After some political wrangling, the "Growth Opportunities Act" was passed at the end of March. It also contains practical innovations for treasurers regarding the arm's length principle - this principle is extremely relevant for tax purposes in the case of intra-group financing.

This affects 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 are usually designed and implemented by treasury departments. Financing transactions are regularly the focus of tax audits and are extremely prone to disputes.

The requirements for the tax deductibility of interest expenses have now been tightened by law. In concrete terms, this means

• In principle, the group rating is assumed for the debtor. Deviations from this must be justified.
• The financing must be economically required by the debtor.
• The financing must serve the purpose of the company.
• It must be possible to service the debt in the financial planning. Appropriate planning should be in place for the entire term of the loan.
• In principle, foreign in-house banks or cash pool managers should only receive a small fee unless there is evidence to the contrary.

It is important to note that the new rules will apply from 1 January 2024, but also for existing loans. The above-mentioned aspects must therefore be taken into account not only in the planning of new loans, but also in the transfer pricing documentation for existing loans.

Interest expenses of a domestic taxpayer from a cross-border financing relationship are generally only tax deductible if:

• the domestic taxpayer proves that it could have provided the debt service from the time the financing was granted and for the entire term of the financing relationship from the outset and that the financing is economically required and used for the business purpose; and
• insofar as 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 is proven in individual cases that a rating derived from the group rating complies with the arm's length principle, this must be taken into account when calculating the interest rate.

In addition, the new legal regulations categorise 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 are 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. An exception in the form of higher remuneration is only possible if the taxpayer proves on the basis of an analysis that, for example, financial risks can be managed independently by qualified personnel 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 will be happy to assist you.

Source: KPMG Corporate Treasury News, Issue 143, May 2024
Authors:
Marc Oliver Birmans, Partner, Tax, Global Transfer Pricing Services, 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