Draft bill for the SE (European Company) published

The EU Council order on the Societas Europaea (SE or European Company) requires member states to amend their national legislation as necessary for SE's to be formed locally in time for them to begin active trading as of January 1, 2005. The deadline set by the EU for the national legislature is October 8, 2004. To this end the Ministry of Justice has drafted an SE Introduction Bill jointly with the Ministry of the Economy and Labour. It intends to lay this bill before the cabinet at the next reasonable opportunity and then hopes for a speedy process through Parliament.

The Bill seeks to legislate two new statutes into law, the SE Implementation Act and the SE Participation Act. It would also change a number of other statutes - mostly regulating the processes of litigation - in order to give the SE from the outset full scope to deport its legal personality. The Implementation Act transposes the European Council Order (EC) No. 2157/2001 of October 8, 2001 on the SE statute into German law, whilst, at the same time exercising the national options and derogations. This Act governs the formalities of formation, whether by merger or by acquisition - a Holding SE, including, especially the rights of protection for dissenting shareholders and creditors. However, neither are able to hold up proceedings against the will of the majority, although there are circumstances in which the creditors can demand a surety. The Act also allows the SE to choose between two management structures, a dual system of a management and a supervisory board, and a single system of a board of directors who in turn should elect one or more managing directors. The supervisory board or board of directors may not be less than three persons (share capital of more than € 3 m) or more than 21 (share capital of over € 10 m).

The SE Participation Act regulates the participation of the employees in the running of the company. This includes both the traditional workers' council level of representation of employee interests before management and the co-determination level of employee involvement in the supervision of management. The Act sets forth procedures for the employees to elect a negotiating committee in order to reach agreement on these matters with the employer. Only if negotiations fail, does the model foreseen by the Act become compulsory. Those involved in the negotiations are protected against unfair pressure from the employer and are also given rights to consult trades union and other outside bodies - including experts - as necessary.

Old Age Pensions Bill passes Bundestag

Traditionally, the non-contributory old age pensions of civil servants have been taxed on payment, whereas the old age pensions of the general populace have been largely tax-free because almost all of the employee's contributions were, in effect, not deductible. In 2003 a public prosecutor won a Constitutional Court suit brought in his private capacity against this apparent inequality of treatment. It seems that his ultimate hope was for tax exemption of his pension once it fell due, but the government decided to take the opposite course of moving to a system of fully taxing all pensions against full current relief for premiums and contributions paid. Ultimately, private persons will benefit from the new arrangements, although a very long transitional period will be necessary if both double taxation in individual cases and an immediate fall in tax revenue are to be avoided. The government's Old Age Pensions Bill is therefore a complicated work of legal prose and, perhaps as an inevitable consequence, not free of controversy. It successfully passed the Bundestag in second and third readings on April 29 and has been forwarded to the Bundesrat for provincial confirmation. There, its fate is uncertain - the Bundesrat majority party's attitude is one of acceptance with misgivings, whilst the signals from the individual Länder over the past few days have been contradictory and inconsistent. The Bill's main features:

In 2005, 50% of each state-scheme old age pension will be taxable and 50% will be tax-free. The taxable ratio will be increased by 2 percentage points in each year thereafter for pensions currently falling due for the first time. In 2020 the taxable/tax-free proportion will thus be 80/20, and the annual rise thereafter will drop to 1%. Pensions falling due in 2040 for the first time will thus be fully taxable. For first-year pensioners (all pensioners in 2005) the tax-free portion will be fixed as a lump sum amount, so that subsequent increases in the pensions paid will be fully taxable. However, the social burden of this will be alleviated by a provision exempting the first € 18,900 p.a. of old age pension income from tax altogether. This amount is about double the average old age pension paid out in 2002.

60% of the pension contributions payable in 2005 (the total contribution from both employee and employer up to a combined maximum of € 20,000) will be deductible. This proportion will rise be 2% each year, leading to full deductibility by 2025. The tax offices will, however, be obliged to apply present law when assessing an employee, wherever the changes are disadvantageous in individual cases.

