In the past year, the German Federal Fiscal Court (Bundesfinanzhof, “BFH”) specified in two cases the German legal view regarding intra-company financing. The rulings contain detailed statements on the selection of the most appropriate method, the preparation of ratings and the subordination of shareholder loans.
In principle, the OECD Transfer Pricing Guidelines (OECD-TPG) on financial transactions provide for a preference of the Comparable Uncontrolled Price (“CUP”) method for the pricing of intra-company loans. In contrast to this, the ruling of the tax court, which has now been overturned, stated that the cost-plus method should primarily be used for the pricing of intra-company loans. Even if the “cost of funds” approach, which is comparable to this, is also provided for in principle by the OECD-TPG, there was nevertheless a significant discrepancy between the view of the Tax Court and the OECD with regard to the preference of individual methods.
The BFH ruled on 18 May 2021 (I R 4/17) that on the contrary to the tax court, the CUP method is to be preferred. In its reasoning, the BFH explicitly refers to the OECD-TPG on financial transactions.
In the above-mentioned case, the Tax Court also ruled that rating assessments based on undisclosed algorithms are not to be accepted, as they are not sufficiently comprehensible. In the case at hand, the rating was based on the “credit-model” of the rating agency Standard and Poor's.
With regard to ratings for intra-group borrowers, the BFH stated however that, in principle, these can also be generated using such models. It is essential that these models are “a basis for assessing the creditworthiness of companies that is recognised and applied in market practice”.
Furthermore, the BFH states that third-party lenders, when assessing the creditworthiness of a group company, would not only consider the “stand-alone” rating of a borrower, but would also not automatically consider the group's creditworthiness. Rather, the strategic importance of the borrowing company for the entire group is decisive for whether and to what extent the group affiliation improves the stand-alone rating of a company.
In the second ruling of 18 May 2021 (I R 62/17), the BFH ruled on the question of the extent to which the subordination of intra-company loans is relevant in the determination of interest. Here, the BFH states that unrelated lenders would probably expect a higher remuneration for the granting of subordinated, unsecured loans than for senior and/or secured loans. Therefore, in the BFH's view, it is in line with the arm’s length principle to also apply a higher remuneration for subordinated and/or unsecured intra-company loans to compensate for the additional risks arising from the subordination/unsecured nature.
In the ruling, the BFH also mentions that it is not relevant whether this subordination is contractually agreed - as is also possible with third parties - or results from statutory provisions - as is often the case with intra-company loans. In both cases, a third party lender would expect a risk-adequate remuneration.
Among experts, the two rulings of tax courts that have now been overturned by the BFH were criticized, as they were a clear deviation from previous practice and doctrine regarding the arm’s length pricing of intra-company financial transactions. In particular, the ruling of the Münster Regional Court (see “Choice of method” and “Ratings”) was viewed extremely critical in the literature, which even the BFH mentions in its ruling. Both rulings were only partially compatible with the statements of the OECD in its guidelines on financial transactions. This divergent interpretation of the arm’s length principle in connection with financial transactions between Germany and the OECD would probably have led to a large number of taxation disputes in the future.
It is therefore welcomed that the BFH has now overturned these rulings and that its reasoning is very much based on the OECD-TPG and the Court even quotes them directly in part. In its case law, the BFH now confirms the primacy of the price comparison method for financial transactions (although other methods may also be applicable in individual cases) as well as the common practice of preparing ratings for classifying the creditworthiness of borrowers and also states that the subordination of loans, even if this is only prescribed by law and not contractually agreed, has an influence on the pricing of intra-company financial transactions.
Daniel Gloser ist seit 2017 Berufsanwärter in der Steuerberatung bei Deloitte. Als Teil des Verrechnungspreis Teams unterstützt er in der Beratung von multinational agierenden österreichischen Unternehmen und österreichischen Geschäftseinheiten ausländischer Unternehmensgruppen. Der Tätigkeitsumfang reicht hierbei von der Erstellung über die Dokumentation bis hin zur Verteidigung von Verrechnungspreissystemen in Außenprüfungen.