Germany: German Tax & Legal News - August 2004

Last Updated: 26 August 2004
Article by Andrew Miles


Cabinet Initiates Ratification of Supplement to the Dutch Tax Treaty

Germany and Holland signed a third supplementary protocol to the double tax treaty on June 4. The protocol requires ratification before it can enter into force and the German government has started the ratification process with a cabinet resolution on August 18. It covers four matters of substance:

  • Companies with their head offices in joint German/Dutch trading estates located on the border; the place of management depends upon where the border passes through the building in which the management is located. In principle, the country of residence is the country of location of the managerial offices. If the border passes through these offices, residence is in the country in which the greater part of that building is located. Free standing buildings with no managerial offices, e.g. an adjacent factory or store, are ignored even if they are on the same trading estate. Employee wages are taxable in the country responsible for the employee's social security. Either country may carry out a tax audit on such premises but the authority responsible should inform its opposite number of its intention to do so. These provisions only apply to joint trading estates specifically defined as such.
  • Branches or other facilities located in such a border trading estate; a company resident in one state (other than on a border trading estate) will not be deemed to have any tax liability in the other by reference to an establishment in a border trading estate even if the facility is entirely within the other country.
  • Invalidity and disability pensions paid by Germany to former Dutch forced labourers conscripted during WW II; these are already tax-free in Holland, but will now be taken out of the calculation of the marginal rates to be applied to other, taxable income. In effect, these pensions will be ignored for Dutch tax purposes altogether from 2003 onwards.
  • German withholding tax deducted from dividends on portfolio investments held by Dutch owners; this is now to be credited against any Dutch tax payable on that income.

New Tax Treaty with Singapore Signed

A new double tax treaty with Singapore was signed there on June 28. It will replace the existing treaty of 1972 once it has been ratified by both countries. It follows the OECD model with the following variations:

  • A building site or assembly project becomes a permanent establishment after six months.
  • The withholding tax on dividends is 5% if the shareholder is a corporation holding at least 10% and 15% in all other cases.
  • The withholding tax on interest is 8%.
  • The withholding tax on royalties is 8%. Royalties are paid for the use of all intellectual property and for the hire (leasing) of equipment.
  • Germany will grant a credit of 8% against the tax liability of her taxpayers on Singapore source interest and royalty income even if the tax actually deducted in Singapore is less than this. This "tax sparing" credit ceases to be available from January 1, 2005. The present tax sparing credit is 10% in line with the present withholding taxes on interest and royalties.
  • Capital gains on the sale of property are taxable in the state of location and on the sale of shares in the state of residence. If a person changes his residence between the two states, the first country may levy an "exit" tax on the appreciation in value of his investments if he has been resident there for at least five years. Any such tax will be relieved by the acceptance of a correspondingly higher base cost in the second country.
  • Qualification conflicts are avoided by crediting the source country's taxation against that due in the country of residence where the exemption method - the general rule for the avoidance of double taxation - would lead to "white" income, that is to income items not being taxed at all.
  • The new treaty will take effect for business years starting on or after the 1st of January following the exchange of instruments of ratification. It will also apply to all income paid from then on.

OECD Enhances Model Treaty Exchange of Information Clause

The OECD has revised the information exchange article of its model tax treaty together with its commentary thereto with immediate effect. Essentially, the changes bring the article into line with the increasingly demanding attitudes of many governments in the face of an apparently rising tendency for taxpayers to invest in foreign countries in the hope of not declaring their income at home. More specifically, the changes reflect the substance of the information exchange agreements which the OECD is pressing on tax haven countries for conclusion with its members. The three main items are

  • Information may be shared by the recipient tax authority or court with its own supervisory authority; this latter is to be bound by the same conditions of secrecy and restrictions on usage.
  • A request for information may no longer be declined because the authority requested has, itself, no interest in the information asked for and therefore no domestic legitimation to collect it.
  • A request for information may not be declined solely because the information is held by a bank or similar institution or because it relates to ownership interests in an entity.