The tax-free proceeds payable when life insurance policies fall in will be cut back for policies starting in 2005. The deduction rules for the premiums will also be re-vamped, with the ultimate objective of ensuring that only that part of the proceeds from a policy that were "purchased" from taxed income remains untaxed on payout.

"Ecology tax" confirmed by Constitutional Court

The case was brought by five road haulage companies and two refrigerated storage operators claiming that the mineral oil tax increases since April 1999 and the electricity tax, known collectively as the "ecology tax", are in breach of the constitution. The Court dismissed the claim, holding that the tax was neither confiscatory nor discriminatory (despite the reliefs available to high energy manufacturers) and that pollution reduction was a legitimate objective for tax legislation. This case was immediately followed by the refusal of a screening committee to grant a similar suit from three farming businesses a hearing.

The European Commission has already approved the reliefs (rebates) for high energy manufacturers as not being in conflict with European law.

Unintended favourable taxation of CFC deemed dividend for 2000 in 2001

In the course of the comprehensive amendments of the German tax statutes necessary to replace the corporation tax imputation system with a half-charge of the dividend income to the income tax of natural person shareholders in 2001, the German Foreign Tax Act came in for a few revisions. One of these was to ensure that domestic taxpayers could apply neither the half-charge income tax method, nor the full exemption of dividend income from corporation tax to passive income deemed taxable in Germany under CFC rules. Without this exclusion, the CFC rules would, of course, largely lose their point.

However, the changeover provisions of the Corporation and Income Tax Acts were not particularly well coordinated with those of the Foreign Tax Act. In consequence, the CFC income deemed to have been received in 2001 would seem to rank for the relief available to dividends actually received, notwithstanding the declared intention of the legislature to the contrary. This conclusion is arrived at as follows:

The CFC income is deemed to be dividend income within the meaning of the Income and Corporation Tax Acts - Sec. 20 (1) No. 1 Income Tax Act. The income attribution is based on the accounts of the foreign corporation for the year in which it was earned and qualified as attributable (virtually all cases of passive income taxed at less than 25%), but is not actually made to the German shareholders until the following year.

The tax exemption of dividend income under the amended version of the Corporation Tax Act - (Sec. 8b (1) and (5) - applies for the first time to items taken to income in 2001, at least for taxpayers with a calendar year end.

The half-charge to income tax for natural person shareholders applies for the first time to dividends received in 2001. This applies in all cases, unless the dividend is earned as part of a trade or business with a non-calendar year-end.

The exclusion of CFC income from the exemption or half-charge relief, however, only applies to income recorded by the foreign corporation in 2001 and attributed to the German shareholder in 2002. Foreign passive income received abroad in 2000 for domestic attribution in 2001 is therefore not excluded from the reliefs available on dividends actually received.

The foregoing does not necessarily apply if either a German shareholder or the CFC with the passive income has a non-calendar year-end. In either case, it becomes necessary to check the transitional rules in more detail, although often with advantageous results.

Taxpayers with CFC income attributions in 2001 from 2000 are therefore advised to consider lodging appeals against the assessments if these are still open.


Transfer pricing - finance ministry decree on failure to fully cooperate

In a landmark case of October 17, 2001, the Supreme Tax Court held that:

  1. where the taxpayer breaches his duty to supply the tax authorities with full information on all aspects of his foreign trading and other relationships, it is necessary to distinguish between failure to supply all the facts and failure to provide information on the legal consequences of those facts. The first breach lowers the burden of proof on the tax authorities, whilst the second will generally justify an estimated assessment.
  2. the refusal of a German subsidiary to disclose the basis for the prices charged by the parent implies that those prices were influenced by the parent as shareholder. Even so, the prices may still be reasonable. The objective onus of proof in respect to the comparable third party prices lies with the tax office.
  3. The arm's length prices for a selling company cannot be based on the resale price method where there are only three independent suppliers in only part of the period in dispute and from whom no more than 5% of the goods for resale were procured.

