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Germany – Updates on Intragroup Financing

OVERVIEW

On 22 March 2024, the German Federal Council introduced new provisions to enhance transparency and ensure tax compliance in cross-boarder intragroup financial operations. While arm’s length compliance is required in terms of the interest rates applied in financing received from abroad, the deductibility of the interest expenses can now also be challenged.

Financing Relationships

So far, net interest expenses (>3 million EUR) were deductible up to 30% of the related party’s EBITDA, with the possibility to carry forward undeducted interests an unused EBITDA. However, Section 1 Abs. 3d AStG has recently been amended to include the definition of various financing relationships beyond traditional loan transactions, such as debt capital use and provisions and further rules regarding interest expense deduction are introduced.

The interest expenses of German taxpayers in cross-boarder intragroup financing must comply with the arm’s length principle in two senses:

  • Taxpayers have to demonstrate their interest and amortization payment capacity, otherwise the interest expenses deriving from the operation will be considered non-deductible, and
  • Unless otherwise proven based on Group credit ratings, interest rates above the Group’s refinancing rate are considered non-deductible.

Financing Services

The amendment to Section 1 para. 3e AStG provide special provisions for pass-through loans, such as internal group treasury, financial or currency risk management functions. These are generally considered low-value adding services and shall be remunerated based on the cost plus method.  

In case the taxpayer considers that its financing services are not of a low-risk and/or low-function character, evidence shall be provided through a specific functional and risk analysis to prove it.

Key considerations

Taxpayers will also have to pay attention to proving that the intragroup financing received is economically necessary and used for company purposes, otherwise interest deduction could be denied in full.

These provisions are applicable for fiscal year 2024 and ahead, entering into force retroactively, with effects from 1 January 2024.

Key actions

To ensure compliance with the new requirements and mitigate tax risks arising from the changes, multinational groups operating in Germany shall review their related party financing operations to check if the new amendments require an adjustment or justification of the conditions applied and prepare the proper Transfer Pricing Report and/or Documentation in a timely manner for the current fiscal period and any inbound financing relationships (to be) established going forward.

 

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