Germany
Stefan Ditsch
PwC
Germany
Despite a quiet few years of tax law change since the 2007
reforms, Stefan Ditsch of PwC argues that taxpayers have been kept
busier than ever with a number of tax rulings and the issuance of
several decrees affecting how business is done in Germany
The quiet before the storm? After the tax law changes in 2007, the
German law maker has been rather reserved since then in coming up with
groundbreaking tax law changes. Based on recent statements the
government seems not to have respective plans under discussion for
corporate taxpayers. However, this does not mean that the German tax
courts has been inactive and also as an usual procedure the Ministry of
Finance has been issuing decrees so that in the following some notable
2011 tax highlights can be presented.
Commission objects to enhanced loss relief for troubled companies
Generally, companies forfeit remaining loss carry forwards if more
than 50% of their share capital changes hands over a five-year period.
If the change is between 50% and 25%, the loss is forfeit in proportion
to the change. This rule applies to direct and indirect changes in
ownership. Its purpose is to curb dealings in tax loss companies. In
2009 in a reaction to the economic crisis, the government introduced a
temporary exemption for share acquisitions to enable corporate recovery.
This exemption applied retroactively to all acquisitions from January 1
2008 and was later made permanent. Its stated objective is to
facilitate the preservation of the business in a substantially unchanged
form of a company in difficulties. Companies taking advantage of it
must still be in business on the date of the share transfer and not
change the nature of their business activity for the next five years.
They and their shareholders must also demonstrate commitment in one of
three ways – a formal shop agreement with the employees on job
preservation, maintaining the average wages bill for the next five years
at no less than 80% of the average for the previous five, or with a
capital injection of not less than 25% of existing net assets.
The European Commission decided in Spring 2011 that this exemption
from the normal loss forfeiture rule is unlawful state aid. Its main
objection is that the inducement is available to all companies in
trouble, and not merely to those who actually need it. Its press
announcement implies that it might have accepted a system of individual
exemptions subject to its individual approval on the bases of minimising
competition distortion and medium turn viability of the business. It
has ordered Germany to recover any aid already paid out (reduced tax
from offset of an otherwise forfeit loss) and has asked for a list of
amounts and beneficiaries. The finance ministry warned beneficiaries of a
possible repayment obligation and suspended the exemption pending the
Commission's decision. However, the decision has been contested by the
German government before the ECJ. It has also to be noted that in a
recent tax court decision the judge did not follow the EU decision and
the case will now be brought in front of the Supreme tax court.
Real estate transfer tax on share acquisitions unconstitutional?
Real estate transfer tax is a stamp duty levied on property sales at
the rate of 3.5% of the consideration. However, it is also levied on
various other ownership transfers with a similar – direct or indirect –
effect, including the accumulation of at least 95% of the shares in a
property-owning company in a single hand. In this case, though, the tax
is levied on one of a set of specific formulae – for different types of
site, a built up commercial property at 12.5 times its annual rentable
value – given that the consideration for the indirect transfer of
ownership in the property is inseparable from that for the rest of the
share transfer. The same formulae were also applied when taxing
transfers of property by gift or inheritance, but were held in that
connection in 2006 by the Constitutional Court to be too arbitrary to
meet the constitutional requirement of like treatment of like
circumstances. The main argument of the court at that time was that the
formulae could lead to values varying between some 20% and "over 100%"
of the present value of the property and thus could not ensure that
similar transfers were taxed in an even remotely similar way. However,
the judgment allowed continued application of the Inheritance Tax Act up
to December 31 2008 in its then form to give the government time to
make the appropriate amendments.
At the time, it was widely assumed that the changes would also be
carried over into the Real Estate Transfer Tax Act; in the event, though
that act was left as it stood. The Supreme Tax Court is now faced with a
case brought by a taxpayer, claiming on the basis of the Constitutional
Court's 2006 judgment that the present tax on share transfers of
property-owning companies is unconstitutional and cannot be levied.
Interestingly, the share transfer in was executed on December 2 2008,
that is, in the last month of the period of grace granted to the
government. That the government did not avail itself of this opportunity
means in the view of many that it cannot now claim that it then still
had the right to levy an unconstitutional tax. Because the previous case
addressed a different tax, the Supreme Tax Court rule on its present
case, but must again refer the issue to the Constitutional Court.
