Germany: German Tax and Legal News - July 2004

Last Updated: 14 July 2004
Article by Andrew Miles

Finance Ministry Drafts Bill Transposing EU Parent/Subsidiary and Other Amendments

The finance ministry has published its draft bill to transpose various EU amendments and ECJ cases into national law whilst taking the opportunity to make a number of editorial changes. The main features of substance are:

  • Conformity with the amended Parent/Subsidiary Directive, in particular revising the lists of legal forms covered by the Directive to include practically any entity within the EU subject to corporation tax except partnerships able to opt. The Directive provisions will now apply to dividends on shares held through a permanent establishment in a third member state of the EU and the minimum shareholding levels will fall from the present 25% to 20% in 2004-06, 15% in 2007/8 and to 10% thereafter.
  • The transmission of electric power and the throughput of natural gas is to be deemed for VAT to have been performed in the country of the customer of the service. Sales of power and gas to a distributor are to be treated as supplies in the country of the distributor; sales to end-users are subject to VAT as supplies in the country of usage (consumption).
  • The rules governing the correction of a VAT input tax deduction following a later change of circumstance have been rewritten in considerably greater detail. In particular provision has now been made for the input tax deduction for a current asset to be adjusted to the circumstances (proportion of VAT-able to VAT-free turnover) obtaining in the year of sale/use. If a fixed asset is sold under a different VAT regime than for which it was originally acquired, the adjustment in the year of sale shall assume continued future use under the new regime for the remainder of the adjustment period (five years for equipment, ten for buildings).
  • If a retailer redeems a manufacturer's or wholesaler's credit voucher presented by his customer and charges the cost back to the supplier, the latter may henceforth reduce his taxable turnover accordingly. The retailer must reduce his input tax deduction if he retains some or all of the redemption amount for himself.
  • Among the various changes to the Tax Management Act, particularly worthy of note is a right of each taxpayer to information on his personal data stored by the tax authorities. This right is restricted if there are security objections, if release of the data would impair the privacy of others, or if finding the data stored would appear to be excessively difficult.

Draft Bill To Implement The EU Directive On Interest And Royalties

The finance ministry has published its draft of a bill to implement the EU directive on interest and royalties into national law, and to reflect the recent amendment to the mutual assistance directive as well as the new VAT cooperation order. Formalities apart, the bill addresses the following items:

  • Interest and royalties paid from January 1, 2004 to a related-party company in another EU state are to be free of withholding tax.
  • The exemption is applied for on the basis of a certificate of residence from the responsible tax office in the other EU state. The procedure is similar to that presently in force for dividends.
  • Withholding tax deducted, e.g. for want of an exemption certificate, may be reclaimed. The refund bears simple interest at 6% p.a. running from 12 months following the end of the month in which the refund claim was filed. This interest
  • rule will also apply to refunds of withholding tax on dividends as well as to refunds under tax treaties to EU and non-EU claimants.
  • A related-party relationship is based on a shareholding ratio of 25% or more. An EU-related party company is a company established in another member state or its permanent establishment in a third member state, but not the German PE of an EU company of the EU PE of a foreign company.
  • Interest does not include silent partnership distributions or other forms of profit sharing.
  • Royalties are all payments for the use of licences, copyrights, knowledge or equipment.
  • The catalogue of legal forms to be treated as companies includes the partnership forms from some of the countries that tax partnerships as corporations. However, the bill does not extend this thinking further, e.g. to the eradication of "white" income from conflicts of legal definition. Interestingly, the catalogue does not include the French Société Anonyme, although this may be an oversight.
  • The Corporation Tax Act is to be amended to exclude corresponding withholding taxes from other EU-countries from credit in the hands of a German corporate recipient. Account is taken of the transitional provisions for Greece, Portugal and Spain.
  • The mutual assistance procedures with the tax authorities in other EU member states are to be extended to include insurance tax.

