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Articles:

Possible abuse of tax planning schemes in the case of a contribution and corresponding repayment of a liability

14 April 2022

Roland Speidel, Certified Tax Advisor, Lawyer, Senior Manager, Department Tax & Legal |

In view of the possibility of abusive tax structuring schemes, the tax authorities are increasingly taking up the issue of mere intercompany charges, which also takes place in close temporal connection and entirely without any actual cash flow, and examining the actual content of the offsetting and the associated taxation.

In the case decided by the Düsseldorf Regional Tax Court in its ruling of December 22, 2021 (Case No. 7 K 101/18), a corporation had significant liabilities to its parent company, partly from loans and partly from intercompany charges. In 2011, the parent company made a contribution to the capital reserve of the subsidiary via the group' s internal intercompany accounting system.

On the same day, their liabilities to the parent company were derecognized in the amount of the contribution to the capital reserve. The tax office considered this to be a debt waiver from an economic point of view and therefore assumed a tax evasion in the form of an abuse of legal tax planning schemes pursuant to Sec. 42 of the German Fiscal Code (AO) and treated the contribution made in the amount of the non-recoverable portion as taxable income. This was upheld by the Düsseldorf Regional Tax Court.

Accordingly, due to the special facts and circumstances of the case, the prerequisites of an abuse of legal options for tax planning schemes pursuant to Sec. 42 of the German Fiscal Code (AO) are met. The appropriate way of eliminating the over-indebtedness would have been a debt waiver. The Düsseldorf Regional Tax Court admittedly does not dispute the argument put forward by the company that the replacement of debt capital by equity capital is covered by the shareholder's freedom of financing. However, the abuse of the tax structuring results from the combination with the same-day repayment of the liabilities and the entire processing of the accounting transactions.

The purpose of the capital contribution was not to finance the subsidiary. Rather, the contribution, which was only executed in the accounting records, and the subsequent repayment of the liabilities merely served to avoid the tax consequences of a waiver of the undisputedly essentially non-recoverable receivables. There were no evident non-tax reasons for this tax planning. The immediate sequence of the two transactions and the fact that they were only processed for accounting purposes made it impossible, as planned, to establish an economically appropriate capitalization of the subsidiary. This was also not necessary, as it had participated actively in economic life for the last time in 2010 and had been in liquidation since then.

Note: The court ruling shows that, on the basis of the shareholders' freedom of financing, which is not to be questioned, arrangements to be made must be approached with increased caution and subjected to special prior examination. The distinction between this and abuse of legal tax planning schemes must always be considered on a case-by-case basis and depends on a number of factors. The BFH shall have the opportunity to assess the particular circumstances of the case and to provide further legal certainty in such cases in the context of the appeal (Case No. I R 11/22).