Landmark rulings for Arm's lenght interest rates for intercompany loans in Germany

Introduction

In May 2021, the German Federal Fiscal Court (BFH) issued two landmark rulings on how to determine arm’s-length interest rates for intercompany and shareholder loans. These rulings have remained authoritative in the years since, and as of 2025, tax authorities, companies, and advisors in Germany continue to rely on them. Their significance lies in their direct impact on the tax treatment of intercompany loans.
A central aspect of these rulings is the clear preference for the Comparable Uncontrolled Price (CUP) method, while the cost-plus method was considered less appropriate. The rulings also underscore the fundamental importance of the arm’s-length principle in determining interest rates for intercompany loans. For tax advisors and corporate finance professionals, this means: a thorough credit risk analysis and detailed transfer pricing documentation are essential for the tax acceptance of your chosen interest rates.

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First ruling: Arm's length interest rates for group loans (BFH case no. IR 4/17)

This case concerned a loan from a Dutch financing company to its German sister company. The German company had obtained secured bank loans at lower interest rates than the internal loan. Nevertheless, the German tax authority reduced the interest expense, considering the rate as excessive and not at arm’s length. The authority applied the cost-plus method instead of the CUP method, arguing that the financing company acted as an agent rather than a bank.
The Fiscal Court of Münster upheld this decision. However, on appeal, the German Federal Fiscal Court ruled that the CUP method must be given priority when determining arm’s-length interest rates for intercompany loans. Furthermore, the creditworthiness of the borrowing entity should be assessed on a stand-alone basis, rather than using a group rating.

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Second ruling: Interest on a shareholder loan (BFH case no. IR 62/17)

In this case, a German company had three loans: a secured bank loan at 4.78% p.a., an unsecured vendor loan at 10% p.a., and an unsecured shareholder loan at 8% p.a. The tax authority considered the shareholder loan interest rate too high and only allowed a rate of 5%, based on the bank loan. The difference was treated as a hidden profit distribution, increasing the company’s taxable income.
However, the BFH ruled that a direct comparison with the bank loan was incorrect, as an unrelated third party would not grant a subordinated, unsecured loan on the same terms as a senior, secured loan. The legal subordination of shareholder loans, according to German insolvency law (§ 39 (1) No. 5 InsO), is irrelevant for transfer pricing purposes. The close relationship between group companies must also be disregarded. Actual agreements with third parties, such as the secured bank loan, must be adjusted to reflect the specific circumstances of related-party transactions before being used as comparables. The BFH thus aligned with the OECD Transfer Pricing Guidelines.

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Key Principles for Intercompany Loans

1. Comparable Uncontrolled Price (CUP) Method: When determining arm’s-length interest rates, the CUP method should always be considered before the cost-plus method. This applies to both secured and unsecured intercompany loans, regardless of whether they are granted by the parent company or another group financing entity.

2. Credit Risk Assessment: The creditworthiness of the individual group company-not the average credit standing of the group-is decisive. A group guarantee that is not supported by legally binding commitments from other group entities should only be considered if an external lender would attribute higher creditworthiness to the company than its stand-alone rating.

3. Subordination of Shareholder Loans: When determining the arm’s-length interest rate for an unsecured shareholder loan, the statutory subordination under German insolvency law does not preclude an adjustment of the interest rate to compensate for the lack of collateral.

4. External Comparability: An unrelated third party would not accept the same interest rate for a subordinated, unsecured loan as for a senior, secured loan. Therefore, a direct comparison of intercompany loans with bank loans is generally inappropriate.

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Further Guidance from the Rulings

The German Federal Fiscal Court clarified that the interest rate charged for an intercompany loan should correspond to the rate that would be agreed upon for a comparable loan between independent third parties. Key factors include the loan amount, term, type (e.g., fixed or variable rate), collateral, and the borrower’s creditworthiness.

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PRO TIP: Determining Arm’s-Length Interest Rate in Practice

When applying these principles, remember that interest rates published by the German Bundesbank alone are not sufficient to determine an arm’s-length interest rate for intercompany loans. Bundesbank rates reflect a virtually risk-free base rate and do not account for company-specific risk.
To determine the arm’s-length interest rate, it is essential to add an appropriate credit spread that reflects the individual borrower’s credit risk. Both the base rate and the credit spread are subject to fluctuations and may change from year to year depending on market conditions and the borrower’s financial situation. The Bundesbank publishes various interest rates, so it is important to select the rate that best fits the specific transaction. Alternatively, the risk-free base rate can be derived from government bonds, as implemented in the smartZebra database.
The arm’s-length interest rate is not static. Bundesbank rates fluctuate over time-meaning the base rate in 2023 may differ from that in 2024. The company-specific credit spread is also volatile and should be reassessed regularly. Therefore, it is crucial to determine the arm’s-length interest rate as of the specific date of the transaction. The smartZebra database allows you to select the relevant date for interest rate determination with daily precision.

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Conclusion

The BFH rulings from May 2021 provide clear guidance on how to determine arm’s-length interest rates for intercompany and shareholder loans in Germany. The CUP method takes precedence and should always be the first choice, while the creditworthiness of the individual company-not the group as a whole-must be assessed. These rulings offer important orientation for the tax treatment of intercompany loans and contribute to greater clarity and legal certainty.

For your practical work, remember: the arm’s-length interest rate consists of two components-a risk-free base rate and a credit spread. While the base rate can be derived from Bundesbank statistics or government bonds, determining the appropriate credit spread requires a thorough analysis of the borrower’s creditworthiness.

Since both components are subject to market fluctuations, the arm’s-length interest rate can vary from year to year. Specialized databases like smartZebra support you in this complex process by providing up-to-date market data and credit-specific factors with daily accuracy.

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Test the smartZebra database free of charge for five days. You will have full access to all features, and your trial will expire automatically at the end of the period. Simply request a trial account.

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