Austria, Belgium, Luxembourg and Switzerland have reserved their agreement to the last point.

Dividend Withholding Tax in 2005 Due Immediately

The Bundesrat gave its assent on July 9 to a number of amendments to the Tax Management Act and other statutes. The change of most interest to international business is the new requirement that the dividend withholding tax be paid concurrently with the payment to the shareholders. This applies to withholding taxes on certain other forms of profit distribution, e.g. on cooperative dividends, but not to other withholding taxes, e.g. on interest and royalties. These latter will continue to be governed by the present rule requiring return and payment of withholding taxes by the tenth of the following month. The change applies to dividends paid on or after January 1, 2005.

Other changes agreed to by the Bundesrat during the same session include granting tax relief for the first € 4,000 of costs for a first decree or commercial qualification, extending the circle of persons entitled to single parent relief, and extending for a further year the upper turnover limit of € 500,000 below which businesses in eastern Germany may base their output VAT on cash receipts.

Revised Unfair Competition Act in Force

The Unfair Competition Act has been completely rewritten. The revised version was promulgated by publication in the Bundesgesetzblatt on July 7 and entered into force on the following day. It continues the trend of liberalising the retail trade, this time by removing all restrictions on end-of-season or other sales, and modernises the rules on advertising. It also brings the invasion of privacy ban on "annoyance" up to date. The advertising rules require respect for the copyrights, marks and styles of others, prohibit misleading or malicious advertising, and demand that comparative advertising meet high standards of objectivity. The ban on annoyance extends the previously existing prohibition on unsolicited telephone marketing to faxes and e-mails delivered to private addresses, unless the holder has given the supplier his address as a customer and has been cautioned that he may opt - at no further cost - not to receive advertising messages. The ban also covers advertising with "automatic dialling machines", which presumably curbs mass SMS advertising. The act introduces confiscation of profit as an additional measure to the fines and other penalties for flouting the rules. This new concept was designed particularly with widescale, but individually minor, infringements in mind, and is intended to dissuade managements from cynically comparing the potential benefits of wrongdoing with the likely fine.


German Application of Parent/Subsidiary Directive to New EU Members from May 1 Confirmed

The finance ministry published on August 2 its decree of June 29 confirming that the provisions of the EU Parent/Subsidiary Directive apply to dividends to and from all new member states of the EU from May 1, the date of accession. The relevant provisions of the Income Tax Act will not be changed until 2005, but the ministry does not see this as problematic since the Directive can in any case be directly applied by taxpayers. The only exception to the immediate application concerns dividends from Estonia; Estonia may continue to charge these to income tax up to the end of 2008, provided she does not change beforehand her system of not taxing business profits until distribution. Dividends from Estonia continue, though, to rank for tax treaty relief; if the German treaty applies, 5% is the maximum tax that may be imposed in Estonia on a dividend to a corporate shareholder with at least 25% of the shares. 15% is the limit on dividends to other shareholders.

Sale of a Business for an Annuity

Those who sell their businesses for an annuity, or for recurring payments which they see as a retirement pension, have the option to tax the gain immediately, or to defer the charge until the proceeds are actually received. If they avail themselves of the deferral, the proceeds become taxable as subsequent receipts of business income. The ministry of finance has now issued a decree for their guidance.

Annuity payments are to be split into their interest and capital repayment portions. The basis is the statutory apportionment table for annuity payments based on the age of the recipient on receipt of the first payment. If the proceeds are paid in instalments spread over a period of more than ten years under an arrangement giving the unambiguous impression of a retirement pension, the same split is to be made, this time using the official table for fixed-term pensions. If a business was sold, the interest is taxable on receipt as subsequently realised business income. The same applies to the capital repayment portion once the original investment together with the costs of sale have been recovered. If the seller sells a company (shares held as a private asset), the interest portion is taxable on receipt as other income and the capital repayment (after deduction of the costs of investment and of the sales transaction itself) is half-charged to income tax as a capital gain.

