Banking privilege for group financing companies until the 2020 assessment period

When determining the trade income of credit institutions, debt interest that must be added in accordance with Section 8 No. 1 letter a sentence 1 of the German Trade Tax Act (GewStG) is generally disregarded as long as the assets from banking transactions and the acquisition of monetary claims outweigh those from other transactions (Section 35c (1) No. 2 letter e GewStG in conjunction with Section 19 (1) and (2) of the German Trade Tax Ordinance (GewStDV)). This so-called banking privilege takes into account the high level of debt capital used by credit institutions due to their business model and prevents these companies from being particularly affected by the addition of debt interest to trade tax. In cases up to the 2020 assessment period, it may also apply to group financing companies that were not (yet) excluded from the benefit by reference to the list of exceptions in Section 2 (1) of the German Banking Act (KWG) in the relevant version of Section 19 GewStDV (old version).

However, this changed fundamentally for assessment periods from 2021 onwards, as Section 19 (1) sentence 1 GewStDV was supplemented by Section 2 KWG by the Fifth Ordinance Amending Tax Regulations of June 25, 2020 (German Federal Law Gazette I 2020, 1495), and thus, among other things, group financing companies were excluded from the group of beneficiaries of the banking privilege. The question of whether a group financing company is essentially a company focused on money and credit transactions – i.e. actual banking transactions – or whether it must meet additional criteria in order to claim the banking privilege, which is therefore only relevant for open ‘old cases’, was clarified by the German Federal Fiscal Court (BFH) in its decision of May 21, 2025 (case no. III R 6/24).

In the disputed year 2012, the wholly-owned subsidiary (GmbH) of a holding company within the group was responsible for its financing. The limited liability company provided financial and cash management services to other group companies, distributing incoming funds to affiliated group companies (cash pooling); it also held investments within the group as an intermediate holding company. It did not generate any output turnover from active operations, but did generate other operating income in the form of foreign exchange gains from realised exchange rate transactions and other income from costs passed on and its status as a controlling company. Following a tax audit, the tax office refused to apply the banking privilege when determining the 2012 trade income and added the total fees for debts. This was contradicted by the Fiscal Court and finally by the BFH.

In its opinion, under the old legal situation applicable until the 2020 assessment period, banking privileges should be granted to a company that conducts banking transactions on a commercial basis or to the extent necessary in a commercially organised business operation and meets other necessary criteria. Since banking transactions are, in particular, credit transactions in the form of granting cash loans and acceptance credits (Section 1 (1) sentence 2 no. 2 KWG), the financing activities undertaken by the limited liability company within the group are also considered as such. Banking transactions are considered to be conducted on a commercial basis if they are designed to be of a certain duration and are carried out with the intention of making a profit or in return for payment. The BFH defines the time component as ‘indefinite’ or if similar loan agreements designed for a longer period of time are repeatedly concluded over a period of several years.

The question of the intention to make a profit or remuneration must be answered on the basis of the civil and supervisory law understanding of the characteristic of ‘commerciality’. This is because the relevant regulatory area of the KWG applicable via the GewStDV primarily determines the persons subject to supervision by the German Federal Financial Supervisory Authority with the requirements to be met and the rules to be observed. Contrary to the opinion of the Fiscal Court, the BFH thus expressly clarifies that the existence of the intention to make a profit within the meaning of Section 15 (2) of the German Income Tax Act (EStG) is not decisive. Previously, the Fiscal Court had bindingly determined that, according to the agreements concluded for the same periods, the GmbH's credit balances earned lower interest than the credit lines it granted and that the GmbH therefore achieved a positive result from its actual banking transactions. However, by referring to Section 15 (2) EStG, the Fiscal Court had already considered higher requirements to be fulfilled than those deemed necessary by the BFH for the concept of commerciality within the meaning of Section 1 (1) KWG. The BFH therefore affirmed the commercial nature of the GmbH and considered the requirements for claiming the trade tax banking privilege to be fulfilled.


 

Notice: 

With its current decision, the BFH confirms its previous case law on the application of banking privilege to group financing companies up to the 2020 assessment period (BFH, decisions of November 30, 2023, case no. III R 55/20 and of December 6, 2016, case no. I R 79/15), but also develops it further. In particular, it answers the question of banking transactions carried out by group financing companies with the intention of making a profit not on the basis of the income tax provision in section 15 (2) EStG, but according to the civil and supervisory law understanding of ‘commerciality’ in section 1 (1) KWG. This broad view is to be welcomed for open, similar ‘old cases’.