On April 19 the ministry of finance published its decree of February 26 stating that the Supreme Tax Court's point 1. is incomprehensible and has no basis in law. The legal consequences are for the tax office to decide without reference to the taxpayer. Point 3. is to be treated as only being relevant to the case decided. In all other cases, each instance must be adjudged on its own merits and it is not possible to set a table of minimum levels of third party comparison, such as a minimum number of comparative companies.

The decree discusses the ministry's attitude to point 2. at greater length. It accepts that the German subsidiary does not bear the onus of proving that its purchase prices were at arm's length, although the company must accept estimates by the tax office if it fails in its duty to disclose all relevant facts and information in its possession or for which it is responsible. The tax office has only to meet a lower standard of evidence on income increasing factors, especially as the taxpayer should not be allowed to benefit from his own failure to provide information. The tax office may therefore satisfy itself with a lower level of certainty for an unfavourable estimate than would normally be called for. If the taxpayer's breach of duty is serious, the tax office is in duty bound to estimate on the basis of the least favourable assumptions for the taxpayer, so long as its assumptions remain within the realm of the possible. However, the taxpayer can contest the estimate on the basis of further evidence or information.

If the taxpayer refuses to disclose how the pricing structures were agreed, but otherwise cooperates, the tax office must clarify the arm's length prices for itself. If it is able to do so and finds the arm's length price to be lower than that actually charged, it should adjust the income accordingly. On the other hand, the taxpayer's return is to be accepted where the tax office is unable to determine the arm's length price, but has no grounds for assuming overcharging. If there are such grounds, e.g. continual but unexplained losses, the taxable income should be estimated at a level which at least reflects a reasonable rate of return on the shareholders' equity with an appropriate uplift for risk. It the arm's length price can only be determined within a range, the reported income is not to be adjusted if the actual pricing lies at any point within the range. If, however, an estimate is called for, it must be based on the most probable point within the range. Where different points within the range have the same degree of probability that most favourable for the taxpayer is to be taken. This position may be seen in some circumstances as contrasting rather starkly with Supreme Tax Court cases holding that if income can only be estimated within a range, the taxpayer's position is secure if his reported income lies at any point within the range, and that, consequently, any income adjustment by the tax office should only be to the lower extreme of the range.

The decree closes with a reminder of the enhanced documentation duties from 2003 and of the penalties for their breach.

Limited partnership losses - ministry rejects Supreme Tax Court case as a Precedent

In a case of October 14, 2003, the Supreme Tax Court held that where a limited partner paid in additional capital of more than necessary to cover his existing loss share, he should be entitled to claim relief on future losses up to the excess even if the loss allocations were left as a debit balance on the partner's earnings or capital account. The ministry of finance has now decreed that this case should not be followed in other cases, so a limited partner's loss relief remains restricted to his share of the loss that he has either paid (or allowed to be deducted from his partnership capital) or guaranteed by a formal undertaking registered in the trade registry.

VAT: changeover arrangements on EU enlargement

On May 1, Cyprus (Greek Cyprus only), the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia joined the EU as full members. No transitional arrangements were agreed for VAT. The ministry of finance has published a decree for the practical guidance of German traders with business partners in the acceding countries. Apart from the details of the various limits, build-up of VAT ID Nos. and responsible authorities of the acceding countries, the main items of interest are that German suppliers will not be required to record the VAT ID No. of a customer from a new member state during the first three months, May to July, provided the missing number has been applied for and the other conditions for a tax free intra-community supply have been met. Shipments leaving Germany in April but not arriving until May are to be treated as exports; those inbound on May 1 are imports and subject to import VAT on the border.