The Supreme Tax Court is clearly convinced that the present real
estate transfer tax is unconstitutional. On the other hand, the effect
of the Constitutional Court ruling now requested is open. The court
might disapply the provision retroactively to the date of the case
(2001), it might declare it unconstitutional, but grant a further
remedial period of grace to the government, or it might even disallow it
retroactively whilst giving the government time to make retroactive
amends. That this last possibility is not wholly unrealistic is
illustrated by a resolution a month later in which the Supreme Tax Court
refused another plaintiff a stay of execution of a real estate transfer
tax debt on the grounds that an interim relief granted in advance of
the main hearing should not exceed the likely ultimate result.
Profit pooling agreement must run for five full years
Court cases with respect to the German tax grouping rules are a
favorite subject in tax audits and proves that the rules are quite
complex and require simplification to be a benefit and not an
administrative burden and risk factor for the taxpayer. The case at hand
is as follows: A company concluded a profit pooling agreement with its
newly formed subsidiary to run from the date of formation until the end
of the fifth business year. Since the first business year was slightly
shorter than the full 365 days, the actual period of the agreement was
slightly less than 60 calendar months. The tax office refused to
recognise it as the basis for an Organschaft as it did not run
for the five years laid down in the Corporation Tax Act. The Supreme Tax
Court has now confirmed the tax office in this view. The Corporation
Tax Act sets the minimum term of a profit pooling agreement at five
years without elaborating on whether business years, calendar years or
full annual time spans are meant. On the other hand it refers to
business year when setting the dates by which the agreement must be
concluded and registered. The use of a specific and a general term in
the same context implies, so the court, that the legislator intended to
depart from the general understanding of year as a time span of 12
months only in the one connection in which the term business year was
used. Thus the five year minimum period prescribed by law must be taken
as being at least 60 months. If one of the business years within that
period is less than 12 months the minimum running time will be six
business years and between 60 and 72 calendar months.
US profit sharing loan interest to be taxed in Germany
In May 2010, the Supreme Tax Court held that profit related loan
interest from the USA could not be taxed as a dividend in Germany under
the letter of the treaty. The dividend clause of the treaty allowed such
income to be taxed as a dividend, while the avoidance of double
taxation provision substituted a foreign tax credit for the general
exemption of income from the other state only for dividends. The income
was therefore, doubtless unintentionally, exempt in both countries. The
finance ministry has now issued a decree pointing to the 2006 treaty
revision, which, among other things, introduced a new treaty override
for income taxable in the other state but not actually taxed there for
reasons of domestic law, "for instance because (the US) does not tax
certain types of interest accruing to persons not fully liable to tax in
the US". Whether the ministry's override interpretation can be regarded
as authentic, time will tell.
Restrictions on write-offs of receivables from foreign related parties
From 2008 onwards, the Corporation Tax Act excludes a tax deduction
for the write-off of related-party receivables (common shareholding of
more than 25%) unless the taxpayer can show that an independent
third-party in similar circumstances would also have allowed the debt to
remain outstanding. Previously there was no such explicit exclusion. In
2009, the Supreme Tax Court held in a case based on earlier
circumstances that a troubled loan to an under-capitalised subsidiary
could be written down with tax effect for want of an express
prohibition. The finance ministry has now reacted with a decree pointing
out that the Foreign Tax Act provides for income adjustment in respect
of transactions with foreign related parties that were other than at
arm's length. The ministry concludes from this that a bad debt loss on a
receivable from a foreign related party is only allowable where the
taxpayer can show that a third-party would not have taken steps
beforehand to recover or secure the outstanding. It suggests that this
could be the case where it was clearly in the business interests of the
lender not to pursue vigorously debt recovery in order to maintain
trading relationships. However, it offers no other examples of an
acceptable write-down.
The ministry's reasoning is based on the arm's-length requirement of
the Foreign Tax Act. This includes adequate security for a related party
debt. Adequate security can, however, be seen in overall group support
to enable a subsidiary to meet its debts as they fall due. Accordingly,
no charge can be made for enhanced risk of default within a group. On
the other hand, a default, itself, demonstrates the failure of that
support. Hence the debt would have arisen, or been allowed to remain, in
other than arm's length circumstances. Its write-off is therefore per se
disallowable. In effect, the ministry is seeking to apply the present,
2008, prohibition on related-party bad debt losses to write-downs of
foreign related-party debt in all years still open.
