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URL: http://www.deloitte-tax-news.de/german-tax-legal-news/lower-tax-court-ruleson-application-of-interest-deduction-limitation-for-two-tier-partnerships.html
24.03.2014
Lower tax court rules on application
of interest deduction limitation for
two-tier partnerships
The lower tax court of Cologne has ruled on the application of the
interest deduction limitation rules to a two-tier partnership
structure (10K 1916/12). The court disagreed with guidance issued
by the tax authorities in 2008.
The general interest deduction limitation rule in German tax law restricts the
deductibility of net interest expense to 30% of the tax EBITDA of a business. Interest
that is nondeductible under these rules may be carried forward and is available for use
in subsequent years. In guidance issued in 2008, the tax authorities set out their
position on how the tax EBITDA should be calculated for purposes of the interest
deduction limitation rule. The guidance states, in particular, state that a partnership
constitutes a business on its own for purposes of the interest deduction limitation and,
therefore, interest expense, interest income and the EBITDA must be calculated at the
level of the partnership and cannot be taken into account at the level of the partner in
the partnership. An exception to this rule would apply only in the case of a mere assetmanaging partnership.
The case involved a KG (limited partnership) that held various interests in other
partnerships. The KG used the income of the lower tier partnerships that was allocated
to its own income as a result of the tax transparency of the lower tier partnership to
determine the tax EBITDA and the amount of deductible interest expenses at the level
of the KG.
The lower tax court of Cologne agreed with the taxpayer, concluding that there is no
legal basis for the treatment described by the tax authorities in the 2008 guidance. A
partnership can have only one business for purposes of the interest deduction
limitation rule; in the case of multi-tier partnership structures, the EBITDA (and interest
expense/interest income) at the level of the lower tier partnership must be recognized
on a pro rata basis (interest percentage of the upper tier partnership in the lower tier
company) at the level of the upper tier partnership together with its own EBITDA (and
interest expenses/income).
The case is now pending before the Federal Tax Court.
Contact
Andreas Maywald | German Desk New York
Client Service Executive
[email protected]
+1 212 436 7487
www.deloitte-tax-news.de
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