Hornbach-Baumarkt v Finanzamt Landau: German Transfer Pricing Legislation Is Compatible with Freedom of Establishment

03 July 2018
Author: JHA

The CJEU concluded in Hornbach-Baumarkt v Finanzamt Landau (C-382/16) that German legislation taxing a guarantee given without corresponding consideration for loans incurred by non-resident subsidiaries is not in breach of the freedom of establishment.

Hornbach, a German company, gave its Dutch subsidiaries a guarantee for their loans, but did not charge them any consideration. The German tax authorities took the view that unrelated third parties would have agreed on remuneration for the guarantees, and decided to increase the income of Hornbach by the presumed remuneration amount and tax it accordingly.

The CJEU held that this approach was a restriction on the freedom of establishment as the deemed profit increase and corresponding tax charge would not have been applied if the loan guarantee had been given for a German company. However, the CJEU further held that this restriction was justified based on the need to maintain the balanced allocation of power to tax between Member States. Allowing companies resident in a Member State to transfer their profits (in the form of unusual or gratuitous advantages) to companies in other Member States and with which they had a relationship of interdependence may undermine such balanced allocation. This was the case in the present scenario, and the German legislation permitted the exercise of the power to tax. Nonetheless, the CJEU noted there was potentially a commercial justification in the present case for granting a guarantee gratuitously, since Hornbach was a shareholder in the Dutch borrowers. The CJEU added that it was for the referring court to determine whether Hornbach could provide a satisfactory commercial justification for the gratuitous guarantee. 

This article appears in the JHA June 2018 Tax Newsletter, which also features:


  1. Fidelity Funds: Danish Withholding Tax on Dividends Breaches EU Law
  2. A/S Bevola Applies Marks & Spencer to the Losses of a Foreign Permanent Establishment
Return to List of Articles by UK Lawyers on Tax Disputes, Tax Litigation, HMRC Tax Appeal Return to Listings
Left Button on Tax Dispute & Tax Litigation Lawyers in London

Our Insights

Right Button on Tax Dispute & Tax Litigation Lawyers in London