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Trade tax banking privilege also for non-banks

Trade tax banking privilege also for non-banks

The German Federal Fiscal Court [BFH] allows the application of trade tax baking privilege also for non-banks.


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The ruling

In its ruling dated 6 December 2016 the BFH decided that a domestic finance company can also benefit from the trade tax banking privilege set out in Section 19 of the German Trade Tax Implementation Regulation [GewStDV] provided that this company is not subject to banking supervision pursuant to the German Banking Act [KWG].

The case in question concerned a German limited liability company [GmbH] (appellant) that undertook the function of a finance company within the group of companies. In this role the GmbH extended loans to group companies. The GmbH financed itself through bank and shareholder loans. The disputed matter was whether the appellant's interest expenses fell short of the 25% add-back for debt fees pursuant to Section 8 no. 1 letter a) of the German Trade Tax Act [GewStG]. The appellant was of the opinion that this was not the case as the banking privilege under Section 19 GewStDV was applicable.

Section 19 GewStDV limits the add-back of debt fees for credit institutions within the meaning of Section 1 (1) KWG to debt fees that correspond to the amount of the debt, by which the recognition of assets that do not belong to the banking business exceeds equity. The question was whether a finance company that does not have a banking licence pursuant to Section 32 KWG can be considered a credit institution in this sense, if the criteria pursuant to Section 1 (1) KWG have been met (in this case for a lending business). This was partially dismissed in the past in view of the BHF ruling from 2002 (IR 23/02).

In the most recent ruling the first senate has decided this does not depend on the existence of a banking licence, pursuant to the wording and objective of Section 19 GewStDV.

It is sufficient that the banking business is operated on a commercial basis pursuant to the requirements set out in Section 1 (1) KWG. This was the case for the appellant.

Even if an exception from the supervisory licensing requirement pursuant to Section 2 (1) no. 7 KWG were to apply to the appellant due to the fact that they solely provide banking services within a group of companies (group privilege), this would not obstruct their classification as a credit institution. Therefore, the appellant was to be granted tax relief on the debt interest in full under the further requirements set out in Section 19 GewStDV.

Trade tax advantages can also be obtained outside of companies that are solely finance companies in instances where the supervisory and special tax preconditions have been fulfilled.

Implications in practice

The ruling is considered landmark as companies not subject to supervision pursuant to the KWG are granted the banking privilege under Section 19 GewStDV. A significant drawback in connection with operating a domestic treasury function, namely the limited trade tax relief on debt interest in the borrowing business when the loan fees collected in the lending business are recorded in full as well as the associated taxation of earnings not recorded on the balance sheet, could thus no longer be applicable in certain constellations.

It will primarily be companies that have already separated their domestic group financing into a separate legal unit (finance company) that will benefit from the ruling. Provided that the lending does not generate only an insignificant amount of funds, the criteria for the lending business within the meaning of Section 1 (1) no. 2 KWG are often likely to be fulfilled.

In cases where the group financing function is based at the group parent company or another company that undertakes mixed activities (for example a holding function or operational activity alongside the granting of loans), the criteria for the lending business are also likely to be fulfilled if the extent of the financing activities is not insignificant. Consequently, the extent to which the lending business exceeds the requirements for a certain minimum scope set down by the BFH in other cases in relation to other business should be examined, as well as the extent to which the majority requirement of Section 19 (2) GewStDV can be met.

In cases where the financing function has not yet been legally separated, consideration could be given to transferring the function to its own domestic finance company.

Source: KPMG Corporate Treasury News, Edition 78, March 2018
Author: Dr. Dirk Niedling, Partner, International Tax,

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