Direct Tax
Germany
Banking privilege pursuant to Section 19 (1) Trade Tax
Ordinance applicable to group finance company
December 2015
Local tax court of Hamburg, decision of 28.08.2015, 6 K 285/13 (appealed)
Taxpayers are generally subject to Corporate Income Tax (CIT) and, if they
maintain a permanent establishment in Germany, Trade Tax (TT). The TT
base is derived from the CIT base, except that certain expenses are partially
added-back to the TT base and that certain income items are (partially or
fully) deducted from the TT base. The TT add-back rules apply in particular to
interest expenses, of which 25% are generally added-back as non-deductible
expenses. There can be no doubt that the application of the add-back rules to
banks and financial institutions would inevitably result in prohibitive (tax)
costs for the German financial industry. For this reason, the German
legislator introduced the so-called "banking privilege", which basically
exempts interest expenses incurred by banks and financial institutions from
the add-back mechanism subject to certain requirements. There was
considerable legal uncertainty in the past as to whether the "banking
privilege" can also be claimed by group finance companies. In its decision
dated 28 August 2015, the local tax court of Hamburg concluded that group
finance companies can claim the "banking privilege" irrespective of whether
they obtained a banking permit beforehand. The German tax administration
appealed against the decision, which means that the case will be reviewed by
the Federal Tax Court.
In the case at hand, a German Finance Company which exclusively issued loans to
other group companies ("FinCo") argued that interest expenses incurred on its
refinancing loans should not be subject to the TT add-back rules due to the
"banking privilege". The responsible tax office refused to apply the "banking
privilege" and reassessed FinCo. FinCo appealed against the reassessment and,
upon receipt of the rejection notice, filed court action. The local tax court of
Hamburg ruled in favor of FinCo:
Our Expertise
Tax
1. The tax court held that FinCo qualifies as a credit institution within the meaning
of Section 1 (1) of the German Banking Act (GBA). According to this provision,
financial institutions are undertakings which conduct banking business
commercially or on a scale which requires commercially organized business
operations. The fact that FinCo had not applied for and thus had not received a
banking permit pursuant to Section 32 GBA from the Federal Financial
Supervisory Authority (BAFIN) beforehand was deemed to be irrelevant. This
conclusion is consistent and in line with preceding case law of the Federal Tax
Court (decision I R 23/02 dated 16.10.2002).
2. However, a company meeting the requirements for a credit institution in terms
of Section 1 (1) GBA may still be excluded from the definition of "credit
institution" if the requirements of Section 2 (1) GBA are fulfilled. According to
Section 2 (1) No. 7 GBA, a company is deemed not to be a credit institution if it
conducts its banking business solely with parent undertaking or with their
subsidiaries or affiliated undertakings ("Intragroup Exemption"). Since, in the
case at hand, FinCo exclusively acted as a group finance company the
fulfillment of the requirements of the Intragroup Exemption was not in dispute.
Still, the local tax court held that the Intragroup Exemption did not prevent
FinCo from claiming the "banking privilege", inter alia because the "banking
privilege" only refers to Section 1 (1) GBA and not to Section 2 (1) GBA. In this
regard, the decision of the local tax court of Hamburg may contradict the ruling
of the Federal Tax Court dated 16 October 2002 (I R 23/02), in which the
Federal Tax Court held that the exception pursuant to Section 2 GBA "has to
be considered when determining whether a company qualifies as a credit
institution in terms of Section 1 (1) GBA".
It should be noted that the responsible tax office appealed against the decision of
the local tax court of Hamburg (reference BFH I R 79/15). It thus remains to be
seen whether the Federal Tax Court will ultimately maintain the decision of the first
instance.
For further information, please contact:
Dr. Stephan Georg Behnes
E-Mail: stephan.behnes
@bakermckenzie.com
Dr. Christian Port
E-Mail: christian.port
@bakermckenzie.com
Dr. Philipp Jost, LL.M.
E-Mail: philipp.jost
@bakermckenzie.com
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