VIES returns now online

The Federal Tax Office has announced that is now prepared to accept online VIES returns (zusammenfassende Meldungen in German) from those VAT payers who have received the requisite registration number. Registration is by way of hardcopy form, signed by hand and delivered to the Federal Tax Office in Saarlouis by post (no scanning or faxing!). The address and the links to download the forms are given in the press announcement of the Federal Tax Office (in German) available from http://www.bff-online.de/15_Presse/Pressemitteilung_ZM.pdf

Retailers must record customers spending € 15,000 or more in cash - ministry of finance

The ministry of finance has just published its decree of April 5 raising the limit at and beyond which retailers must record the names and addresses of cash sale customers from DM 20,000 to € 15,000.


Withholding taxes only on net royalty income paid abroad

The case before the Court was brought by a German advertising agency managing a campaign for a client involving a well-known sportsman. The sportsman's services - mixed between posing for photos, making filmspots, attending functions and events, allowing his name and picture to feature on posters, and permitting references to himself in promotional literature for the client's products - were paid for in lump sums to his Luxembourg management company. The German advertising agency reported the payments as royalties subject to a 5% withholding tax (the German/Luxembourg treaty rate), but contested the issue immediately afterwards by claiming that the payments should be free of withholding tax because of their actual character of trading income from a Luxembourg permanent establishment. The tax office countered with the claim that the lump sum should be taxed at source, because the passive, royalty element of the service predominated, colouring the rest.

The Court held that the payments as contractually agreed must be split over the services actually rendered on the basis of whatever objective criteria might be available. The amounts reflecting the sportsman's personal appearances and other activities ranked as trading income and were not taxable in Germany for want of a German permanent establishment. Those reflecting the use of his name and images but without requiring a personal appearance were "passive" and thus liable to be taxed at source by the payer. In this case the relevant withholding tax rate was that for royalties. The Court remitted the case back to the lower court to determine, as a question of fact, the split between the two categories of income as a preliminary to a final ruling. In doing so, it advised the lower court, but without further explanation, that the ECJ Gerritse case (ECJ case C-234/01) to the effect that withholding tax should be deducted from the royalty paid net of the directly related expenses rather than from the gross amount due, also applied - as in this case - to royalties paid to corporations.

Employee of foreign parent sent to manage GmbH is not a local employee

The Supreme Tax Court has held that the employee of a foreign parent company did not become the employee of the German subsidiary, merely because he was seconded to Germany to act as the subsidiary´s managing director. As the managing director he was a company law organ of the GmbH, but this did not make him its employee. In this respect tax law had to follow civil law, so the Court. The GmbH was therefore not liable to account for "wages tax", the income tax withheld from an employee´s salary.

In the case at issue, the employee concerned continued to draw his salary from the parent. He did not enter into an employment contract with the GmbH and otherwise continued to behave as the employee of the parent put to managing the subsidiary on the parent´s behalf and in accordance with its wishes. The only activity of the GmbH was to act as the managing (general) partner in a limited partnership. The duty of the management fell on the employee concerned in his capacity as the general partner´s managing director and legal representative. The foreign parent charged a management fee to the partnership, but this, in the view of the Court, did not change the legal conclusion, as that charge was for the management of the partnership´s own business.

Given that a GmbH & Co. KG with a non-operating GmbH is generally regarded for tax accounting purposes as a single unit, the conclusion seems tenable that this case also applies to the more usual, simpler circumstances of a foreign parent´s seconding its employee to manage its operating GmbH, but without changing his employment contract. On the other hand, one would expect the tax office to make every effort to contest the issue, if the consequence for them is an apparent loss of tax revenue.

Debenture issuer not required to name holders

The case before the Court was brought by a company that had issued a series of debentures payable to bearer within a commercial paper programme organised by a series of banks. Each debenture was documented in a single deed held by a bank acting as trustee. This bank placed sub-entitlements to the debenture on the money market to be taken up by the ultimate investors. These generally purchased their paper through their own banks offering custodial and payment collection services. The debentures were issued at a discount to reflect interest and costs and redemption was at face value. Both transactions were concluded with a single payment of a lump sum between the issuer and the trustee bank. This bank then processed the payments from and to the custodial banks of the investors. The point at issue was a demand on the issuer from its tax office to name the ultimate bearers of the debentures so that the tax authorities would be able to check whether they had correctly declared their discount as interest income.

