German inbound structures - Crowe Kleeberg Real Estate GmbH

German inbound structures: Deductibility of interest expenses
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German inbound structures:
Deductibility of interest expenses
Tax audit experiences
September 2015
German Tax audit is challenging interest deductibility
in German inbound investment structures
Background
Corporate investments into Germany are often structured through a German tax transparent holding partnership – in most cases a
German GmbH & Co. KG. The partnership is
tax transparent for corporate income tax purposes while it is subject to German trade tax
by its own. In most cases, the foreign investor
refinances his acquisition cost for the partnership interest by a loan (provided by a bank
or another group company). In general, there
are two material tax advantages given by
such a structure:
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Refinancing cost of the foreign investor
(normally loans) for the acquisition of the
partnership interest are to be classified as
so-called “Sonderbetriebsvermögen II”
and thus, are tax deductible in Germany
and
no withholding tax regime on withdrawals
from the partnership is in place. Thus,
cash repatriation is possible without any
tax leakage in Germany.
View of the tax authorities
In the past, the tax deductibility of interest
expenses has also been accepted by the
German tax authorities unless a hybrid mismatch of the loan has been given/assumed
(foreign country classifies the loan as equity),
respectively a so-called double dip has been
given (tax deductibility in both countries). In
essence, a debt push down into Germany
has been possible in a relatively simple way.
However, since the beginning of this year, we
are confronted in tax audits with a new opposing view of the German tax authorities.
The tax authorities argue that the loan could
not be allocated to the German partnership
interest of the foreign investor but has to be
allocated according to civil law aspects to the
country of residence of the foreign investor.
This should be applicable in all cases where
the foreign investor has not constituted a
permanent establishment in Germany according to civil law aspects. As a consequence, interest expenses would not be tax
deductible in Germany.
Our view
We see strong arguments that interest expenses are tax deductible in Germany in
cases as set out above anyway. The refinancing loan is strongly linked to the partnership interest and thus, should be allocated to
this partnership – according to double tax
treaty as well as national law aspects. Besides, the German national treaty override
law feigns for different remunerations of the
foreign investor linked to the partnership that
those are part of the German taxable income
of the partnership. There is no reason why
this should not be applicable for expenses of
the foreign investor, here refinancing cost.
Furthermore, we see no evidence why a foreign investor should be treated differently
than a national investor. For national investors there is no doubt that interest expenses
are deductible at partnership level.
German inbound structures: Deductibility of interest expenses
Recommendation
In current tax audits, clients should confront
the tax authorities with the arguments set out
above. If this is not successful clients should
file an appeal against the following tax assessment notices.
Independently of a tax audit discussion
clients should consider to restructure their
debt push down to a more robust structure.
There are different debt push down techniques available to safeguard the tax deductibility of interest expenses in Germany.
Your contact:
Robert Hörtnagl, Tel. 089/55983-297
[email protected]
Dr. Michael Hoheisel, Tel. 089/55983-207
[email protected]
Alexander Lehnen, Tel. 089/55983-134
[email protected]
Dr. Lars Lüdemann, Tel. 089/55983-229
[email protected]
Crowe Kleeberg Real Estate GmbH
Audit & Accountancy Company
Member Crowe Horwath International
Munich │Hamburg
www.kleeberg-realestate.de/en
www.crowekleeberg-realestate.de/en
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