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ARTICLE · 14 FEBRUARY 1995

004. German Thin Capitalization Rules - New Directive Interpreting Statute

KPMG Germany
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1. Introductory

To prevent foreign shareholders from draining off the earnings of their German subsidiaries in the form of interest on loans (or other compensation paid for debt capital), an anti-earnings-stripping provision was recently added to the German tax code (new sec. 8a of the Corporation Tax Act). For a summary of basic provisions, see section 11 below.

The German tax authorities have now issued a directive addressing questions of interpretation and application of the new thin capitalization rules for corporations. These rules apply to loans to German corporations from foreign shareholders or related persons from 1994 on. Transition provisions exist only for profit-linked loans made before 9 December 1992.

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