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What applies to write-downs of loans within a group?


New uncertainties regarding the write-off of cross-border loans within a group: Two years ago, the legal situation seemed to have been clarified by the Federal Fiscal Court. Now, within one day, the Federal Constitutional Court and the Federal Fiscal Court itself have overturned two of these rulings. 

Initial situation
About two years ago, the German Federal Fiscal Court (Bundesfinanzhof, BFH) issued several rulings on the derecognition of an unsecured loan receivable within a group of companies from a foreign group company. In particular, in cases where the loan receivable is not collateralized, the BFH does not want to recognize the derecognition or write-off for tax purposes because it considers the lack of collateralization not to be customary for third parties. At the time, the decisions represented a new direction in case law and caused considerable uncertainty in corporate practice with regard to the structuring of intra-group financing relationships.

Decision of the Federal Constitutional Court
The Federal Constitutional Court (Bundesverfassungsgericht, BVerfG) recently upheld a constitutional complaint against one of the relevant rulings on the grounds that the BFH had failed to refer the matter to the European Court of Justice (ECJ). The decision taken by the BFH constituted an interference with the freedom of establishment, and the BFH had failed to sufficiently address the question of whether such a restriction was justified by overriding reasons in the general interest. In this regard, the ECJ had set out clear criteria which also had to be examined in the present case. Since such an examination had not taken place, the BVerfG overturned the decision and referred the matter back to the BFH. The BFH will presumably have no choice but to refer the matter to the ECJ. Further constitutional complaints on similar BFH rulings are pending and could also lead to a referral back.

Annulment of an ineffective ruling
Another ruling that dealt - with a similar result - with the write-off of intra-group loans was itself overturned by the BFH in a decision dated March 3, 2021. The reason for this is particularly piquant: the then Chairman of the First Senate had, after the judgment had been signed by all the participating judges, arbitrarily made changes to the draft judgment, but had not informed the other participating judges of this. This, as the BFH itself has now determined, is an incurable procedural defect which leads to the invalidity of the judgment. Thus, the oral proceedings on the case had to be reopened - with an uncertain outcome.

Following the latest developments, the legal situation with regard to the write-off of cross-border loans within a group is again largely unclarified. In particular, the very sweeping statement of the BFH, according to which a lack of collateralization is always not customary for third parties and therefore requires an off-balance sheet correction of the impairment pursuant to Sec. 1 of the Foreign Tax Act, is unlikely to stand up in this form. It is to be hoped that the European Court of Justice will deal intensively with this issue and issue guidelines on this subject that are equally valid for all EU member states.