On March 12, 2024, AmCham Germany, in cooperation with PricewaterhouseCoopers, hosted an Expert Webinar with the title “Status update 2024: Group financing – between Scylla and Charybdis.”
Christof Letzgus, International Corporate Tax Partner at PwC Germany, opened the Expert Briefing by highlighting the importance of financing for investor decisions, which are urgently needed to successfully manage multiple challenges such as infrastructure, energy as well as digital transformation and despite a significant rise of market interest rates in recent years.
For a long time, it was largely uncontested that an investor taking an investment risk should be free to elect whether to fund investments with debt or equity. In the late 20th century, this financing freedom was restricted by introducing tax-specific thin capitalization rules for intercompany group financing transactions. A company with debt leverage in excess of the statutory debt-to-equity ratio was deemed to pay a profit distribution with respect to interest relating to any excess debt principal amount. Later on, a broader net interest barrier rule was introduced initially by Germany, which caps the net interest expense amount which is tax deductible on a current basis at a certain percentage of taxable EBITDA and which applies not only for intercompany financing but also for third party financing. The German system has been broadly adopted by the OECD BEPS initiative and incorporated into the EU Anti-Tax Avoidance Directive (ATAD).
Dr. Joerg Huelshorst, Transfer Pricing Partner at PwC Germany, continued the Expert Webinar by illustrating the dynamic environment for transfer pricing testing and documentation requirements on intercompany financial transactions at the OECD level and, in particular, in Germany. On the one hand, this relates to the approach of taxing authorities in inbound or outbound funding scenarios, while on the other hand, developing case law and the impact of EU law, as well as regulatory restrictions which are mainly targeting inbound structures only.
These restrictions are accompanied by various further detailed and sometimes complex specific disallowance and anti-abuse rules, which partly overlap and always result in double taxation risks as well as increased compliance burdens and personal liability risks.
From both speakers’ perspective, it appears highly questionable whether these issues will be settled by the expected further statutory transfer pricing changes for inbound financing transactions only, which may be enacted as part of the Growth Opportunities Act later this month and which would confirm the controversial position of taxing authorities. Such certainty is urgently needed in the current economic environment.
The final part of the Expert Webinar provided initial practical guidance for tax directors and treasury departments to support their funding and investment structures in current tax audits and navigate through additional challenges resulting from new legislation.
