Tax - The One Pager: Market Development/Penetration Grant for Distressed Entities

In two judgments dated May 20, 2026 (IV R 37/23 – published; IV R 4/26 – parallel decision, unpublished), the Federal Fiscal Court (BFH) issued fundamental rulings on the tax treatment of so-called market development grants to foreign group companies. The decisions concern the same corporate group and the same set of facts—the payment of a subsidy amounting to millions to the French parent company within a franchise concept. They are of considerable practical significance for international corporate groups with distressed sales subsidiaries abroad, particularly with regard to the distinction between business expenses and withdrawals, as well as transfer pricing.

Key Findings of the Decisions

The Federal Fiscal Court (BFH) has ruled that a market development grant to a distressed group-affiliated sales company abroad (distressed entity) may be business-related within the meaning of Section 4(4) of the German Income Tax Act (EStG) and consistent with the arm’s-length principle if it serves to secure and increase license revenues. A withdrawal within the meaning of Section 4(1), second sentence, of the German Income Tax Act (EStG) is ruled out without the strategic entity having to contribute capital directly. At the same time, an income adjustment under Section 1 of the German Foreign Tax Act (AStG) is not applicable. The grant must be capitalized as the acquisition cost of an intangible asset similar to goodwill and amortized over its useful life (here: 15 years). The Federal Fiscal Court (BFH) expressly bases its approach on the strategy provider’s functional and risk profile, referring in doing so to the administrative principles on transfer pricing (Federal Ministry of Finance letter dated July 14, 2021, Federal Tax Gazette I 2021, 1098, para. 3.31 et seq.).

Requirements According to the BFH 

• Proof of profitability: Demonstration of economic viability based on projected revenue figures. If targets are not met: Reservation of the right to require increased market development efforts—no automatic repayment.
• Repayment obligation upon cessation of operations: Pro-rata repayment of the grant in the event of premature cessation of business operations, based on a 15-year obligation to continue operations.
• Equity Commitment by the Holding Company: A guarantee by the holding company to provide the sales company with (additional) equity capital as needed.
• Ex-ante Projection: Preparation of a projection of the franchise/license fees expected over the 15-year term. In the event of a dispute, the projected revenues (nominal and discounted at 5%) significantly exceeded the grant.
• Integration into an Overall Restructuring Plan: The grant must be part of a coherent, documented restructuring plan for the foreign distribution companies.
• Demonstration of the company’s own business interest: The company’s own business interest (securing and increasing licensing revenue) must be demonstrable and must not take a back seat to a mere shareholder interest.

Key take-aways 

• Classification of Intra-Group Subsidies: The decision strengthens the position of strategic stakeholders (IP owners, licensors) who support distressed foreign sales subsidiaries through subsidies rather than capital contributions. The subsidy may also be channelled through an intermediate company. The case law should apply to both inbound and outbound cases as well as to purely domestic situations. 
• Documentation Requirements: Intra-group grants should be supported from the outset by written agreements, robust ex-ante projections, a documented restructuring plan, and timely transfer pricing documentation (see VWG-VP, para. 3.31 et seq.).
• Distinction from Loans: In the case of a non-repayable grant, collateral is neither required nor possible. Anyone granting a loan instead of a grant must separately demonstrate that the terms are arm’s-length. The risk of the tax authorities reclassifying the grant as a loan should be mitigated through precisely tailored contractual documentation.
• Caution Regarding § 42 AO / Cash Circles: In the case of circular cash flows, the tax authorities may assert an abuse of legal form. The contract must always demonstrate a genuine economic purpose and a substantial use of funds by the recipient (Munich Fiscal Court, Oct. 27, 2009 – 6 K 3941/06; Dusseldorf Fiscal Court, Dec. 22, 2021 – 7 K 101/18).