BDO Transfer Pricing News

The new rules impose stricter limits on the deductibility of interest expenses on intercompany loans. These limitations are designed to prevent profit shifting through excessive interest deductions. This article delves into the details of these changes and their potential implications for businesses operating in Germany. 

New Arm's Length Test for Cross-Border Intercompany Financing  

The new rules of section 1 paragraph 3d AStG require a much more detailed analysis for cross-border intragroup financial transactions to be considered arm’s length. The following conditions must be met: 
 

• The interest rate must be determined based on the group rating. It is also possible to prove that a rating derived from the group rating is at arm’s length (most likely a simple stand-alone rating will not be sufficient). 

• It must be shown that the financing is economically necessary and used for a business purpose. 

• A debt capacity test must be documented, covering both interest rate payments as well as redemption (ex-ante cash flow test). 
   

The conditions listed above must be fulfilled and documented, thereby further increasing taxpayers’ compliance obligations. Even though the rules describe the necessary steps, possible penalties for noncompliance are not explicitly mentioned.

Multinational entities must reassess their intercompany financing strategies to ensure all transactions comply with the new rules and that interest rates on intercompany loans are market-based and defensible during audits. Transfer pricing documentation of financial transactions also must be supplemented.

For more information about this topic, click here. 

The possible effects for your own company should be examined now. Please feel free to contact us for a quick check to identify any actions needed.