The price comparison method is the method of choice for market interest rates on group loans, according to two relevant BFH rulings.
In May 2021, the Federal Fiscal Court (BFH) issued two landmark rulings on the determination of market interest rates for group loans and shareholder loans, which are still valid and are used as a guide by tax authorities, companies and tax consultants. These rulings have a relevant impact on the tax treatment of group loans and emphasize above all that the price comparison method is to be classified as the preferred method, while the cost-plus method was considered less suitable.
This case concerned a loan from a Dutch financing company to its German sister company. Although the German company had taken out secured loans from banks at a lower interest rate than the internal loan, the interest expense was reduced by the German tax office because it considered the interest rate to be unusual and too high. The tax office applied the cost-plus method instead of the price comparison method, as the financing company was considered an agent and not a bank. The Münster tax court confirmed this decision. However, on appeal, the BFH ruled that the price comparison method should be applied as a matter of priority in order to determine market interest rates for group loans. In addition, the creditworthiness of the borrower (taking into account the group structure) should be assessed independently instead of using a group rating.
In this case, a German company had taken out a secured bank loan with an interest rate of 4.78% p.a., an unsecured loan from the seller with an interest rate of 10% p.a. and an unsecured shareholder loan with an interest rate of 8% p.a.. The tax office considered the interest rate on the shareholder loan to be too high and only granted an interest rate of 5% based on the bank loan. The difference between the two interest rates was regarded as a hidden profit distribution that increased the company's profit. However, the BFH ruled that an unrestricted comparison with the bank loan was incorrect, as a third party would not grant a subordinated and unsecured loan on the same terms as a senior and secured loan. According to the BFH, the statutory subordination of shareholder loans is irrelevant for the arm's length comparison. The intra-group affiliation of the companies must also be excluded. Actual agreements with third parties, such as the secured and senior bank loan, must be mathematically adjusted to take into account special circumstances at affiliated companies before they can be used for the arm's length comparison. The BFH thus followed the OECD transfer pricing guidelines.
Summary guidelines on group loans
As part of the ruling, the Federal Fiscal Court clarified that the interest rate charged for a group loan should correspond to the interest rate that would also be agreed for a comparable loan between independent third parties. Particular attention must be paid to the amount of the loan, the term, the type of loan (e.g. fixed-rate loan or variable-rate loan), the collateral and the creditworthiness of the borrower.
The BFH rulings from May 2021 have set out a clear line on how market interest rates for group loans and shareholder loans are to be determined. The price comparison method is in the foreground and should always be preferred, while the creditworthiness of the individual company and not that of the entire group should be assessed. These rulings provide important guidance on the tax treatment of group loans and contribute to clarity and legal certainty in this area.
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