The issuer refused to comply with this demand. In any case it was unable to do so, since it only dealt with the trustee bank. The Court agreed with this position, making the point that the nature of this business regularly placed the debenture holders beyond the ken or influence of the issuer. Any measures which the issuer might be able to take would run counter to the customs of investment banking to the extent that any official demand would be unreasonable unless backed by a legal provision. The Court also went on to discuss the requirement on taxpayers to identify their business partners in the context of the bank secrecy provisions. The one could not be used to counter the other, although this would inevitably be the case here if the issuer acceded to the tax office' demands, given that the information could only come from banks.

Taxable income of visiting musician to include expenses

Under the US/German tax treaty, visiting artists, athletes and similar performers enjoy their fees free of local tax if the total in any one year does not exceed US$ 20,000. In the case before the Court, the net amounts actually received by a US-resident musician on tour in Germany were below the US$ 20,000 level, although the limit would have been exceeded if VAT had been added to the fees paid, and if all the related traveling, hotel and subsistence costs borne by the organisers had been paid out to the musician. The Court held:

  • the concept of "income" for this purpose included all traveling and similar costs paid or borne to or for the musician, on a literal interpretation of the wording of the treaty,
  • all items of income were deemed to accrue in the year of the appearance for which they were paid - in answer to an attempt by the musician to shift some of the income into the following year in the hope of staying below the limit in both years,
  • if the contract is governed by foreign law, it is up to the lower court to determine as a matter of fact whether the fee agreed was inclusive or exclusive of VAT - the contract was subject to the laws of California and did not mention VAT. No VAT was actually due under the so-called "zero- rule" (since repealed) allowing a foreign service provider to invoice his domestic business customer free of VAT if the latter had an unrestricted right of input tax deduction. Thus the point was moot between the parties, albeit relevant to the US$ 20,000 income limit. Unfortunately, the Court gave no hint to the lower court as to how it should determine a VAT status by reference to the laws of a state without VAT, and
  • there is no relevant prohibition on taxing a US-resident higher than his German fellow. The non-discrimination clauses in the tax treaty and in the 1965 friendship treaty prohibit discrimination by nationality, but not by residence. The Gerritse ECJ case is not a precedent, since the musician is not an EU resident.

Blackmail payments to conceal adultery not "special expenses"

The Supreme Tax Court has held that an adulterous taxpayer may not deduct blackmail payments made to avert the threat of revelation to his wife, because the expense was not necessarily incurred. The taxpayer had exposed himself to the blackmail of his own free will when committing the adultery, and in any case he could have avoided the expense altogether by going to the police once the blackmail started.


Holding company and pooled activities - ECJ gives guidance on VAT Deduction

The case was brought by a Portuguese holding company in the mining industry. Its main activities were to hold and, occasionally, to sell investments, to finance its subsidiaries, and to carry out scientific and technical research and development work on behalf of its members under a pool agreement. The dispute with the tax authorities arose over its calculation of the deductible proportion of its total VAT borne on charges from its suppliers. The ECJ held:

  • the management and sale of investments including holdings in investment funds (investment of surplus cash) is not an economic activity relevant to the Sixth Directive,
  • the interest-bearing financing of subsidiaries and short-term investments in bank deposits, treasury notes or the like are economic activities free of VAT,
  • the extent to which these VAT-free transactions may be ignored as "incidental" in calculating the deductible input tax is a matter for the national authorities, but the fact that they generate more income than the main activity of the enterprise does not of itself preclude their classification as "incidental", and
  • otherwise taxable operations carried out by pool members in proportion to their respective interests in the pool are not taxable outputs. By contrast, a member company realises a taxable output if its activities exceed its own share under the pool agreement and it therefore receives a cash reimbursement from the other members.

