In a decision published today, the Supreme Tax Court held that Section 1 (5) Foreign Tax Act does not constitute an independent rule for determining permanent establishment profits. General allocation methods such as the cost-plus method require a clear legal basis - otherwise they are inadmissible.
Following a referral from the Federal Constitutional Court, the Supreme Tax Court has again had to rule on the income adjustment pursuant to Section 1 (1) Foreign Taxes Act vis-à-vis the write-down of an unsecured loan receivable issued within a group
The Lower Tax Court of Rhineland Palatinate has asked the ECJ to rule on the income adjustment provision of the Foreign Tax Act as amended in 2003 as it might not be in accordance with EU-law. The focus of the judicial review is on the tax consequences of a business relationship with a related party and where the terms do not meet the third party comparison test. The ECJ advocate general has suggested the court decide that the German rules for profit adjustment under Sec. 1 Foreign Tax Act are not in violation of the freedom of establishment.
The German Finance Ministry has commented on possible profit adjustments under Sec. 1 Foreign Tax Act with respect to the use of group name and logo between the taxpayer and a related party.
The finance ministry has decreed that Supreme Tax Court judgments limiting the income adjustments under the Foreign Tax Act to questions of amount are not to be followed as precedents prohibiting adjustments by reason of the nature of the transaction under review.
The Supreme Tax Court has held that an income adjustment for the interest lost on an interest-free loan to a foreign subsidiary can be made under the Foreign Tax Act unless the loan was granted as a substitute for share capital.