Undeclared ("Black") Work - Political Differences Resolved In Resolution Committee

Over the past few years, government spokespeople have not infrequently blamed the allegedly widespread practice of working "on the black" as one of the root causes of the recurring excessive budget deficit and other ills of the public finances. Part of the answer has been found in arrangements for so-called "mini jobs" allowing semi-formal employments for a monthly wage of up to € 400 with low fixed rate income tax and social security charges on the employer and accompanied by what the government seems to regard as a minimum of bureaucracy. This scheme has been in operation since April 2003 and appears to have met with some success. However, the unemployment rate has not fallen, and the government has been seeking for some time to find ways and means of intensifying controls over sensitive sectors of the economy. The opposition has regularly blocked these attempts. A compromise has now been reached through the parliamentary Reconciliation Committee and a new draft of the "Bill to Intensify the Struggle against Black Work and the Related Tax Evasion" has been passed by the Bundestag and Bundesrat. Concrete measures can now be taken in August, especially against the main targets of the building, cleaning and catering trades. Basically, the compromise now reached

  • defines "black" work exhaustively but with heavy emphasis on the evasion of taxes and dues,
  • codifies, coordinates and significantly enhances the various control measures of the different authorities and institutions concerned with different aspects of the problem, and
  • re-regulates the various spot-check and other audit provisions, in particular assigning increased powers and responsibilities to the customs administration.

The government has always been careful not to say anything definite about the extent of the problem. The finance minister, Hans Eichel, in a speech on May 6 referred to a "very high sum in billions", but qualified this estimate with a cautionary "very difficult to estimate exactly the extent of black work in Germany". The EU has just published a study on "Undeclared work in an enlarged Union" in which it estimates German "undeclared work" (work in itself legal, but not reported to the authorities) at 6% of GDP. This makes Germany third equal with France in the "old" EU rankings and well behind Italy at 16-17% and Greece at over 20%. Many of the new member states lie within the 10-20% range. The EU study makes it clear that the reasons for the problem are complex and cites labour market rigidity, the tax burden (including social security contributions), lack of trust in the effectiveness of government and cultural traditions as examples. The study, though, praises Germany for her "mini jobs". It can be downloaded from http://europa.eu.int/comm/employment_social/employment_analysis/work_enlarg_en.htm

Venture Capital Incentive Bill Passes Bundestag

On Friday, June 18 the Bundestag passed a Venture Capital Incentive Bill by a large majority. The main objective is to encourage venture capital funds by allowing the promoters to half-charge their "carried interest", that is their overall profits from the venture, to income or, as the case may be, corporation tax. Complications arising from possible dividend analogies will be avoided by including carried interests under the general heading of trading income, and by exempting one half of their proceeds from taxation. Thus, the half-charge will also be enjoyed by a corporate promoter. The condition is that a carried interest is not due until the investors have received a full return of their capital.

Tax Simplification: Finance Ministry Reports Progress On Streamlining Procedures

Ultimately, the tax administration hopes to do away with paper altogether and to assess and collect income tax entirely online. The first major step in this direction - electronic filing of returns - has already been taken. More than a million income tax returns were filed online in 2003, although these were followed up by a hardcopy summary in almost every case because the electronic signature procedures are seen by many as being too clumsy. Also, certain hardcopy vouchers - such as receipts for charitable donations - are still required by law. The latest progress report published by the ministry of finance exudes official optimism that these and other hindrances can be overcome and that online return filing and assessment will soon be the norm. The next major step is to digitise the entire administration of the "wages" tax system of deducting income tax at source from employee remuneration. Pilot projects are in process in some provinces, and results to date give hope of universal application in the not too distant future. The present communication links would be reduced to those necessary between taxpayer, employer and the tax office, so that the tax card and salary data would be automatically transmitted to and from the administration, leaving the employee with a simple import into his own tax return at the end of the year. A risk management system would be used to automate return reviews in simple cases, leaving the assessment officials free to concentrate their personal efforts on more complicated issues involving larger sums. Hardcopy arrangements will, however, continue to be available for those who do not have computers. The report is silent on arrangements for the reporting and verification of foreign income.

