The Supreme Tax Court has held that a parent may write a subordinated loan to a subsidiary down to its fair market value calculated on the same lines as for an equity investment.
The case before the Supreme Tax Court concerned a loan made by a parent to its subsidiary. The subsidiary suffered losses, which forced the parent to subordinate the loan and to suspend the interest charges and repayment obligations until the subsidiary had recovered financially. Had the loan not been subordinated, the subsidiary would have been insolvent and obliged to file for receivership. The parent owned the premises and other fixed assets of the subsidiary without having any other particular function, and this gave the business the status of being "divided" between two entities. This concept of German tax law means that business valuations have to take both units into account, at least to the extent of reflecting the "business importance" of the one for the other.
