Tax & Legal

On 10 October 2024 the Federal Ministry of Finance (MoF) published a first draft of a revised BMF circular on the interest limitation provisons in Section 4a Income Tax Act (ITA) and Section 8a Corporate Tax Act (CTA). Due to various amendments which took place in the course of the Act to Promote the Secondary Credit Market (Kreditzweitmarktförderungsgesetz) the tax administration sees the need for revisions.

In a most recent judgment, the European Court of Justice decided that Article 10a of the Dutch Corporate Income Tax Act providing for an interest deduction limitation rule in wholly artificial arrangements is compatible with EU law. Although this article introduces a difference in treatment between a domestic and a cross-border situation, such a difference is justified based on the need to combat tax fraud and tax evasion.

On 15 December 2023, the Bundesrat approved the partial implementation of the contents of the Growth Opportunities Act in the Act to Promote the Secondary Credit Market. This includes changes to the interest limitation rule and adjustments resulting from the introduction of the Act for the Modernisation of Partnerships.

At its closed-door meeting in Meseberg on 30.8.2023, the Federal Cabinet adopted the government draft for a law to enhance growth opportunities, investment, and innovation as well as tax simplification and tax fairness (Growth Opportunities Act).

The tax courts had to clarify whether an "arrangement fee" and an "agency and security agency fee" are to be included as interest expenses when determining the interest limitation under Section 4h (1) of the German Income Tax Act. The tax authorities were of the opinion that both fees are to be included insofar as they are payable to the lender. The Supreme Tax Court held that the agency fee must be regarded as interest expense, but that the situation is different for the arrangement fee.

On 11 May 2022, the European Commission published a draft Directive which is intended to mitigate the tax induced debt-equity bias in corporate investment decisions. Technically, this is to be achieved through, on the one hand, an allowance that provides for the deductibility of notional interest on equity and, on the other, by introducing further restrictions on the deductibility of interest on debt.

The Supreme Tax Court has held – contrary to the finance ministry interest limitation decree – that the exception for interest payments to a significant shareholder of not more 10% of the company’s total borrowing cost applies separately for each shareholder, rather than to all significant shareholders cumulatively.

The Supreme Tax Court has requested the Constitutional Court to rule on the conformity of the interest limitation with the constitutional requirement to tax like circumstances alike.

The Supreme Tax Court has granted a stay of execution because of doubt as to whether the interest limitation rule meets the constitutional requirement of equal treatment of like matters.

The Supreme Tax Court has held that the application of the pre-2008 “thin capital” rule to disallow interest on related party finance breaches the discrimination prohibition of double tax treaties.

The Supreme Tax Court has resolved a stay of execution of a payment demand due to its constitutional doubts on the interest limitation as applied to a non-group company borrowing from banks with recourse to significant shareholders.