OECD Report On German Regulatory Practices

The G7 and various other OECD countries have asked the OECD for a high-level review of their regulatory systems. The report on Germany has just been released. It concludes that stability and complexity of the German regulatory system helped Germany to master the strains of reunification, but are now beginning to impede change. It also makes the point that German reunification distracted attention from regulatory reforms and Germany has now fallen behind other European countries. On the other hand, it commends the German public administration for reliability, legality and honesty, and particularly praises the clarity of competition law and policy. Specific suggestions stemming from the report are that Germany should, in the words of the OECD press release,

  • Encourage entry and competition in the electricity, gas and pharmacies sector, as well as in craft services and professions;
  • Improve market openness in public procurement;
  • Consider trade and investment issues explicitly when assessing regulations;
  • Cut red tape and administrative burdens to save time and reduce costs for firms;
  • Get on with the privatization of the telecoms sector;
  • Improve the political, institutional and practical support for regulatory quality;
  • Communicate the objectives and benefits of reform – and the risks and costs of doing nothing.

OFFICIAL PRONOUNCEMENTS

Branch Capital For Banks - Finance Ministry Republishes Draft Decree

Bank branches in Germany from the European Economic Area countries (EU, Iceland, Liechtenstein and Norway) do not fall under the full supervision of the German supervision authority, BAFin, and do not therefore draw up and submit financial statements as independent banks. Accordingly, no specific branch capital is allocated to their German operations under the provisions of the Banking Act, which means there are no "statutory" financial statements to serve as the basis for the branch's tax accounts. In particular, there is no accounting rule under which a bank could allocate its equity, or "core", capital over its domestic and foreign branches. The finance ministry decree of Christmas Eve 1999 on permanent establishments laid down minimum amounts of capital to be assumed for tax purposes in a rather rough-and-ready table but stated that the rule did not apply after 2000. The ministry of finance has now issued the second draft of a replacement decree. The main thrust of the draft is to set out formulae for calculating the minimum capital to be allocated by a foreign bank to its German branch, or, for that matter, the maximum capital to be allocated by a German bank to its foreign branches. If these limits are overstepped, the interest expense to be charged against the branch profit taxable in Germany will be reduced accordingly. More specifically, the decree rules that:

  • The core capital of the bank should be allocated between its German and foreign branches in proportion to its weighted risk assets and market risk positions carried. This calculation may be derived from the bank's accounts under foreign law and from the risk weighting rules of its foreign supervisory authority as long as appropriate adjustments are made to take differences between national accounting principles into account (e.g. in the calculation of pension provisions).
  • If this "capital allocation method" gives an excessive result, the bank may base its "branch capital" on a "minimum capital" of 8.5% of the branch's weighted risk assets and market risk amounts. The factor of 8.5% can fall to not less than 4.5% if the bank has secondary, or supplemental, capital. The "minimum capital method" may be applied for a further four years without the need to reexamine its justification, unless circumstances change dramatically.
  • Newly opened branches start with a minimum capital of at least € 5m.
  • Small branches with gross assets of not more than € 500m can take their minimum capital at 3% of gross assets if this is higher than € 5m. For 2001-2 the minimum capital is 2% and for 2003-4 2.5% of gross assets.
  • For 2001-2 other banks may apply the "minimum capital method" at a standardised factor of 4.5% of the weighted risk assets and market risk amounts. For 2003-4 the full factor relevant to the bank must be taken. Thereafter the "capital allocation method" must be applied unless it is inappropriate.
  • Banks from the USA, Japan and Australia (equated with EEA banks for supervision purposes) should follow these rules with respect to their German branches except that the branch capital must be at least € 5m.
  • Banks from other countries must take the higher amount of branch capital from these rules or from their branch financial statements as filed with the BAFin.
  • German banks apply these rules in respect of their foreign branches in the order of preference of minimum capital for an equivalent branch in Germany under German law, the "capital allocation method", or at 3% of gross assets if a small branch.
  • The calculations are to be done annually as the basis for the minimum capital for the following year. Adjustments to the interest charge are to be at the average refinancing cost to the bank, or, for simplicity, at the average of the three-month EURIBOR rate.