Input VAT not recoverable until supply is made and the invoice is issued - ECJ

The case, Terra Baubedarf-Handel GmbH, was brought by a German trader in building supplies who had been denied an input tax deduction in the 1999 VAT return on services received in 1999, but not invoiced - albeit under a 1999 date - until 2000. In its refusal, the German tax office relied on a passage in the VAT Guidelines reading (in the ECJ translation) "... where receipt of the services or supplies and receipt of the invoice fall within different tax periods, deduction is permissible in respect of the tax period in which both conditions are satisfied for the first time". The taxpayer, though, claimed that this was not in accordance with the Sixth Directive.

The ECJ side with the tax office. It accepted that the German version of the Sixth Directive was slightly ambiguous, but found that the French and English texts were not. It also made the point that payment for goods and services and therefore of the input VAT is not normally made until the invoice has been received.

The case has implications for related parties subsequently found to have exchanged goods or services either without making a charge at all, or without subjecting the transaction to VAT. In either event, the supplier would be held to have been liable to VAT as of the period of the supply and therefore to pay interest accordingly, whilst the customer would not be able to claim a deduction for the input tax until he held the necessary supplier's invoice. This, though, will not normally be until after the tax audit has reached its final stages, that is, it will be outside the audit period, and the group as a whole will suffer an often not inconsiderable interest expense.

ECJ allows VAT input tax deduction to formation partnership for an AG

Under German law, the promoters of an AG may form a start-up partnership as a vehicle for the necessary practical preparations for business operations to start once the company's formation formalities have been completed. In the case referred to the ECJ by the Supreme Tax Court, the partnership was contesting the refusal of the Offenbach tax office to grant an input tax deduction on the expenses incurred in the course of preparing for the start of business operations by the AG. The tax office maintained that the only output of the partnership was the tax-free sale of its net assets to the AG at book value, once the AG was legally able to buy them. Since this had been the original intention all along, it was impossible for the partnership to claim it were a business undertaking with an input tax deduction entitlement.

The Supreme Tax Court was inclined to decide in favour of the taxpayer, but felt unsure as to the precise legal position. In particular, it was in doubt as to whether the partnership should have its own deduction, or whether the deduction right should pass to the AG along with the net assets at the start of third party business. The ECJ took the former view and held that "a partnership formed for the sole purpose of forming a company is entitled to deduct the input tax on the purchase of goods and services if, in accordance with its business objects, its only output transaction is the transfer for consideration to the company after its formation of the items purchased, and if ........ the transfer of the entire net assets is treated as though there had been no delivery or service".

Insurance tax confirmed by ECJ

The UK insurance premium tax is levied at two rates depending on the type of risk covered. It is a single-phase tax based on the price of the policy and is openly borne by the consumer to whom it is passed on as a cash outlay shown separately on the invoice. It is intended to compensate for the Sixth Directive exemption from VAT for insurance premiums. The higher rate is identical to the standard rate of VAT and is intended to confound attempts in the retail trade to reduce the transaction tax burden on final consumers by selling them an insurance policy rather than giving them a guarantee on, particularly, household appliances.

In a suit contesting the validity of the UK tax at European law, the ECJ held that:

  • the UK insurance premium tax is in accordance with the Sixth Directive because it is not comparable in nature to VAT,
  • the insurance premium tax may be levied at different rates for different risks without first gaining the authorisation of the European Commission, and
  • the dual-rate tax does constitute state aid.

The German insurance tax is levied on similar lines, except that the upper, 16% rate is the rule rather than the exception. Otherwise, the ECJ's reasoning behind its decision on the UK would seem directly applicable to Germany.

