof are subject to the same conditions as for the taxpayer. This includes the specific circumstances being substantiated and presented in a conclusive manner. The overwhelming probability that the criteria are met is therefore sufficient.
3.150 ff.: = 3.129 ff. of the old version are inserted here (remuneration for increased creditworthiness
+ cash pool etc.)