Tax - The One Pager: guidelines on documentation of outbound loans

International tax / transfer pricing (“TP”) / group financing

In its decision I R 29/22 of 6 May 2026, the German Federal Tax Court (“FTC”) clarified key requirements for TP documentation of intercompany loans. The ruling reinforces Chapter X of the OECD TP Guidelines 2022, emphasizing the ex-ante perspective for the arm’s length test, the obligation to assess security arrangements under the applicable foreign law, and the possibility of risk compensation through higher interest rates.

The case A German parent company (30% shareholding) granted a loan and several top-up loans (Nachschussdarlehen) to a Ukrainian subsidiary for hotel construction. The interest rates were around 12% p.a. and no valuable securities such as a land lien were granted. Under Ukrainian law, it is not unusual to not receive valuable securities for loans relating to the real estate sector as the developer does not become the owner of the property until it is inspected by the authorities. Usually, as a security claims from contracts with third parties are assigned. The principal as well as any interest thereon was written off.

View of the tax authorities The tax authorities and the lower tax court took the view that the loan agreement did not meet the arm’s length principle as no security was granted by the Ukrainian subsidiary and the Ukrainian subsidiary did not pay any interest (ex-post). Therefore, the write-off of the principal as well as the interest thereon by the German parent company was not recognized for tax purposes. The profit of the German parent company was increased under the regime of the German Foreign Tax Act (AStG).

Ruling The FTC held that even if no security has been granted, the loan agreement may meet the arm’s length principle. The tax authorities and the lower tax court failed to determine whether such security is customary under foreign law. Furthermore, a missing security may be compensated by a higher interest rate (risk compensation). The non-payment of interest is also no reasoning for non-compliance with the arm’s length principle as a loan agreement must always be analysed for tax purposes at the time it was agreed (ex-ante perspective, Sec. 1 (3) sentence 4 AStG). Furthermore, it was stated that the protection of an initial investment may be considered as an economic reason for a top-up loan and even a third party may grant a loan to protect such investment. As a result, the case was referred back to the lower tax court for a new ruling.

Key take-aways German outbound loan agreements should be well documented for transfer pricing purposes in accordance with Chapter X of the OECD TP Guidelines 2022 and the German Administrative Guidelines. Such documentation should be made at the time of the loan agreement (ex-ante) and should include:

1. Local law analysis for possible security arrangements and reasoning why such security was not granted.
2. Comprehensive analysis of all loan conditions from an ex-ante perspective (creditworthiness, purpose, amount, term).
3. Top-up loans: economic reasoning such as protection of initial investments and project success prospects.
4. Determination of arm’s length interest rate considering market for comparable loans (CUP method) and risk compensation through interest rate mark-up.