On the Interpretation of Section 4i EStG in Connection with Dutch Group Taxation (Federal Tax Court Ruling of 11 June 2026 – IV R 36/23)

By judgment of 11 June 2026 (IV R 36/23), the German Federal Tax Court (BFH) reversed a 2023 decision of the Fiscal Court of Münster on the application of Section 4i of the German Income Tax Act (EStG) on a cross-border financing. The question was whether Section 4i EStG applies to interest on a loan treated as special business expenses of a limited partner which is part of a Dutch tax group or fiscal unity (fiscale eenheid).

Facts and procedural history

The claimant, a German GmbH & Co. KG, had a Dutch limited partner, C BV, which was in turn wholly owned by another Dutch company, F BV. For Dutch tax purposes, the two companies were treated as a single taxpayer under the Dutch group taxation regime.

F BV granted C BV several loans under agreements concluded prior to 2015, which served to provide C BV with funds to capitalize the claimant in Germany. C BV paid interest on these loans to F BV, and the claimant deducted this interest as special business expenses (Sonderbetriebsausgaben) of C BV.

The tax authorities denied the deduction under Section 4i EStG, arguing that because of the Dutch group taxation regime, the interest expense effectively reduced the tax base in both jurisdictions, in Germany and the Netherlands.

The Fiscal Court of Münster disagreed. In its view, the intra-group loans are disregarded for tax purposes within a Dutch fiscal unity. Thus, the interest expense had no effect on the Dutch tax base, so Section 4i EStG did not apply (see Engelen/Licht, DB 2025, 74).

Decision of the Federal Tax Court of 11 June 2026 - IV R 36/23

The BFH disagreed with the lower court and held that the requirements of Section 4i EStG were met, so the interest deduction had rightly been denied.

According to the BFH, the interest paid by C BV qualified as special business expenses that reduced the claimant's German tax base. Crucially, these same expenses also reduced the Dutch tax base.

The BFH clarified that it does not matter which taxpayer benefits from the reduction abroad: Section 4i EStG does not require that the same taxpayer is entitled to the deduction in Germany and sees its tax base reduced abroad. According to the court, the economic effect is relevant. If the expenses lower the taxable result of a taxpayer abroad, this counts as a reduction under Section 4i EStG, regardless of the technical mechanism used under foreign law. This does not apply, however, where the expenses are simply not deductible or not taxable abroad.

Whether a foreign tax base was reduced is a question of foreign law, which the Fiscal Court must establish. Here, the BFH found that the interest payments were, at least indirectly, offset against the parent company's income within the Dutch fiscal unity, so the NL tax base was reduced. The BFH also saw no conflict with EU law and did not consider a referral to the CJEU to be necessary.

NL group tax regime

For Dutch tax purposes, the fiscal unity F BV did not realize any interest pick-up. C BV was included in fiscal unity with F BV as a fiscal unity is regarded as a single taxpayer, the loan and thus the interest charge are not recognized from a Dutch tax perspective at all. Since the GmbH & Co. KG was opaque for Dutch tax purposes, the fiscal unity F BV could apply the 100% Dutch participation exemption to all income, including capital gains, derived from its interest in the GmbH & Co. KG. Consequently, no interest income was realized for Dutch tax purposes, nor did the fiscal unity F BV face other adverse tax consequences.

While one may well regard the overall outcome of the BFH's decision as fair, it is nevertheless striking to see that the BFH concludes that interest charges on a loan that does not exist from a Dutch tax perspective apparently reduced the Dutch tax base.

For the purposes of applying Section 4i EStG, the key question is whether the broad scope attributed to the provision by the BFH is justified. Only if one adopts an economic interpretation of the concepts of a “tax base” (Steuerbemessungsgrundlage) and “reduction” (mindern), Section 4i EStG appears to result in a German interest deduction limitation in cases such as the present one. The economic interpretation adopted by the BFH may, however, be subject to critical review.

Interesting is also the interpretation of the Dutch fiscal unity regime for purposes of Section 4k EStG, which was introduced at a later stage as part of the ATAD 2 implementation. Unlike Section 4i EStG, the focus of Section 4k EStG is not on a reduction of the tax base in two jurisdictions, but on situations in which expenses are deductible in Germany without a corresponding taxable inclusion abroad.

As a final note, it is worth mentioning that since 2025, a GmbH & Co. KG is generally transparent according to Dutch tax law (except for certain fund structures). Specific fiscal unity measures determine that (an amount equal to) the interest income on the loan within the fiscal unity is added back to the Dutch tax base. Absent such rules, ATAD2 anti-hybrid measures would likely avoid German deduction without a corresponding Dutch pick-up (Section 4k EStG).

This article was written in collaboration with our colleagues Joost van Helvoirt and Arnold Hupka from Loyens & Loeff.