On 21 October 2021, the German Ministry of Finance released Tax Court Decision No. IR 4/17(dated 18 May 2021), regarding the calculation of an arm’s-length interest rate on intercompany loans.
Under the ruling, the interest rate should be based on the economic circumstances of the borrower (and not the lender). In addition, the comparable uncontrolled price method (CUP) is to be used with priority over the cost-plus method. The priority of the CUP method should also apply if (comparability) adjustments are necessary and carried out properly. Essentially, the decision provides that the reasonable interest rate is the interest rate that the borrower would have to pay to a third-party lender and that certain intra-group lenders are not restricted to a risk-free interest rate – in contrast to the representation by the MoF in the Administrative Principles regarding Transfer Pricing.
Although the MoF guideline is seen by the tax authorities as a clarification of the arm’s length principle, it is applied retrospectively in all open cases and is binding for the tax authorities (e.g. in the context of tax audits).