Pre-2004 50% VAT input tax deduction for dual-use cars confirmed by ECJ

Up to the end of 2003, German businesses were only able to deduct 50% of the VAT incurred on the purchase and running costs of cars used both on business and privately. On the other hand no charge to VAT was made in respect of the private use. A case was brought by a German business proprietor with a 70% business use contesting the validity of the German regulation and, more specifically, the validity of the Council decision authorising it. The Council's decision was based on "the proven difficulty of actually verifying the breakdown between business and private expenditure on this type of good and by the consequent likelihood of tax evasion or abuse". The Council also drew attention to the resulting simplification. The plaintiff, on the other hand, claimed that this decision offended against the Sixth Directive condition for its issue, that "measures intended to simplify the procedure for charging the tax, except to a negligible extent, may not affect the amount of tax due at the final consumption stage."

The Court sided with the tax office. It held that the Council was entitled to authorise the German government to set the input tax deduction at 50% in the interests of simplicity and of making the system more resilient against fraud. It also felt the overall effects of this simplification to be negligible, since the number of cases of over-taxation was likely to correspond with the number of cases in which the taxpayer benefits. Interestingly, this generalised approach represented a radical departure from the opinion of the advocate general, who called for an individual approach to each taxpayer, for whom the difference between 50% and 70% was not necessarily negligible.

On the other hand, the Court sided with the taxpayer and advocate general in agreeing that Council Decision of February 28, 2000 was invalid insofar as it was retroactively applied to expenses incurred between April 1, 1999 and the date of its publication, March 4, 2000.

Transfer pricing: European Commission proposes Arbitration Code of Conduct

The EU Joint Transfer Pricing Forum has finished the first phase of its task with the presentation to the Commission of its suggestion for a Code of Conduct to be followed by member states when applying the Arbitration Convention. Its suggestion, which has now been endorsed by the Commission, is for the member states to adopt the Code during a Council meeting once the European Parliament has given its views. This would avoid the inevitable delays associated with finalising and the ratifying a legal act. The Forum has now turned to the next part of its project, the review of the documentation requirements in the various member states and of the scope for harmonisation.

The proposed Code of Conduct would require member states to apply the Arbitration Convention as follows:

  • the three year period for the submission of an arbitration request shall run from the date of the assessment notice leading to the double taxation objected to
  • the two year period for member states to attempt to reach amicable agreement without formally going to arbitration shall run from the date of the taxpayer's arbitration request - with all the necessary detail - unless the assessment notice is not issued until later
  • the mutual agreement procedures shall be expeditious and free of any inappropriate or unnecessary burden on the taxpayer. The tax authorities shall keep the taxpayer informed of progress. If an authority is unable to accept the request of the taxpayer, it shall send the other authority a position paper setting out its views and suggestions for remedial action. If the other authority can accept that suggestion, it should say so; if not, it shall respond with its own paper and, if necessary, suggest a date for a personal meeting. All authorities will do their best to keep matters moving forward
  • the same principles should be followed in dealing with mutual agreement procedures under double tax treaties
  • the Code sets forth detailed rules on the establishment, rights and obligations of the advisory commission of independent persons during the second stage of arbitration
  • collection of the disputed taxes should be suspended until the dispute is resolved
  • member states are to sign and ratify the accession conventions to the Convention of the new member states within two years
  • member states should report on the functioning of the Code to the Commission every two years.

VAT: European Commission presents draft of recast Sixth Directive

The European Commission is concerned that the VAT rules are not always immediately clear or even accessible to businesses and other interested parties. It has therefore resolved a recast of the Sixth Directive to be promulgated as a Council Directive after consultation with the European Parliament. There will be no substantive changes of major, and few of minor, import, even though most of the Directive will be entirely rewritten and restructured. The Commission's object is to codify all but the purely transitional rules into a single directive, to improve legibility by breaking the long articles of the Sixth Directive down into very many more 9 short ones, revising the language to correct linguistic errors and to improve uniformity of expression, and to discard obsolete or redundant provisions. The present transitional provisions governing taxation in the state of consumption until the definitive system of taxation in the state of origin is reached, will be moved to their logical places in the body of the directive, since the state of origin system now appears much farther off than it once did.

