![]() The same applies to Article 9 of the OECD Model Tax Convention, so that Article 9 of the OECD Model Tax Convention has no precluding effect on the unilateral adjustment of profit under Section 1 AStG. The BFH held that the lack of loan collateral falls under the "conditions" within the meaning of Section 1 AStG which, in the overall analysis, could lead to the business relationship (related-party transaction) being considered non-arm's length. The tax office took the position that the loan terms were not at arm's length and added the write-downs back to profit (pursuant to Section 1 of the German External Tax Relations Act – profit adjustment in the case of cross-border business relationships between associated companies at non-arm's length conditions). In the year under dispute (2005), the German company wrote off its receivables against profit. For one of the loans, annual participation in net profit was agreed as compensation in lieu of a fixed interest rate. In the third case, a domestic company granted shareholder loans to its foreign subsidiaries. As a result, for arm's length comparison, actual agreements with unrelated parties (in this case, the secured senior bank loan) would first have to be adjusted mathematically to compensate for any special circumstances at affiliated companies (and again in this case, no collateral, subordinated) before they can be used.The "close relationship" between the shareholder and the subsidiary was to be "disregarded,” meaning that the lender was not acting as a shareholder, and thus statutory subordination did not apply or compensation would be required for "voluntary" subordination of the loan.The statutory subordination of shareholder loans was irrelevant for arm's length determination.An unrelated party would not grant a subordinated and unsecured loan at the same "price" as a secured and senior loan. The comparison with the bank loan was flawed-the bank loan was (contrary to the shareholder loan) secured and senior.The tax office considered the interest rate on the shareholder loan too high and only granted a tax deduction of the interest payable of 5% (comparison with bank loan). Unsecured loan from the seller of the shares (interest rate 10%).Secured bank loan (interest rate 4.78%).Unsecured subordinated shareholder loan (interest rate 8%).This was financed by the following loans: In the second case, a German company acquired shares in a company. A rating agency's credit rating could be used for that purpose (in this case, the S&P). The credit rating of the borrower must be on a stand-alone basis and not a group rating. The group affiliation itself did not prevent application of the CUP method but, however, could affect the credit rating and the interest rate.Corporate bonds could also be used for comparison.The external arm's length comparison was found not to fail because of the FinCo's structure, which typically has less resources than a bank.It could not be ruled out that the effect of the security provided on the interest rate can be quantified and eliminated.The comparison with the bank loans was to be rejected, not only because the bank loans were secured (internal arm's length comparison).The basic method to be used for determining arm's length lending rates is the comparable unrelated price method (CUP).The interest, therefore, must be determined on an arm's length basis using the cost-plus method. The service nature of forwarding loan funds is to be regarded as the primary focus. In the opinion of the tax office, the FinCo would not be considered a bank, but an agent. The tax office considered the interest rate on the intercompany loan to be non-arm's length (that is, too high) and reduced the interest payable in Germany. At the same time, the German company took out loans from banks which, although bearing lower interest than the intercompany loan, were secured by guarantees. In the first case, a Dutch finance company (FinCo) granted an interest-bearing unsecured loan to its German related or associated company.
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