close
Share with your friends

Amendment of prior decisions of the German Federal Tax Court ...

Amendment of prior decisions of the Federal Tax Court

... on the precluding effect pursuant to Article 9(1) of the OECD Model Tax Convention

1000

Related content

FTM

In its judgment of 27 February 2019 (file ref. I R 73/16), the German Federal Tax Court [BFH] decided – contrary to its prior judgments – that Article 9(1) of the OECD Model Tax Convention does not preclude an adjustment of income pursuant to Section 1 (1) of the German External Tax Relations Act [AStG] for the profit-reducing derecognition of an unsecured intragroup loan, and the loss therefore is not tax deductible.

Underlying case

The BFH judgment of 27 February 2019 is based on the following underlying case: in 2005, a German limited liability company maintained an unsecured clearing account for a Belgian subsidiary. After the Belgian subsidiary had experienced financial difficulty, the German limited liability company waived the receivable from the clearing account and derecognised it, thus reducing profit. However, the tax office treated the loss as non-deductible for tax purposes pursuant to Section 1 (1) AStG. The limited liability company appealed the decision. The tax court allowed the appeal in view of the prior decisions of the BFH.

Prior judgments of the German Federal Tax Court [BFH]

According to prior decisions of the BFH, Article 9(1) of the OECD Model Tax Convention had a precluding effect with regard to Section 1 (1) AStG in that Article 9(1) OECD MTC limited the scope of Section 1 (1) AStG to price adjustments and precluded the adjustment of income pursuant to Section 1 (1) AStG for the profit-reducing derecognition of a loan receivable or write-down to fair value. Based on the prior judgments of the BFH, any loss arising from the profit-reducing derecognition of a loan receivable or write-down to fair value was therefore tax deductible.

Amendment of prior decisions of the German Federal Tax Court

With its judgment of 27 February 2019, the BFH has amended its prior decisions and overruled the verdict of the tax court. According to the amended BFH decision, Article 9(1) of the OECD Model Tax Convention has no precluding effect with regard to Section 1 (1) AStG. Article 9(1) OECD MTC does not limit the scope of Section 1 (1) AStG to price adjustments, but also permits the adjustment of income pursuant to Section 1 (1) AStG for the profit-reducing derecognition of a loan receivable or write-down to fair value. A precluding effect of Article 9(1) OECD MTC with regard to Section 1 (1) AStG can be deduced neither from the wording nor the intent and purpose of Article 9(1) OECD MTC. An adjustment of income pursuant to Section 1 (1) AStG is also not in contravention of EU law. Based on the BFH amendment, any loss arising from the profit-reducing derecognition of a loan receivable or write-down to fair value is therefore not tax deductible.

Conclusion

The amendment of prior BFH decisions has considerable implications for the financing of foreign subsidiaries by domestic parent companies. In its press release no. 29 of 15 May 2019 regarding the BFH judgment of 27 February 2019, the BFH indicates that the new principles will be clarified in more detail on the basis of other cases. It therefore needs to be ascertained whether similar such cases should be kept open.

Author: Dr. Dirk Niedling, Partner, International Tax, dniedling@kpmg.com
Source: KPMG Corporate Treasury News, Edition 92, June 2019

© 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, ein Mitglied des KPMG-Netzwerks unabhängiger Mitgliedsfirmen, die KPMG International Cooperative (“KPMG International”), einer juristischen Person schweizerischen Rechts, angeschlossen sind. Alle Rechte vorbehalten.

Connect with us

 

Want to do business with KPMG?

 

loading image Request for proposal