German Federal Tax Court Rules in Favour of Taxpayer in Transfer Pricing Cases on Intercompany Financing Transactions

In two recent landmark decisions, the German Federal Tax Court has reaffirmed its preference for applying the (internal or external) CUP method for the determination of intra-group interest rates if comparables are less than ideal. While the creditworthiness of the borrower should be regarded on a stand-alone basis, the effects of the group affiliation may need to be considered. The burden of proof regarding the arm’s length nature of intra-group interest rates rests with the tax authorities.