Transfer Pricing Methods (60 points)

a) On 1rst January 2020 Lufthansa AG gives an intragroup credit to its Italian subsidiary Alitalia SE with the terms of the credit as given below:

- 1.0 Mio. €.

- Nominal interest rate 1.75 %.

- Term: 10 years.

- No collaterals.

On 1rst March 2020 Lufthansa AG has issued a comparable corporate coupon bond listed on Frankfurt Stock Exchange. The bond’s current Yield to Maturity is amounting to 2.0%. Alitalia SE has a ABB issuer rating leading to a credit spread amounting to 45 basis points. (20 points)

(1) Give a sketch of the in-house transfer! (5 points)

(2) Which method of transfer pricing has to be used? What is the ALP interest rate for the credit? (15 points)

b) Lufthansa AG established a new affiliate in the Belgium: Beta Ltd, which is handling all legal issues of the group. Additionally, Beta is responsible for all activities related to the dividend payments of Lufthansa AG. Beta Ltd. has 200 employees. All risks of the activities are allocated to Lufthansa AG. (15 points)

(1) Give a sketch of the in-house transfers! (5 points)

(2) Which method of transfer pricing has to be used? Give reasons for your answer and explain the proceedings when applying the method!