KPMG Germany Webpage
Click on the above link to visit the KPMG Germany webpage on the Mondaq website
For disclaimer and copyright see end of this article.
Ruling on suit brought by the taxpayer to compel a stay of collection of assessed tax, the Brandenburg tax court has held that the VAT treatment of mailbox companies is subject to serious doubt in various respects. The court therefore granted the taxpayer's motion for a stay. The tax authorities did not appeal the ruling.
The case involved a corporation (private limited company) formed on the Isle of Man under British law. The corporation was one of the suppliers in chain deliveries of goods in Germany. It filed VAT returns on which it declared VAT charged to customers and claimed the input tax credit with respect to its expenses. It paid the balance owing (excess of VAT charged over input VAT paid or accrued). The tax authorities denied the input tax credit on the grounds that the corporation lacked sufficient substance to qualify as an entrepreneur within the meaning of VAT law. The transactions carried out in its name were regarded as attributable to the persons behind the corporation. Lacking entrepreneur status, the corporation was not entitled to the input tax credit. Nevertheless, the tax authorities contended that it owed the VAT shown in its invoices by reason of sec. 14 (3) UStG, which provides that persons who invoice VAT without legal entitlement to do so are liable for the VAT so invoiced.
The doubts of the tax court related to the following issues:
1. Issues of fact and burden of proof
The court found inadequate the evidence assembled by the tax authorities in support of their contention that the corporation was a "mailbox company" (Domizilgesellschaft, Briefkastengesellschaft). Essentially, the tax authorities showed that the corporation had the same address as a company which specialised in the formation and management of offshore companies for tax avoidance purposes. Specific involvement in the formation and management of the corporation was not shown. Additional contentions by the tax authorities were neither backed up by hard evidence nor refuted by the taxpayer. Since the tax authorities did not challenge the corporation's calculation of net VAT owing, there was no showing that the corporation had been used to avoid German VAT, nor was there any argument that other German taxes had been avoided. The court reserved for the proceedings on the merits the important issue of the taxpayer's heightened obligation to provide tax information on foreign activities (sec. 90 (2) AO). Based on the above, the court stated that it had considerable doubt whether the corporation was a "mailbox" company in the first place.
At issue here is the showing which the tax authorities have to make to establish a prima facie case that a particular corporation is a mailbox company and the burden to refute which such a showing places on the taxpayer. The resolution of this issue may well be different in a proceeding on the merits than in a summary hearing.
2. VAT treatment of mailbox companies
The court further ruled that the VAT treatment of mailbox companies was itself unclear as a legal matter. While certain authorities argue that the VAT supplies of companies which lack a minimum degree of substance should be attributed to the persons on whose behalf the company acts (fiduciary theory), others advocate a formalistic approach for VAT purposes in the case of corporate entities. Under the formalistic approach, it would make no difference whether the corporation in fact acts as the fiduciary or undisclosed agent (strawman) of others. The court found no clear guidance in the previous decisions of the Federal Tax Court on point. It noted that the proponents of the fiduciary theory based their argument on the concept of entrepreneur under sec. 2 UStG, not the general anti-abuse provision of sec. 42 AO because the situations in question do not typically involve avoidance of German VAT.
3. Sec. 14 (3) UStG possibly inapplicable
Finally, the court stated that, even under the fiduciary theory, the result sought by the tax authorities may still not be correct. Since, under the fiduciary theory, the supplies formally effected by the corporation are attributed to other persons, it may be proper under this theory to attribute the invoices issued by the corporation to these persons as well. In this case, sec. 14 (3) UStG would no longer operate because the invoices issued showing VAT would be deemed issued by the same persons to whom the supplies were properly attributable.
Since the ruling was not appealed, resolution of the issues which the court found to be subject to serious doubt will depend initially on the outcome of the lower court proceeding on the merits. If the position of the tax authorities is upheld, this would in effect deny the input tax credit to mailbox companies. The only way to avoid this result would be to issue invoices and file VAT returns in the name of the persons behind the mailbox company. Such disclosure would likely defeat purpose of the mailbox corporation in other respects, however.
Disclaimer and Copyright
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.