Hidden Equity
Intra-Group loan transactions are amongst those transactions that are most frequently discussed from a Transfer Pricing perspective. As an Austrian specificity, however, auditors regularly do not only focus on the arm's length character of the interest rate but place a particularly strong focus on whether the debt instrument might be re-qualified into “hidden equity” (leading to a loss of interest deductibility). Therefore, it should be clearly documented that unrelated parties would have granted debt financing under comparable circumstances.
The following indicate that no re-qualification into hidden equity should be made:
- Capital structure of the borrower
Whilst there are no statutory debt-to-equity ratios or thin-caps in Austria, this depends on the specifics of the company, such as industry standards, risk-assessment, start-up character, etc. An equity ratio of about 20% is regularly seen as appropriate.
- Clarity and transparency of the loan agreement
There should be a written agreement about the terms of conditions of the debt financing. Additionally, some documentation about the rating of the borrower should be available.
- Arm's length character of the terms and conditions
These include e.g. clear rules about the arm's length interest rate. If interest payments can be suspended, compound interest should be charged. Furthermore, a transparent repayment and interest payment plan should be drawn up based on the liquidity of the borrower.
These criteria should be assessed from an overall perspective at the time the loan is granted. For example, if a subsidiary is in a loss-making position for years and no turnaround is expected, the debt character of a loan might be challenged. A partial re-qualification is also possible.
Interest Rate
Concerning the interest rate, Austrian Transfer Pricing Guidelines are fully in line with the OECD Guidelines. The traditional comparable unrelated price method is generally seen as the preferred method. Factors such as repayment sum, maturity date, repayment dates, currency and securities need to be considered.
While practitioners regularly refer to the recent case law of the German Federal Court of Justice (May 18, 2021, I R 4/14; May 18, 2021, I R 62/14; June 09, 2021, I R 32/17),
these have not been implemented in the Austrian Transfer Pricing Guidelines. Hence, there is still some uncertainty as to the extent to which bank loans are considered comparable to intra-group financing.
In view of the current inflation, it should also be considered if loan agreements are still up to date. In the case of long-term agreements with fixed interest rates, early repayments or re-negotiations might need to be applied.
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