EU rejects calls to change VAT system but calls for greater efforts to combat Fraud

The European Commission has rejected repeated calls to change the VAT system to make it less prone to abuse, saying that it feels that the disadvantages of all the changes suggested would be greater than their benefits - at least whilst there is still no political will to move to a system of taxing sales in the country of origin. However, it maintains that member states could usefully make greater efforts to combat fraud and recommends that they

  • make more intensive use of administrative cooperation arrangements
  • make greater use of multilateral controls
  • remove the remaining legal barriers (such as legislation on secrecy) to the exchange of information
  • adopt as quickly as possible a national plan to reduce the average response time to mutual assistance requests
  • rapidly allocate additional resources to mutual assistance and decentralise mutual assistance so that this work does not overload the system
  • continue efforts to make tax control more efficient and modern, mainly by speedily implementing electronic audit procedures
  • implement best practices to combat carousel (merry-go-round) fraud, and in particular set up national fraud departments to exchange information with other member states.

European Commission requests Germany to end exit tax

Following the ECJ case C-9/02 of March 11, 2004 against France (the de Lasteyrie du Saillant case), the European Commission has formally called on Germany in the form of a "reasoned opinion" to end her system of exit taxation for 1% or more shareholders in German companies who wish to emigrate. The tax basis is the unrealised capital gain at the time of the move with no allowance for any subsequent fall in value of the investment. Whilst the Commission does not dispute Germany's right to tax capital gains, it does consider that the German system of charging a potential gain to taxation before realisation merely because the shareholder leaves the country to be incompatible with the EC Treaty when a change in residence within the country would not have this tax consequence. As the Commission said, "There is no valid justification for such an obvious hindrance to the free movement of persons within the Internal Market."

If the Commission does not receive a satisfactory reply within two months to its "reasoned opinion, it may take the matter to the ECJ.

EU amends Mutual Assistance Directive

The European Council has adopted an amendment to the Mutual Assistance Directive 77/799/EEC in the interests of facilitating communication and cooperation between the tax authorities of member states. The motives of the Commission in proposing the amendment lay in the wish to combat more effectively cross border fraud in the area of direct taxes. The changes serve to bring the Mutual Assistance Directive up to date and in particular to reflect the corresponding VAT rules as well as the arrangements foreseen for 2005 in the agreement on savings income. The main amendments now adopted are:

  • national tax authorities may now conduct simultaneous local site reviews of taxpayers operating in several countries and share the results
  • each tax authority must pursue information requests from another member state as though it were acting on its own behalf.
  • a local tax authority can be requested to act on behalf of another member state on routine matters, such as serving assessment notices.

EU Joint Transfer Pricing Forum addresses database searches

The EU Joint Transfer Pricing Forum regularly meets four or five times a year in order to discuss EU-wide transfer pricing issues according to an agreed work programme. The agenda and supporting documents for the last meeting, on March 18, have just been published. The discussion on mutual agreement procedures or the Arbitration Directive as a means of avoiding double taxation in the event of transfer pricing adjustments by tax authorities has now been concluded with a report to the Commission. The current major topic is the level of documentation that can reasonably be required by the tax authorities and the time limit for its preparation. The Forum expects to conclude this discussion by the end of 2004 and has started on the question of publicly available, commercially operated databases as a source for third party comparables as a second topic. For the moment this discussion is oriented towards establishing an arm's length profit margin for pricing under the transaction net margin method (TNMM) and the ferocity of the contest is lessened by the considerations that TNMM is only a method of last resort for use when the more traditional approaches fail, and that internal comparisons are generally a better indicator of arm's length than external ones. The Forum was originally set up in 2002 for two years, but has now suggested to the Commission - in reply to a letter asking about apparent lack of progress - that its mandate be extended for a further two years, to the end of 2006.

European Commission opens public consultation on outside directors

The European Commission has opened a public consultation on the role played by non-executive, supervisory directors in listed companies. The link to the website with the Commission's announcement and further links to the consultation document is


Those interested in corporate governance topics are invite to respond with their views to the Commission by June 4.

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