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July 23, 2021

German Ministry of Finance issues new guidance on financing structures

Executive summary

On 14 July 2021, the German Ministry of Finance (MoF) issued the Administrative Principles regarding Transfer Pricing (AP TP). This guidance includes numerous relevant changes from a transfer pricing perspective (see EY Global Tax Alert, German Ministry of Finance issues new Administrative Principles regarding transfer pricing, dated 23 July 2021). In addition, the tax authorities have again taken a position regarding intercompany financing originally issued at the end of 2019 within the first draft of the German implementation law of the European Union Anti-Tax Avoidance Directive (ATAD) (see EY Global Tax Alert, Germany publishes draft ATAD implementation law, dated 12 December 2019), but later dropped from the bill.

The guidance provides that the acceptable interest margin for a foreign financing company is limited to the current risk-free market return unless the financing company is “able and authorized” to control the financial investment and bear the corresponding risks. It seems reasonable to assume that a financing company with only limited substance and people functions will not be considered to meet this requirement in the view of the tax authorities. According to the guidance, these principles apply retroactively in all open cases.

Given that a very similar concept was initially proposed in the ATAD implementation law but subsequently dropped by the legislator, it is rather surprising that the tax authorities now seek to achieve similar results through guidance. It is anticipated that this question will be subject to a high level of dispute during tax audits and will likely have to be resolved in court.

Detailed discussion

If a financing entity (and any other “intermediary” in an intercompany “financial relationship”) provides funds to a related party but does not have the capability and authority to control the financial investment and to bear the associated risks, the compensation for the provision of funds is limited to a risk-free return according to the guidance. In such a case, the appropriate compensation for the financing company is generally to be determined based on the cost-plus method on the basis of substantiated and directly attributable operating costs. Refinancing costs are explicitly excluded from the cost base and have to be considered with a risk-free return within the calculation of the appropriate remuneration of the financing company.

The rule would also apply if a loan was granted by an equity-financed intercompany lender. The guidance includes an explicit example in which a fully equity financed financing company provides a loan to a German resident related party. According to this example, the deductibility of interest charged is limited to the costs incurred by a fully equity financed financing company, unless the financing company actually controls the investment and bears the corresponding financial risks.

The guidance does not specify the requirements necessary to exercise “control over the investment” and what is meant by the “absorption of corresponding risks. Therefore, it is generally unclear what level of activities and documentation is required in this regard, but it should be expected that financing companies with rather limited substance and activity may not qualify in the eyes of the tax authorities.

Even though guidance issued by the German tax authorities is not binding for taxpayers and courts, it illustrates the interpretation of the law by the authorities and is binding for the tax authorities (e.g., within tax audits). Hence, the positions taken are of significant practical importance for taxpayers.


Since the guidance is considered a clarification of the arm’s-length principle by the tax authorities, it will be applied retroactively in all open cases. In light of the fact that a very similar concept was proposed in the first draft of the ATAD implementation law, but then no longer pursued by the legislator, it appears at least doubtful whether this is indeed a clarification only. Given the obvious controversy risk, taxpayers should carefully review whether existing financing structures could fall within the scope of the guidance and whether an interest deduction in Germany could, at least according to the guidance, be denied based on these principles.

Moreover, it is generally strongly recommended to disclose a deviation from official guidance when filing their tax returns.


For additional information with respect to this Alert, please contact the following:

Ernst & Young GmbH

Ernst & Young LLP (United States), German Tax Desk, New York

Ernst & Young LLP (United States), EMEIA Transfer Pricing Desk, New York