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In article no. 87, we reported on a recent decision of the European Court of Justice (15 May 1997 - IStR 1997, 366) holding that it violates EU law for a member state to require the domestic branch establishment of an entity with its legal seat in another EU country to keep books in the member state in accordance with this member state's domestic law in order to qualify for a net operating loss carryforward or carryback. We commented that this decision casts doubt on the validity of sec. 50 (1) sentence 3 EStG and sec. 146 (2) AO.

The Duesseldorf Regional Tax Office recently issued an administrative order dated 2 September 1997 (DB 1997, 1896) providing guidance to the tax offices under its jurisdiction as to how to respond to the requests of international corporations for relief from sec. 146 (2) AO, which requires books to be kept (gefuehrt) and held for safekeeping in Germany.

The order states that the purpose of the statute is to ensure that books and other business records are available in Germany for audit at any time by the German tax authorities. Transfer of the books to a foreign country is seen as incompatible with this goal. Any such transfer must therefore be subject to stringent conditions. Short-term processing abroad is viewed as the limit of what is permissible. Furthermore, the wording of the administrative order suggests that only "data recorded in Germany" (im Inland erfasste Daten) may be transferred abroad for short-term processing, provided the systems and procedures employed are particularly well documented. There would seem to be little point to transferring data abroad if it must be recorded in Germany first, as the recordation of transactions is the primary activity of financial bookkeeping. This is the activity which foreign corporations typically seek to centralise and therefore rationalise for their entire group.

The administrative order furthermore alleges that there is no conflict between sec. 146 (2) AO and European law and hence no need for different treatment of the subsidiaries and permanent establishments of EU corporations.

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