Finance Ministry Distinguishes Between Implicit Interest Income and Capital Losses

December 2001 saw the retroactive attempt to ensure full taxation of the income earned by holders of zero-bonds and similar instruments by allocating the difference between the issue and redemption price to taxable income over the term of a bond without an openly disclosed interest rate. If the implied interest cannot be determined in advance, it must be derived from subsequent price movements on the market. The finance ministry has now refined this change to the legislation with an interpretive decree to exclude losses on disposal of such a bond following an interest or redemption moratorium, or the insolvency, of the issuer from the calculation of the interest currently chargeable as such. The loss thus not taken into account is a capital loss in the year of ultimate realisation following the default. The rules for allocating income apply on issue of the bond or not at all. Consequently, any changes in value following the default on an interest-bearing bond are not current expense (or income) if the bond is traded as a non-performer from then on. Rather, these changes are part of an ultimate capital gain or loss and are deferred until realised, when they may, or may not, still be relevant.

VAT - Ministry of Finance Decree on Invoice Details

The ministry of finance has issued a decree setting out with somewhat greater precision its expectations in respect of certain of the details to be given on invoices issued on or after July 1, 2004 under the new rules. In brief:

  • The date of performance of a service is sufficiently disclosed if the month is given on the invoice or in a document referred to on the face of the invoice.
  • The requirement to show the date of payment for a future supply where this has already been set and does not coincide with the date of the invoice is satisfied by giving the month of payment.
  • The requirement to refer to a bonus, trade discount or rebate agreement on the face of the invoice can be satisfied by a general statement such as,"We operate a bonus or rebate scheme." However, both supplier and customer must be able to produce their copies of the scheme agreement on request.
  • A cash discount agreement is sufficiently documented by a sentence on the invoice such as, "2% discount for payment by ......"
  • The discount deduction from the net payment does not require a separate voucher. The same applies to bonuses and rebates granted by prior agreement in respect of a range of supplies/invoices, unless the supplies have been charged to VAT at different rates.

Reduced Rate VAT - Ministry Defines Goods in More Detail

The statutory catalogue of goods chargeable to the 7% reduced rate of VAT on sale is based on customs nomenclature. Often, the VAT relief only applies to sales of certain items within a given tariff position. Importers in doubt may request an advance ruling from the responsible customs office before import, and the customs offices are also prepared to issue non-binding rulings ex gratia to purchasers of goods from other EU countries who wish to know the rate at which they should calculate the acquisition tax. Unfortunately sellers of goods on the home market are generally without access to this sort of official guidance. For their benefit the ministry of finance has now issued a decree expounding on the exact definition of each item in the catalogue.

VAT Registration Rules for Foreign Bus Companies Published

Foreign bus companies not infrequently - in some cases, regularly - become subject to German VAT on their cross-border traffic to and from Germany. If the journey is to or from a third country (Switzerland), the VAT is collected on the border at the point of entry and there is no further reporting requirement. If the journey is made for a German business, the VAT is accounted for by the customer as a reverse charge. If, however, the tickets are bought by the passengers, as is the case with cross-border local bus services just as it is with long-distance coaches between, say, Warsaw and Paris, the bus company will have its own direct liability to German VAT. The finance ministry has issued its detailed rules for foreign bus companies to register.

  • The new registration rules apply to companies intending to carry passengers to and from other EU countries in 2005 (note: non-EU companies can also fall under these rules, such as when a Croatian tour operator offers coach trips from Zagreb through "central" Europe). Companies already registered will not have to re-register and will receive their certificates automatically.
  • Registration is with the same tax office that is responsible for non-resident suppliers of goods from the relevant country.
  • On registration, the company will receive a certificate of registration for each bus. The driver must carry this at all times whilst in Germany. Failure to produce it on demand in the event of a traffic control etc. carries the risk of fine and of immediate assessment and collection of the VAT apparently due. This VAT is then treated as a payment on account of the final, annual liability.
  • The registrant must maintain the necessary accounting records to support the VAT returns made. Returns are monthly, quarterly or annual and follow the normal rules applicable to any business.

