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The validity of central provisions in Germany's trade tax law is subject to "serious doubt" as applied to EU residents according to an interlocutory ruling of the Federal Tax Court dated 30 December 1996 (IStR 1997, 206). KPMG Germany represented the taxpayer in this proceeding.
The trade tax law requires that half of the fees paid by the lessee for lease of personal (moveable) property be added back to the lessee's earnings in determining its trade tax earnings. The full value of such leased property is added back for purposes of the trade tax on capital. The addbacks do not occur, however, if the fees and the leased property are subject to German trade tax in the hands of the lessor. Generally speaking, this is the case when the lessor is a German resident.
A German lessee of airplanes from an Irish lessor challenged the addbacks under EU law on the grounds that they impermissibly discriminated against the Irish lessor. The argument ran that, since the addbacks as a practical matter only apply when a German enterprise leases from a foreign enterprise, German lessees would be inclined to lease from German lessors to avoid the addback, hence the addback impermissibly disadvantages foreign EU lessors.
Because the validity of the provisions was subject to "serious doubt," the German taxpayer was entitled to a stay of collection of the tax pending the outcome of the underlying case. This is still pending on administrative appeal before the Berlin tax authorities.
More recently, a new case posing the same issue has been brought before the Muenster Tax Court. It also involves the lease of airplanes by an Irish lessor to a German lessee. The German court has suspended proceedings by its ruling dated 28 July 1997 (IStR 1997, 526) and interpolated the European Court of Justice, asking it to decide the underlying question of EU law. In addition to noting the arguments in support of the taxpayer's position, the Muenster Tax Court also pointed out that, in the specific situation, the Irish and German tax laws were perhaps more likely to discriminate against German lessors than the Irish EU lessor, who paid only a 10 % corporation tax in Ireland under the "Shannon" tax incentive scheme and was subject to no tax comparable to the German trade tax. The implication was that the Irish lessor could pass some of its tax breaks along to its German lessee (to compensate the latter for the trade tax addbacks) and still outbid German lessors, whose tax burden as corporations retaining their earnings would be around 60 %.
The probability that the ECJ will hold the provisions in question to be incompatible with EU law nevertheless appears to be high. The aspects discussed in the preceding paragraph were all present as well in the case decided by the Federal Tax Court but were not cited by the higher court as legally relevant.
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