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Comment and analysis

Germany

New regulations on financial tranasactions?

Introduction

During recent talks with officials from the German Ministry of Finance, it was announced that revised administration principles on the appropriateness of financial transactions can be expected in the near future. It is anticipated that these revised principles will replace Section 4 of the principles relating to the examination of income allocation in the case of internationally affiliated enterprises, dating from 23 February 1983.

Reasons for the new regulations

The anticipated revision of the administrative principles follows a trend of continued tightening of transfer pricing regulations within Germany, commencing initially with the introduction of new transfer pricing documentation requirements in 2004 and extending to all related party financial transactions such as loans and guarantees.

The objective of the new regulations is likely to be to update and amend the existing administrative instructions to better reflect a market interpretation of

the arm’s length principle for financial transactions particularly in light of the recent turmoil in financial markets. Other reasons for the need to revise the existing administrative principles include groundbreaking international developments, for example the December 2009 tax court ruling in Canada concerning the appropriateness of guarantee fees.

Clarification of Germany’s administrative approach with regard to the general acceptance of financial transactions (and in particular, deductible amounts) is highly desirable from a taxpayer’s perspective.

Potential amendments

Section 4 currently contains four sub- sections focusing on: the differentiation between ‘real’ financial transactions, and ‘not seriously intended’ financial transactions leading to constructive dividends or hidden capital contributions; loans and relevant interest rates; guarantees; and other special issues. The sub-sections concerning loans and guarantees in particular require substantial amendment and clarification.

While the current sub-section on loans first details circumstances to be considered when determining an appropriate rate of interest for a loan (especially relevant terms and conditions such as credit standing of borrower, loan amount and maturity, currency, securities, etc.) it later recognizes the existence of a range of arm´s length interest rates. Historically, the most common interpretation of these “ranges” for financial intercompany transactions outside the banking sector has been the median between credit interest and debit interest adequately reflects the arm´s length principle. A perspective shared by

PricewaterhouseCoopers • A publication for financial services industry tax and transfer pricing professionals • February 2010

9

the German Federal Tax Court in its ruling in 1990. However, this view is no longer maintained by the German tax authorities who emphasize that for financial transactions, the factual arm´s length test (based on, for example, interest rates prevalent in the money and capital markets) has absolute priority.

With regard to guarantees, the German tax authorities emphasized that they consider the stand-alone credit rating of the creditor to be the most appropriate starting point in determining an arm´s length guarantee fee: a clarification that would provide a welcome addition to the new administrative principles.

For more information please contact:

Jobst Wilmanns - jobst.wilmanns@de.pwc.com

Martin Schmitt - m.schmitt@de.pwc.com

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    “The anticipated revision [...] follows a trend of continued tightening of transfer pricing regulations in Germany”

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