In its decision of 6 July 2011 (case reference: 6 K 82/09), the Tax Court of Lower Saxony had to deal with the anti-debt pushdown rule under the old German thin capitalization rules that were in effect until 2007.
The claimant in the case, a German top holding company, acquired a German shelf company (NewCo) and made a cash injection of 93.8 million Euro into the capital reserve of NewCo. NewCo subsequently acquired several subsidiaries that had been held indirectly by the claimant. The cash injection into NewCo was financed by a loan granted by the claimant’s nonresident parent company. The tax authorities denied the deductibility of the interest expense to the parent company on the basis of the anti-debt pushdown rule in effect at the time. Under that rule, interest expense was nondeductible if a loan was granted by a related party (or secured by a related party) for the purpose of acquiring shares from a related party.
In the proceedings, the claimant argued that the funds were not used to acquire a corporation but rather to increase the equity of a corporation. Indirect acquisitions, according to the claimant, were not within the scope of the anti-debt pushdown rule. The court agreed because the wording of the rule did not allow its application to situations in which the shares in the subsidiary were only acquired indirectly via a subsidiary which had received the funds as equity.
The tax authorities have appealed the decision to the Federal Tax Court (case reference: I R 55/11).
Affected taxpayers that have set up similar structures in the past should keep their assessments open in order to benefit in the event the Federal Tax Court rules for the taxpayer.
If you have any questions, please contact the authors of this article at gtln@deloitte.de or your regular Deloitte contact.
