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Does interest on transitory loans have to be added back for trade tax purposes?

Within the framework of determining trade tax, the German Trade Tax Act provides for the adding back of debt service charges in some cases. According to the wording of Section 8 no. 1 of the Trade Tax Act (Gewerbesteuergesetz, GewStG) this includes all debt service charges. However, the extent to which interest on transitory loans also has to be covered is questionable under this provision. The Federal Fiscal Court (Bundesfinanzhof, BFH) recently examined this issue within the scope of a ruling from 17.7.2019.

Issue – Ship financing

The case in question was about the purchase of a ship by the company T. To finance this, the vendor had taken out a loan with a bank at that time. T did not directly assume the loan obligation as a result of the purchase. Instead, the parent company M assumed the loan and became the liable party for the loan. Furthermore, A took out a working capital loan with the bank. This was consistent with the business purpose of A whose commercial activities consisted in taking out loans with the bank and passing them on to the subsidiary company T. When calculating the trade tax, the local tax office added back the interest expense, as debt service charges, to the trading profit in accordance with Section 8 no. 1(a) GewStG. However, the claim filed by A was dismissed by the tax court, which reasoned that, following the change to the law, add-backs were not restricted to interest on permanent debt and that transitory loans likewise had to be added back to the trading profit.

Not transitory loans

The BFH judges ruled, on 17.7.2019, that the interest indeed had to be added back to the trading profit, however, the case in question did not involve transitory loans. The judges based their ruling on the conditions that had previously been specified for transitory loans in BFH case law. Accordingly, a transitory loan, in particular, has to be taken out in the interest of others. Given that the business purpose of the company consisted in taking out loans and passing them on to a subsidiary company, the parent company was also acting in its own interests. Consequently, there was no transitory loan.

Please note: It remains unclear whether or not the exception with respect to the add-backs does indeed apply to transitory loans. The BFH was able to leave this open in the case in question, as it was of the opinion that a loan that has been passed on is not a transitory loan.

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