In a recently published decision, the local tax court of Munich ruled on the application of the general anti-abuse rule in connection with debt restructuring (case reference 6 K 3941/06).
The case involved shareholders of a corporation that also held an interest in a partnership. The corporation had liabilities against the partnership and was in financial difficulties. The shareholders resolved a cash injection to the reserves of the corporation, which used the funds to repay its liabilities against the partnership. In a last step, the partners withdrew the funds from the partnership, so that the funds were ultimately returned to the shareholders/partners (cash “round tripping”). The tax authorities challenged the structure based on the general anti-abuse rule arguing that a taxable waiver of the receivable held by the partnership was actually intended.
The tax court of Munich rejected this view and confirmed the taxpayer’s position. According to the tax court, the taxpayer was free to finance its operations with debt or equity and, thus, could not be forced to fund the operations of the corporation by a waiver of the receivable rather than by an injection of new cash. The objective to avoid over-indebtedness and/or insolvency was considered a valid justification for the structure. Finally, the court ruled that the fact that the repayment of the liability to the partnership was resolved shortly after the capital injection but before the funds were actually paid into the capital reserves of the corporation was not sufficient to constitute an exception to the general principle that the taxpayer is free to finance its operations with debt or equity, since the resolution was necessary for the repayment of the liabilities under the corporation’s articles.
Taxpayers that intend to enter into similar transactions should ensure that they document sound business reasons for the structure because the tax authorities’ examination of such structures is typically very case-specific. Taxpayers also should be aware that the decision has become final so that no decision of the Federal Tax Court can be expected.
If you have any questions, please contact the authors of this article at gtln@deloitte.de or your regular Deloitte contact.
