Questro International

**𝗡𝗲𝘄 𝗔𝗱𝗺𝗶𝗻𝗶𝘀𝘁𝗿𝗮𝘁𝗶𝘃𝗲 𝗣𝗿𝗶𝗻𝗰𝗶𝗽𝗹𝗲𝘀 𝗼𝗻 𝗧𝗿𝗮𝗻𝘀𝗳𝗲𝗿 𝗣𝗿𝗶𝗰𝗶𝗻𝗴 𝟮𝟬𝟮𝟰 (𝗩𝗪𝗚 𝗩𝗣 𝟮𝟬𝟮𝟰) 𝗶𝗻 𝗚𝗲𝗿𝗺𝗮𝗻𝘆 – 𝗣𝗮𝗿𝘁 𝟭: 𝗜𝗻𝘁𝗿𝗮𝗴𝗿𝗼𝘂𝗽 𝗙𝗶𝗻𝗮𝗻𝗰𝗶𝗻𝗴 𝗔𝗿𝗿𝗮𝗻𝗴𝗲𝗺𝗲𝗻𝘁𝘀** The German tax authorities recently updated their administrative principles on transfer pricing. Specifically, the draft supplement to the 2023 guidelines concerning intra-group financing transactions, published in August, has now been finalized. Essentially, the provisions of the draft version have been adopted (for details, see the August article). In addition to minor clarifications and illustrative examples, the following points stand out: - An investment-grade credit rating can be used as a qualitative criterion to demonstrate the borrower’s debt-servicing capacity. - Maintaining arm’s-length liquidity reserves or capital buffers is recognized.  ➣ However, the term “arm’s length” remains undefined, potentially leading to disputes during tax audits. - A rating analysis by the German Bundesbank for the corporate group is now accepted alongside conventional approaches.  ➣ It remains to be seen whether tax auditors will interpret this as an obligation for taxpayers to conduct such analyses as part of their duty to cooperate. In recent times, there have unfortunately been increasing instances of such excessive demands by auditors, which we believe are not in line with the law. - The application of the new Section 1 (3d), (3e) of the German Foreign Tax Act (AStG) has now been codified in Section 21 (1a), Sentence 2 of the AStG. In simple terms, the new rules will apply to all financing relationships – both new and existing loans – from January 1, 2025.  ➣ The tax authorities allow that, for loans issued before January 1, 2025 and still outstanding thereafter, the new rules, including the debt-servicing capacity analysis, can be applied as of the reference date December 31, 2024 – instead of the original issuance date. 𝗞𝗲𝘆 𝘁𝗮𝗸𝗲𝗮𝘄𝗮𝘆: The increased requirements and documentation obligations demand a proactive approach to and thorough documentation of financing arrangements between related parties. Addressing these challenges early can help minimize risks and enhance legal certainty. 𝘛𝘩𝘦 𝘶𝘱𝘤𝘰𝘮𝘪𝘯𝘨 𝘱𝘢𝘳𝘵𝘴 2 𝘢𝘯𝘥 3 𝘰𝘧 𝘵𝘩𝘦 𝘕𝘦𝘸 𝘝𝘞𝘎 𝘝𝘗 2024 𝘸𝘪𝘭𝘭 𝘥𝘦𝘢𝘭 𝘸𝘪𝘵𝘩 𝘵𝘩𝘦 𝘳𝘦𝘮𝘰𝘷𝘢𝘭 𝘰𝘧 𝘵𝘩𝘦 𝘝𝘞𝘎 𝘦𝘮𝘱𝘭𝘰𝘺𝘦𝘦 secondment 𝘱𝘳𝘰𝘷𝘪𝘴𝘪𝘰𝘯𝘴 𝘢𝘯𝘥 𝘵𝘩𝘦 𝘴𝘪𝘮𝘱𝘭𝘪𝘧𝘪𝘦𝘥 𝘢𝘱𝘱𝘳𝘰𝘢𝘤𝘩 𝘧𝘰𝘳 𝘤𝘰𝘳𝘦 𝘴𝘢𝘭𝘦𝘴 𝘢𝘤𝘵𝘪𝘷𝘪𝘵𝘪𝘦𝘴 (𝘗𝘪𝘭𝘭𝘢𝘳 𝘖𝘯𝘦 – 𝘈𝘮𝘰𝘶𝘯𝘵 𝘉). 

