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July 25, 2023

German Ministry of Finance proposes interest-rate limitation rule

  • On 14 July 2023, the German Ministry of Finance published the draft of the Growth Opportunities Act.
  • In part, the draft bill proposes an interest-rate limitation rule to restrict the deduction of interest expenses in business relationships between related parties in certain situations.
  • If no "escape clause" applies, interest expenses are not deductible to the extent that the agreed interest rate exceeds the maximum interest rate defined by law.
  • This Alert summarizes the key aspects of the proposed interest-rate limitation rule and the relevant background of this development.

Executive summary

On 14 July 2023, the German Ministry of Finance (MoF) published the draft of the Growth Opportunities Act, which would constitute the biggest corporate tax reform in Germany since 2008 (see EY Global Tax Alert, German Ministry of Finance surprises with draft bill for biggest corporate tax reform since 2008, dated 18 July 2023). In part, the draft bill proposes an interest-rate limitation rule that is included in the coalition agreement dated 24 November 2021 between the three political parties forming the current German government.

This rule would deny deductions of interest expenses paid to related parties to the extent the interest rate at issue exceeds a maximum interest rate defined by law. The maximum interest rate is the base interest rate according to the German Civil Code (currently 3.12%, but updated every six months) plus 200 basis points. The proposed rule offers two alternative "escape clauses" that would allow the application of a higher (arm's-length) interest rate, however.

The proposed rule represents a further attempt by the German legislature to limit the interest-expense deduction of a borrower in an intercompany financing transaction with an affiliated lender with no or low substance. Previous efforts to limit these expense deductions either failed in the legislative process (see EY Global Tax Alert, Germany publishes draft ATAD implementation law, dated 12 December 2019) or were contradicted by jurisprudence of the German Federal Fiscal Court (see EY Global Tax Alert, German Federal Fiscal Court ruling contradicts position of German Ministry of Finance on Guidance on Financing Structures, dated 21 October 2021).

Detailed discussion

As stipulated in the explanatory notes to the draft bill, the German legislature acknowledges that under case law of the German Federal Fiscal Court, the arm's-length interest rate for cross-border loans is generally determined based solely on the financial strength of the borrowing entity. According to the German MoF, this results in tax structuring opportunities to shift profits to low-tax foreign countries. Hence, the introduction of an interest-rate limitation rule is proposed to prevent arrangements involving lending entities without substance. This would limit the deduction of interest expenses in such cases to a "reasonable" amount in the view of the German legislature.

According to the proposed rule, interest expenses are not deductible to the extent that they are based on an interest rate that exceeds the maximum interest rate, defined as the base interest rate according to the German Civil Code plus 200 basis points. The German Central Bank publishes the base interest rates on a bi-annually basis (on 1 January and 1 July). As of 1 July 2023, the current base interest rate amounts to 3.12%, resulting in a maximum interest rate of 5.12%.

The proposed rule only applies in business transactions between related parties as defined in the German Foreign Tax Act (FTA) and covers cross-border and domestic intercompany financing transactions.

Two alternative "escape clauses" are available that would allow the application of a higher (arm's-length) interest rate. First, if the taxpayer can demonstrate that both the lender and, in the case of a group of companies, the ultimate parent company could only obtain the funds (with otherwise equal conditions) at an interest rate higher than the maximum interest rate defined by law, the maximum interest rate shall be deemed to be the interest rate these parties could have obtained in the most favorable case.

Second, the interest-rate limitation rule would not apply if the lender were engaged in a "substantial economic activity" in the state in which it has its registered office or management (substance exception). Regarding the interpretation of the term "substantial economic activity" the draft law explicitly refers to the German controlled foreign company (CFC) rules in the FTA. These CFC rules were amended in 2021 through the implementation of European Union (EU) Anti-Tax Avoidance Directive (ATAD) Implementation Law.1

To fulfill the "substantial economic activity" requirement, the lender must have appropriate operating substance and human resources necessary for the activity. The requirement is to be met in a qualitative, not quantitative way. Moreover, the lender's personnel must be qualified and perform the activities independently and autonomously; outsourcing of activities is viewed negatively with regard to qualifying for the exception.

It should be noted that the substance exception does not apply if the lender is resident in a jurisdiction that is not obliged to provide administrative assistance to Germany in accordance with the OECD standard for transparency and does not ensure effective exchange of information upon request.

Based on the current draft bill, the proposed interest-rate limitation rule will apply from 1 January 2024 onward and does not grandfather existing financing arrangements. The draft bill is scheduled to be discussed within the entire government in mid-August. On this basis, a legislative process could be completed by end of 2023.

The effect of the rule should be limited to denying the "excessive" portion of interest, and not lead to recasting the debt into equity, nor to a withholding tax obligation.


Potentially affected taxpayers should note the proposed introduction of an interest-rate limitation rule and closely monitor further developments during the legislative process.


For additional information with respect to this Alert, please contact the following:

Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft

Ernst & Young LLP (United States), EMEIA Transfer Pricing Desk, New York

Ernst & Young LLP (United States), German Tax Desk, New York

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor



1 It should be noted that administrative draft guidance published on 19 July 2023 is currently subject to a public consultation process.


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