EU/EEA company managed from Germany can be Organschaft subsidiary
Under the Corporation Tax Act as it stands, an Organschaft
subsidiary must be a German registered company with its place of
management in Germany. Companies formed and registered in other EU/EEA
member states are thus excluded, even if they are tax-resident in
Germany by virtue of their place of management. The European Commission
sees this as a restriction on a company's freedom of establishment and
has initiated infringement proceedings under the EU treaties. The
finance ministry has now reacted with a decree with immediate effect
allowing a company registered in another member state, but managed from
Germany, to join a German Organschaft as a subsidiary in respect of its entire domestically taxable income. The other conditions for joining an Organschaft, including the conclusion of a legally valid profit pooling agreement, must be observed.
US profit sharing loan interest to be taxed in Germany
The finance ministry has announced that application of a Supreme Tax
Court judgment exempting US profit-based interest from German taxes to
be seen against the treaty override provision of 2006.
In May 2010, the Supreme Tax Court held that profit related loan
interest from the US could not be taxed as a dividend in Germany under
the letter of the treaty. The dividend clause of the treaty allowed such
income to be taxed as a dividend, while the avoidance of double
taxation provision substituted a foreign tax credit for the general
exemption of income from the other state only for dividends. The income
was therefore, doubtless unintentionally, exempt in both countries. The
finance ministry has now issued a decree pointing to the 2006 treaty
revision, which, among other things, introduced a new treaty override
for income taxable in the other state but not actually taxed there for
reasons of domestic law, for instance because (the US) does not tax
certain types of interest accruing to persons not fully liable to tax.
Swiss bank secrecy upheld
Germany and Switzerland have long been at loggerheads over the
alleged Swiss practice of providing a safe haven for German tax evaders
in the interests of the Swiss banking industry. Switzerland has answered
this accusation with a counter accusation to the effect that Germany
has aided Swiss wrongdoers by buying bank data from disgruntled
employees, the breach of bank secrecy being an offence under Swiss law.
Representatives of the two finance ministries have now reached a
settlement of this dispute with a draft treaty signed in Bern on August
10. The draft has not been published pending signature; however,
according to the German announcement, it covers the following:
- In future all interest and similar income, including capital gains,
intended for German resident account holders will be credited under
deduction of a 26.375% withholding tax. This tax is a final burden and
exonerates the account holder from all further disclosure and similar
duties. Its proceeds will be paid to the German government without
identifying the individual taxpayer. It corresponds to the final burden
withholding tax in Germany of again 26.375 % (25% plus 5.5% solidarity
surcharge), so a German tax evader's interest in a Swiss bank account is
now limited to protecting the possibly doubtful past and/or the equally
possible doubtful origins of the capital.
- The past will be rectified by a one-time only lump sum taxation on
an account balance. The rate will lie between 19% and 34% depending on
the length of time the account was held and on the difference between
the opening and closing balances. Further details of the calculation
have not been released, but it would seem that the intention is to tax
the undeclared interest from the past without burdening the original
capital. An account holder can avoid this burden by allowing the bank to
disclose his account details to the German authorities. Thus, the
honest business with a genuine reason for an account in Switzerland is
protected.
- The German tax authorities may request information from their Swiss
counterparts on named taxpayers. However, they must give a plausible
ground for suspicion of tax fraud in each case. These requests are
limited by number and should lie within the range of 750-999 within a
two-year period. An automatic information exchange is excluded, as are
requests at random.
- According to the announcement legal problems in Switzerland arising
from the German purchase of confidential data stolen from Swiss banks,
and from the breach of Swiss bank secrecy rules by the employees who
sold it, have been settled. Further details have not been released.
- The restrictions on Swiss banks operating in Germany and on German
banks in Switzerland resulting from the dispute are to be lifted.
The agreement requires parliamentary ratification and, in
Switzerland, probably confirmation by referendum. If all goes well it
will enter into force on January 1 2013.
Last but not least: the long awaited reorganisation tax law decree
should now come out rather end of November than end of September as
originally expected. It remains to be seen if there will be some last
minute changes compared to the draft which could be a reason for the
delay.
Busy 2012
It would not be surprise that 2012 could be a more active year since
the government election will take place in 2013 and tax law changes are
typically part of the profiling campaign of the respective government.
However, the crisis in Europe may require that Germany may have also to
react due to its contribution into the financial emergency chute even
the current business and economical environment in Germany is still
well.
Stefan Ditsch (stefan.ditsch@de.pwc.com), partner, PwC, Mannheim