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𝐆𝐞𝐫𝐦𝐚𝐧𝐲 & 𝐈𝐧𝐭𝐫𝐚-𝐆𝐫𝐨𝐮𝐩 𝐅𝐢𝐧𝐚𝐧𝐜𝐢𝐧𝐠: 𝐃𝐫𝐚𝐟𝐭 𝐀𝐦𝐞𝐧𝐝𝐦𝐞𝐧𝐭 𝐭𝐨 𝐭𝐡𝐞 𝟐𝟎𝟐𝟑 𝐀𝐝𝐦𝐢𝐧𝐢𝐬𝐭𝐫𝐚𝐭𝐢𝐯𝐞 𝐏𝐫𝐢𝐧𝐜𝐢𝐩𝐥𝐞𝐬 𝐨𝐧 𝐓𝐫𝐚𝐧𝐬𝐟𝐞𝐫 𝐏𝐫𝐢𝐜𝐢𝐧𝐠 𝐫𝐞𝐠𝐚𝐫𝐝𝐢𝐧𝐠 𝐭𝐡𝐞 𝐑𝐞𝐪𝐮𝐢𝐫𝐞𝐦𝐞𝐧𝐭𝐬 𝐨𝐟 𝐭𝐡𝐞 𝐍𝐞𝐰 § 𝟏 𝐏𝐚𝐫𝐚. 𝟑𝐝 𝐚𝐧𝐝 𝟑𝐞 𝐀𝐒𝐭𝐆 The recently published draft provides clarifications that ease practical application but also highlights the critical requirements needed to ensure the tax recognition of intra-group financing. 🔍 𝐖𝐡𝐚𝐭 𝐚𝐫𝐞 𝐭𝐡𝐞 𝐤𝐞𝐲 𝐩𝐨𝐢𝐧𝐭𝐬? 𝟏. 𝐑𝐞𝐜𝐨𝐠𝐧𝐢𝐭𝐢𝐨𝐧 𝐨𝐟 𝐟𝐢𝐧𝐚𝐧𝐜𝐢𝐧𝐠 𝐭𝐫𝐚𝐧𝐬𝐚𝐜𝐭𝐢𝐨𝐧𝐬 𝐨𝐧 𝐭𝐡𝐞 𝐦𝐞𝐫𝐢𝐭𝐬: - Appropriateness of considering refinancing in cash flow forecasts. - Planning of capital buffers and their potential (short-term) investment in a cash pool can be considered at arm's length. - Taxpayers must expect a return on their financed investment at least equal to the financing costs; in other words, the expected return on equity should be greater than or equal to the financing interest. - Financing for the purposes of profit distribution may be considered at arm's length. 𝟐. 𝐏𝐫𝐢𝐜𝐢𝐧𝐠 𝐨𝐟 𝐅𝐢𝐧𝐚𝐧𝐜𝐢𝐧𝐠: - The principle of using (publicly) available credit ratings is key, with the option to use market-standard rating software and approaches otherwise. - Escape clause: Based on the strategic importance of the company to the group or the degree of implicit support, the approaches of leading rating agencies are recognized for demonstrating a different credit rating — from the bottom-up approach to individual ratings. - In principle: The comparable uncontrolled price (CUP) method is applied to determine arm's length interest rates. 𝟑. 𝐀𝐩𝐩𝐥𝐢𝐜𝐚𝐭𝐢𝐨𝐧 𝐏𝐫𝐨𝐯𝐢𝐬𝐢𝐨𝐧𝐬 – 𝐌𝐢𝐧𝐢𝐦𝐚𝐥 𝐆𝐫𝐚𝐧𝐝𝐟𝐚𝐭𝐡𝐞𝐫𝐢𝐧𝐠: The new regulations will (not yet) apply in 2024 to financing arrangements implemented before December 31, 2023; for those with terms extending beyond December 31, 2024, the new regulations must be followed starting in 2025. 𝟒. 𝐀𝐝𝐝𝐢𝐭𝐢𝐨𝐧𝐚𝐥 𝐏𝐨𝐢𝐧𝐭𝐬: - The legally rebuttable presumptions under § 1 paragraph 3e regarding financing functions (e.g., intermediary financing function, cash pool leader) as low-risk service providers, whose remuneration is to be determined on a cost-plus basis, do not apply to certain industries, such as banking or insurance. - The legally rebuttable presumptions under § 1 paragraph 3e are not unilateral options for the taxpayer — the tax authorities can also demonstrate a business function and risk profile, leading to corresponding domestic taxation. The increased requirements and documentation obligations necessitate proactive engagement with financing between related parties. Those who address these challenges in a timely manner can minimize risks and increase legal certainty. How are you handling these requirements? I look forward to discussing this in the comments!

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We need to talk 🙈: Germany does not understand OECD transfer pricing guidelines on intra-group financing What has happened? Germany has created deduction restrictions for interest on cross-border intra-group financing transactions in Section 1 (3d) and (3e) AStG. The main new features are the proof of the borrower's prospective ability to service the debt (interest and principal service) and the general application of the group rating to determine arm's length interest rates What went wrong? ⚡️ A different rating derived from the group rating is (only) permitted in exceptional economic cases. This rule is completely contrary to the principles of Chapter X of the OECD Transfer Pricing Guidelines. These see the stand-alone rating as the basis. The result is increased (A) (double) taxation risks (B) Burden of proof and documentation obligations for the taxpayer (C) compliance costs as well as (D) intensified discussions with the tax authorities. From when? 🕚 Growth Opportunities Act has been announced and new regulations will apply from tax year 2024, i.e. immediately What needs to be done now? Review existing intercompany loan transactions and TP documentation and adjust or (re-)document if necessary, if not already in place

We need to talk 🙈: Germany does not understand OECD transfer pricing guidelines on intra-group financing What has happened? Germany has created deduction restrictions for interest on cross-border intra-group financing transactions in Section 1 (3d) and (3e) AStG. The main new features are the proof of the borrower's prospective ability to service the debt (interest and principal service) and the general application of the group rating to determine arm's length interest rates What went wrong? ⚡️ A different rating derived from the group rating is (only) permitted in exceptional economic cases. This rule is completely contrary to the principles of Chapter X of the OECD Transfer Pricing Guidelines. These see the stand-alone rating as the basis. The result is increased (A) (double) taxation risks (B) Burden of proof and documentation obligations for the taxpayer (C) compliance costs as well as (D) intensified discussions with the tax authorities. From when? 🕚 Growth Opportunities Act has been announced and new regulations will apply from tax year 2024, i.e. immediately What needs to be done now? Review existing intercompany loan transactions and TP documentation and adjust or (re-)document if necessary, if not already in place

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#Transferpricing #Distribution #OECD #Inclusiveframework #Pillarone #AmountB #Benchmarking #TNMM

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