Business and corporate investments, transactions and reorganizations are often driven (even if only in part) by tax issues. As can be well imagined, a structure may be impossible to implement from an economic perspective if it triggers a (potential) tax burden of more than 50% of any profits eventually realized. From a tax perspective, profits may even be deemed to exist when no funds have been received, so that the tax becomes an actual cash-flow burden. Similarly, even the most commercially reasonable structure will be cast into doubt if the perceived level of taxation will be significantly disadvantageous.
Therefore, every sound structure must not only be developed and/or reviewed in conjunction with creative, experienced and specialized tax lawyers, but must also provide for the necessary legal certainty in the face of tax questions that are not always susceptible to ready answers. Such legal certainty can sometimes be obtained by means of a so-called (in Germany) "binding Ruling." The tax authorities took a new position regarding the key features of such binding Rulings in a public letter dated December 29, 20031, which describes the prerequisites for obtaining such a Ruling in practice. It is especially significant since such Rulings are not recognized by statute.
The following overview is intended to provide readers with a summary of the different types of tax rulings available, their material prerequisites and the associated risks which makes qualified professional advice essential in connection with the preparation of an application for a binding Ruling.
2. Types of Tax Rulings
2.1. Binding Consent (§ 204 et seq. of the General Tax Act)
The statute (General Tax Act) recognizes a form of binding ruling only in connection with an audit. As a result, it is limited to the evaluation of past facts, which have been reviewed in detail by the tax authorities.
2. 2. Information Request (§ 42e of the Income Tax Act)
This type of ruling, upon which a taxpayer may base a legal claim, only pertains to any payroll tax which is to be withheld from wages and salaries as an advance payment by employers.
2.3. Actual Understanding
This type of arrangement between the taxpayer and the fiscal authorities is not a binding Ruling in the true sense of the term, as it does not permit any binding agreement regarding legal issues to be reached.2 The understanding in this case is limited to the concrete facts of the case and, at most, encompasses subjective intentions and conclusions.3 The most significant implication of such an understanding or agreement in practice is in the prosecution or settlement of fiscal offenses.
2.4. Good Faith
The application of the principle of good faith also does not lead to a binding Ruling being found to exist. It is not based on any binding agreement regarding the legal issues in question and does not permit the facts to be handled with legal certainty since it recognizes only vague assumptions. Nevertheless, by applying the principle of good faith (see § 242 of the German Civil Code), a commitment from the fiscal authorities as to previous actions may be achieved if such a situation was handled a certain way between the parties over many years (in the context of an assessment).
3. Ruling with Binding Effect — A Binding Ruling in the True Sense
A Ruling with binding effect may be understood as the authorities’ issuance of a binding consent under public law. Such a binding Ruling comprehensively evaluates:
- legal risks
- regarding planned future actions
- which may have significant tax effects
- and which are of special interest.
If the facts presented to the tax authorities are carried out by the taxpayer after receiving the binding Ruling, the authorities may not, in the course of the next assessment and audit, deviate from the Ruling, much to the taxpayer’s disadvantage.
3.1 Material Requirements
In addition to other formalities, an application for such a binding Ruling must, in particular, include:
- a detailed and concrete description of the planned actions;4
- an in-depth description of the legal risks;
- the legal viewpoint of the applicant / taxpayer with supporting analysis; and
- specific legal issues must be formulated.
The taxpayer must therefore have researched all circumstances that may be significant from a tax perspective, present them in such a manner that the tax reviewer does not need to make any further inquiries on his own, and at the same time commit to the result to which he has requested a Ruling from the fiscal authorities.
In practice, of course, these requirements can be satisfied only after accepting professional advice in connection with the preparation of the application.
3.2 Risks and Matters that are Not Covered
For the submission of such an application, one must take into account the following:
- that all formalities have been complied with;5
- that a timely Ruling is possible;
- that the application may be affirmatively fulfilled; and
- that there are no residual risks remaining.6 Problematic issues and sensitivities may, in particular, arise under the following circumstances:
- The competent local office of the fiscal authorities should be addressed ("final signatory authority").7
- The identification of all potentially affected companies and persons (as applicants) is required.8
- All aspects which are significant from a tax perspective must be set forth in a detailed and complete manner describing the measures to be taken, as well as, e.g., the group’s situation.