VAT On Leased Cars - Finance Ministry Decree On Petrol Bought For Lessor

The ministry of finance has now reacted to an ECJ case of February 2003 holding a card allowing a car lessee to fill up at the expense of the lessor against later settlement to be a sale to the lessee on credit provided by the lessor. In consequence, the ECJ and subsequently the Supreme Tax Court denied the leasing company the right to deduct the input tax on the bills from the filling station. The ministry of finance has now issued a decree applying this case to all similar instances. The decree distinguishes between transactions seen as deliveries of fuel between the oil company and the lessor followed by a second delivery from the lessor to the lessee, and those to be treated as direct sales to the lessee on credit provided by the lessor. The dual sale presupposes all of the following conditions:

  • there is no specific fuel management, or credit, agreement between lessee and lessor,
  • the lessee purchases petrol recognisably for the account of the lessor - e.g. as shown by the use of a petrol card,
  • the lessor has not blocked the card or taken other steps to prohibit the lessee from filling up at his expense,
  • the price for each transaction has been separately agreed and each party bears his own bad debt risk and
  • the lessee claims damages for defective petrol (e.g. for engine damage) from the lessor who in turn claims on the oil company.

If these conditions are met, each sale is a separate transaction. Both transactions take place at the filling station. The sale of the petrol by the lessor to the lessee cannot be a secondary transaction to the lease.

If any one of the above conditions is not met the sale is a transaction between the oil company and the lessee on the credit provided by the lessor. This will especially be the case where:

  • lessor and lessee conclude a fuel management, or credit, agreement,
  • the lessee appears to fill up in his own name and for his own account, such as where he does not pay with a petrol card, or
  • the lessee pays for the petrol in his own name and reclaims the amount paid from the lessor.

Sport Invalidity Policies Free Of Insurance Tax - Finance Ministry Decree

The Insurance Tax Act exempts invalidity insurance policies that provide for a disability pension or lump sum compensation in the event that the disabled person becomes unfit to exercise his profession or otherwise earn his own living. The ministry of finance has now decreed that the same exemption should apply to policies granting cover to athletes who become, temporarily or permanently, unable to continue with their sport to professional standards. This "sports invalidity" exemption does not extend to policies covering the usual accident risks associated with sporting injuries. Loss of value policies taken out by the club for the protection of the investment in the athlete in the event of injury are also not exempt.

SUPREME TAX COURT CASES

Employer Contributions To Foreign Social Security Agency Are Income - Supreme Tax Court

The Supreme Tax Court has held that social security contributions paid by a German employer to a foreign social security agency are taxable income for the employee. The case concerned a French employee living in Germany for a temporary period as a director of the German subsidiary of a French group. The employee remained covered by the French social security system and thus liable for the relevant contributions. The German company took out employer membership of the employee's social security fund in order to be able to pay the employer's share of the contributions. These latter were treated by the tax office as taxable income not falling under the exemption relevant to employer's contributions. The Court agreed with the tax office, largely because the exemption depended on a legal requirement resting on the employer to make the contributions. There was, though, here no such legal requirement, as there was no law compelling a German GmbH to join a French social security fund. That it did so was a voluntary act to help the employee meet his French legal obligations. The employer's contributions did not therefore fall under the specific exemption provision. However, they were for the benefit of the employee and thus constituted taxable income in his hands.

Bad Debt VAT Adjustment Once Customer Refuses To Pay

The case concerned a builder whose customer had withheld the final payment pending further work to remedy a defect. The builder admitted responsibility, but argued that the defect was beyond economic repair and that the defective part should be replaced. This, though, was not acceptable to the customer. Ultimately a compromise was reached and both sides agreed on a final payment of some 60% of the disputed amount in full and final settlement of all claims and liabilities. In the interim, however, the builder was faced with the customer's refusal to pay before fulfilment of the contract despite a professional opinion to the effect that the repair work was "necessary but unreasonable". In this deadlock, the builder wrote off his debt and reduced accordingly the taxable turnover in his VAT return. The tax office rejected this, taking the view that the builder could have expected at least something at that point in time and that the write-off and sales adjustment should have been deferred until the dispute was finally settled.

The Court sided with the taxpayer, the builder. A debt is not uncollectible merely because payment is delayed past the due date, but does become so once, viewed objectively, the owner appears unable to collect it within the foreseeable future. This condition is met where the customer makes a founded statement disputing the amount due accompanied by a refusal to pay.

