Impact of the Growth Opportunities Act

After much political wrangling, the ‘Growth Opportunities Act’ was adopted at the end of March. It contains practical changes to the arm's length principle for treasurers too - and this principle is extremely relevant for tax purposes in the case of intra-group financing.

The new rules affect inbound financing transactions, in particular inbound loans within the group and remuneration for foreign in-house banks or cash pool managers. These transactions and structures tend to be designed and implemented by treasury departments. These financing transactions are routinely the focus of tax audits and are extremely prone to disputes. 

The law has tightened the requirements for the tax deductibility of interest expenses. More specifically, this means

• As a general rule, the group rating is now deemed to apply to the debtor. Any deviations from this must be justified.
• Such financing must be economically required by the debtor.
• It must serve the company's purpose.
• It must be possible to service the debt in the financial planning. A corresponding plan should exist for the entire term of the loan when the loan is granted.
• As a matter of principle, foreign in-house banks or cash pool managers should only receive a small fee unless documented otherwise.

What is important here is this: These new rules apply from 1 January 2024, but also retroactively to existing loans. This means that the above-mentioned aspects must be factored in not only when planning new loans, but also in the transfer pricing documentation for existing loans.

As a general rule, interest expenses of a domestic taxpayer arising from a cross-border financing relationship are now tax deductible only if:

• the domestic taxpayer demonstrates that it could have provided the debt service from the time of the grant and for the entire term of the financing relationship from the outset and that the financing is economically necessary and used for the company's purpose; and
• to the extent that the interest rate applied is equal to or lower than the interest rate that would be granted by an external third party on the basis of the group rating. If it can be proven in specific cases that a rating derived from the group rating meets the arm's length principle, this must be taken into account when calculating the interest rate.

The new statutory regulations also classify a pure brokerage service or forwarding of a financing relationship or typical treasury functions (such as liquidity management within a cash pool) or the activities of a financing company as a low-function and low-risk service, which is to be remunerated on the basis of a ‘routine remuneration’ - for example, remuneration of the operating costs from personnel and overheads plus a profit mark-up. The only exception in the form of a higher remuneration is where the taxpayer proves through an analysis that, for example, qualified personnel can manage financial risks independently and can also be borne financially by the company.

Our colleagues Marc Oliver Birmans and Svetlana Kuzmina from the Centre of Excellence for Financial Transactions at Global Transfer Pricing Services would be delighted to assist you.

Source: KPMG Corporate Treasury News, Edition 143, May 2024
Authors:
Mark Oliver Birmans, Partner, Tax, KPMG AG
Nils Bothe Partner, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG
Dr. Finn Martensen, Senior Manager, Tax/Global Transfer Pricing Services, KPMG AG