- The specific and determinative questions raised in the application must be complete and precise:
- with respect to all potential types of tax which may be concerned, and
- with respect to the description of all legal issues which have not be definitely clarified.
- Inquiries relating to structures that are based on anticipated changes in statutes are to be avoided, since such an application could stand in the way of a decision being reached by the authorities9 who must then consider whether such changes will in fact occur.
- Also to be avoided are structures based on anticipated judicial decisions.10
- The same is applicable for structures that are based on anticipated administrative decisions.11
- In addition, a binding Ruling is not available in connection with so-called "tax saving models". The authorities will not provide any Ruling in such a case.12
- No Ruling will be given13 for borderline structures, which may be construed as improper.
- Also to be avoided is an application for a Ruling involving unlawful structures, which are not binding if such unlawfulness is recognized or should have been recognized.14
- Finally, a Ruling, which may be freely revoked15 prior to the implementation of the planned action, should be avoided.
The tax authorities in Germany are sovereign authorities with the power of intervention. Thus, they are only willing to commit themselves for the future through a binding Ruling to the benefit of a taxpayer with respect to the facts presented to them if the taxpayer’s application is clear and indisputable.
3.3 Other Aspects
If a structured application for a Ruling is rejected, the Ruling rejecting the facts presented has no binding effect.16 Therefore, no legal appeal with respect to a negative Ruling (i.e., one which decides the legal issues against the applicant) is possible, even if such decision is erroneous.17 An appeal is only possible with respect to the rejection of the Ruling (without a substantive opinion) and then only limited to any discretionary errors which caused the application to be rejected.18
A larger investment, transaction or restructuring with significant financial effects can often only be carried out with certainty by seeking a binding Ruling (in the true sense of the term). This requires that a professional, complete application be submitted.
The importance of a binding Ruling in the context of providing structuring advice rises in proportion with every change in the law. After all, new laws unfortunately tend to create new legal issues rather than solve old ones! The legal certainty achieved through a binding Ruling may therefore be well worth the effort in seeking specialized advice.
By obtaining a binding Ruling, an investment, reorganization or restructuring in Germany will be more certain and safer from a tax perspective.
1 Public letter of the Federal Ministry of Finance dated December 29, 2003, IV A 4 - S o430 - 7/03 (hereinafter "FMF-Letter"), Federal Tax Gazette (Bundessteuerblatt, hereinafter "BStBl") 2003, 742, also available on www.bundesfinanzministerium.de.
2 See, e.g., Supreme Tax Court (Bundesfinanzhof, hereinafter "BFH") decision dated December 13, 1995, XI R 43/89, XI R 44/89, XI R 45/89, BStBl II 1996, 232.
3 See, e.g., BFH decision dated December 13, 1995, XI R 43/89, XI R 44/89, XI R 45/89, BStBl II 1996, 232.
4 See, e.g., BFH decision dated September 26, 1991, V R 33/87, BStBl II 1992, 313.
5 Regarding the burden of proof as to the binding effect, see, e.g., BFH decision dated December 13, 1989, X R 208/87, BStBl II 1990, 274
6 For example, reservations, etc. See BFH decision dated September 17, 1992, IV R 39/90, BStBl II 1993, 218.
7 As only the relevant local office of the tax authorities can issue a binding Ruling. See Subparas. 1,3 & 4.5 of the FMF-Letter, supra note 1; BFH decision dated August 1, 1996, VIII R 71/94, BStBl II 1997, 483.
8 The binding effect is only in respect of these applicants. See Subpara. 4.1 of the FMF-Letter, with further support.
9 Id. at Subpara. 2.6.
12 Id. at Subpara. 2.5.
14 Id. at Subpara. 4.2; BFH decision dated July 16, 2002, IX R 28/98, BStBl II 2002, 714; BFH decision dated September 26, 1991, V R 33/87, BStBl II 1992, 313.
15 See Subparas. 3, 4.1, 4.6, 4.7 of the FMF-Letter, supra note 1.
16 Id. at Subpara. 4.4.
17 Id. at Subpara. 5.2.
18 Id. at Subpara. 5.3.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.