The Growth Opportunities Act introduced new regulations for cross-border group financing. The difficulties for recognising interest payments are now significantly higher and, in many cases, there is a risk of double taxation!
Financial transactions in the focus of the tax audit
Determining arm's length conditions for intra-group financial transactions is one of the most challenging tasks in the context of transfer pricing planning and auditing - and at the same time often leads to discussions and disputes during tax audits. The fact that the tax authorities and tax courts do not always agree on this issue does not make the situation any easier for the companies and groups concerned. As part of the Growth Opportunities Act, the legislator has now also stepped up to the plate and anchored a completely new regulation in the Foreign Tax Act (AStG).
Recognition of interest expense - in terms of substance and amount
In the government draft of the Growth Opportunities Act, the federal government had planned to introduce an interest rate cap. This was intended to make interest expenses between affiliated companies tax-deductible only to the extent that the interest expenses did not exceed the base interest rate within the meaning of Section 247 of the German Civil Code (BGB), increased by two percentage points. This plan was not pursued further in the subsequent legislative process; instead, a special provision (Section 1 (3d) AStG) now applies to cross-border financing relationships between related parties.
According to this new regulation, the recognition of interest expenses as deductible business expenses requires:
- On the merits, that the principal and interest payments can be serviced for the entire term of the financing and that the financing is economically required and used for the business purpose; the taxpayer must provide credible evidence of all requirements; and
- The amount of the interest rate is subject to the condition that it does not exceed the interest rate at which the company "could finance itself vis-à-vis third parties on the basis of the group credit rating".
The legal regulation does not contain a more detailed explanation of the characteristics "ability to service debt", "economic need" and "use for the purpose of the company". However, it can be assumed that the new regulation strengthens the position of the tax authorities, which already hold very comparable positions in the administrative principles on transfer pricing (last published in 2023). The same applies to the use of the so-called "group rating", although the Federal Fiscal Court had clearly spoken out in favor of using a "stand-alone rating".
Characterization of the intra-group financing function
A further, newly added provision (para. 3e of section 1 AStG) deals specifically with the role of financing companies within a group or companies that also assume financing functions for other group companies. This should regularly involve low-function and low-risk services, provided that
- The financial services are brokered or forwarded or
- Consist of management of financial resources, for example in the form of liquidity, risk or currency management.
The legal consequences of such a service qualification are not explicitly stated in the law. However, the aim should be to only allow the application of the cost-plus method with a small profit mark-up (of 5%, for example) for the remuneration of these services to (foreign) group financing companies. With regard to the management of financial resources, the taxpayer can provide counter-evidence that these are not merely low-function and low-risk services; in practice, however, this counter-evidence is likely to be difficult to provide.
Retroactive application restricts reaction options
The new regulations outlined above are already applicable for the 2024 assessment and tax period and therefore affect existing financing relationships and structures - in some cases retroactively - which makes it even more difficult for the companies affected to react. In combination with a further significant increase in market interest rates, both the number and the volume of potential corrections in tax audits and therefore also the risk of double taxation are likely to increase significantly in future. The internal review and optimization of existing financing structures should therefore be given high priority for all cross-border corporate groups.