Sale Of Rented Property VAT-Free If Buyer Takes Over The Lease

The Supreme Tax Court has held that there is "no serious doubt" that a sale of rented commercial property to a buyer who allows the leases with the tenants to continue, is VAT-free as the sale of a business. The judgement was passed in a resolution denying the purchaser the right to suspend repayment of the input tax deducted without entitlement, until the main case was heard. The argument of the Court was that the sale of property in circumstances allowing the buyer to step into the seller's shoes as the landlord vis-à-vis the tenants was tantamount to the sale of an entire business or business unit, as the property and the leases were the only two important elements of a property letting business. The Court made the distinction between the VAT-free sale of a business and the VAT-free sale of property, as the VAT Act allows the latter, but not the former, exemption to be waived if the sale is to a VAT-paying business. If the sale was VAT-free by legal definition, the purchaser had no right to deduct as input tax any VAT actually charged.

FROM EUROPE

Savings Tax Directive Delayed Until July 2005

The EU Savings Tax Directive for the mutual exchange of information between member states on interest and other investment income paid through bank accounts held by non-residents was due to enter into force on January 1, 2005. The condition was that Switzerland and the other European tax havens levy a withholding tax on the income paid to accounts held by EU residents from that date. This withholding tax is to be a substitute for an orderly information exchange with those countries which see bank secrecy for the protection of tax evaders as a virtue. The details were hammered out in a long round of negotiations with Switzerland which came to a provisional conclusion a year ago with agreement on a draft treaty along the lines of a Swiss model. Over the course of May and June of 2004 doubts were voiced from Switzerland as to her ability to ratify the treaty in time for it to be able to take effect at the beginning of next year. It might even be necessary to hold a referendum. Since the banks and tax authorities need up to six months preparation time before the system goes fully operational, it was important from the point of view of the original due date of January 1, 2005 that the Council take a firm decision by June 30, 2004. At its last possible opportunity, a meeting of the environmental ministers on June 28, it announced that the assurances received from Switzerland were satisfactory in substance, though unclear as to time. The Council therefore decided to delay EU implementation of the Savings Tax Directive for six months, until July 1, 2005, and to ask the European Commission to keep the situation under review. The other non-member states affected, Andorra, Liechtenstein, Monaco, San Marino, and the Dutch and British overseas territories are to be informed accordingly. The Commission has "indicated" that Switzerland will be able to meet the new deadline, although the Council has established a provision for further six-monthly extensions in case she does not.

European Commission Proposes Enhancement Of Money Laundering Directive

The European Commission has published a proposal to update and improve the Money Laundering Directive in the interests of more effectively fighting terrorism and organised crime. The proposal will be forwarded to the European Parliament and to the Council of Ministers for adoption under the "co-decision" procedure. The main factors in the proposal are:

  • the directive is to be targeted at the proceeds from a wider range of crimes.
  • it should now cover legally acquired money used to finance terrorism.
  • the range of persons subject to money-laundering rules is to be extended to include service providers to companies and trusts, insurance intermediaries, and all traders with individual cash sales of € 15,000 or more.
  • the customer identification requirements are to be enhanced.
  • other details are to be aligned with the latest recommendations of the international "Financial Action Task Force".

More details are available from the link below.

http://europa.eu.int/comm/internal_market/en/company/financialcrime/index.htm

EU Statistics Show Germany With Low Taxes And High Social Security Costs

The EU has just published a survey comparing the relative tax burdens of the EU and its members - before and after enlargement - and how they have developed between 1995 and 2002. The overall EU15 tax burden as a percentage of GDP has remained roughly constant, whilst that for Germany has fallen slightly. The average EU15 proportions of direct and indirect taxes have both risen, whilst that for social security contributions has fallen. However, this is heavily influenced by the French, Italian, Dutch and Finnish reforms to reduce the burden on wages. The figures for Germany show a slight shift from direct to indirect taxes, and a virtually constant charge on wages. The charge to both forms of tax is noticeably below the EU average, whilst that to social security contributions is higher. The link to Eurostat to download the figures is http://europa.eu.int/comm/eurostat/Public/datashop/print-product/EN?catalogue=Eurostat&product=2-01072004-EN-BP-EN&mode=download

These articles are intended as general information for our clients. Concrete action should not be taken without reference to the specific sources given or advice from your usual PwC office. No part of this publication may be copied or otherwise disseminated without the written permission of the publisher. The opinions expressed reflect the views of each author.

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.

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