This spring, the Growth Opportunities Act enacted new tax legislation on group financing. In mid-August, the Federal Ministry of Finance (BMF) issued a draft administrative instruction.
Some of them raise big question marks, while others offer a few positive aspects. We will take you briefly through the most important points.
Encouraging clarifications
A typical case is a domestic borrower. Where the tax authorities do not recognize the debt capacity or the operational necessity of the loan, the interest expense may not be recognized for tax purposes.
The BMF clarifies that loans to finance a profit distribution are not fundamentally unusual for third parties. It is also possible for group companies with a start-up character to receive outside capital. In addition, a loan is not considered to be unusual for third parties simply because follow-up financing is required.
The core problem: Group vs. stand-alone rating
It is the opinion of the Federal Ministry of Finance that the stand-alone rating – i.e. the assessment of the probability of default of a group company – of a domestic borrower in a group of companies can be superior to the group rating. This is a view already vehemently held by the tax authorities in many current tax audits. In the first step, the tax audit uses the rating resulting from a rating tool, e.g. based on the borrower's key financial figures (see also our July newsletter on estimating credit default probabilities). The second step is to compare it with the group rating: Should the stand-alone rating be better than the group rating, the former is used as a basis. Where the stand-alone rating is worse than the group rating, the stand-alone rating is often raised across the board to the group rating.
This view contradicts established advisory practice, which refers to guidance from Standard&Poor's (S&P). S&P states clearly that group companies can at most enjoy the group rating unless they are particularly isolated in legal terms. The audit ignores this.
Where the stand-alone rating is worse than the group rating, S&P states that the rating can be improved by the strategic relevance – in tax jargon “group backing”. If the company is not a core company or the stand-alone rating corresponds to the group rating, the maximum rating is only up to one notch below the group rating.
Most interestingly, the BMF is strongly oriented towards the S&P concept, which describes five rating categories within a group, and also mentions these categories and the criteria for them. However, it is not made clear whether the capping of the group company's rating by the group rating applies or not.
This raises many questions. There is considerable legal uncertainty. One thing the industry is hoping for is clarification in the final version of the BMF letter.
Hardly any “grandfatherly” leniency
As a rule, the new tax laws apply from the financial year that began on 1 January 2024.
For pre-existing loans that expire this year and are not extended, the new statutory rules will not apply – in other words, there will only be very limited “grandfathering”. Grandfathering will not apply to cash pools and financing companies.
Contact us
Our colleagues Marc Oliver Birmans and Svetlana Kuzmina from the Center of Excellence for Financial Transactions at Global Transfer Pricing Services would be delighted to assist you.
Source: KPMG Corporate Treasury News, Edition 148, October 2024
Authors:
Marc Oliver Birmans, Partner, Tax, Global Transfer Pricing Services
Dr. Finn Martensen, Senior Manager, Tax, Global Transfer Pricing Services
Marc Oliver Birmans
Partner, Tax, Global Transfer Pricing Services
KPMG AG Wirtschaftsprüfungsgesellschaft