Taxable Income for Farmers from Fees for Environment Maintainance

Property developers are often able to meet environmental conditions with a promise to ensure that another site in the same general area will remain either uncultivated or undeveloped. They are able to do this if they can obtain the requisite undertaking from a local farmer. He will not usually give the undertaking without a fee, particularly if to do so would impair his chances of selling his farm later. The finance ministry has now decreed that such fees are part of farming income, assuming that the land continues to be farmed, and that any costs incurred by the farmer are to be charged as incurred. If the environment fee is paid in advance for a definite period, it is to be taken to income over the period; if the period is indefinite, the income is deemed to accrue over 25 years. Similar principles apply to foresters.

Fiscal Audit Results for 2003 Published

The recently published tax audit results for 2003 show little change over the previous year. Just under 11,000 auditors completed 180,000 audits of large companies from which they collected a total of € 11.5 m. The total takings were € 14.7 m, split as to € 5.3 m corporation tax, € 3.7 income tax, € 3.1 m trade tax, € 1.3 m VAT and € 1.3 other taxes. As the ministry was at pains to point out, the figures do not distinguish between lost taxes recovered and tax shifts between years and/or taxpayers. Accordingly, the value of these statistics is limited.


Royalty Withholding Tax - Court Doubts Conformity with EU Law

German law requires a domestic debtor to deduct a withholding tax from royalties, appearance fees and similar payments to non-residents. Failure to do so makes the debtor liable for the tax due. The withholding tax obligation can only be reduced or eliminated if clearance is obtained from the Federal Tax Office in Bonn to apply treaty or EU directive relief. Payments to domestic creditors, on the other hand, are free of withholding tax, as the supplier's income tax obligations are nothing to do with his customer. This, in the view of the Supreme Tax Court, can be seen as impeding the right of suppliers in other member states to service German customers, as the customer assumes risks, obligations and compliance costs that he would not have had if he had satisfied his requirements locally. On the other hand, the Court accepts that there is a legitimate interest in withholding taxes as a method of securing payment from non-residents and is therefore unable to decide the point without turning to the ECJ. The recent Gerritse case of the ECJ (C-234/01 of June 12, 2003) suggests a strong emphasis towards subordinating the security of tax collection to the unfettered freedom to provide, and therefore receive, services. However, that case is not necessarily a definitive precedent for the case now before the Supreme Tax Court involving the consequences of failure to withhold taxes from the fees paid to visiting pop musicians from Holland. The questions laid before the European Court of Justice for a preliminary ruling are:

1. Do Arts. 59 and 60 of the EC Treaty preclude Germany from making a domestic royalty debtor liable for his failure to deduct and account for withholding taxes on the payments to his creditor in another member state, when there would have been no such obligation on corresponding payments to a domestic supplier?

2. Would the answer to 1.) be different if the (natural person) royalty creditor was not a national of an EU state at the relevant time?

3. If the answer to 1.) is no,

  • are the directly connected expenses abroad to be deducted from the gross royalty subject to withholding (because a domestic royalty earner would only pay tax on his net income),
  • is the expense deduction limited to those expenses known to the debtor, or may the creditor make his own refund claim later for further expenses (in view of a licensor's legitimate interest in not disclosing his costs and profits to the licencee), and/or
  • may the debtor claim the treaty exemption available to the creditor as protection from liability for his failure to comply with a withholding requirement?

Treaty Protection for Irish Dublin Docks Unlimited Company

The tax office sought, by claiming a German bank's holding in an Irish financing company in the Dublin Docks financial services centre to be an abuse of legal forms, to deny tax treaty exemption for the profits when dividended back to Germany. The Supreme Tax Court has confirmed existing precedents to the effect that the "not merely temporary" investment by a German company in a low tax company within the EU is not an abuse of legal forms, even if the financing company's investments are managed by a German company. The Court has, however, set a new precedent granting treaty exemption to dividends received by a German company (with a minimum holding of 10%) from an Irish unlimited company having a share capital. In this, it departed from an earlier case holding that an Irish unlimited company did not per se qualify as a limited company for treaty relief.

The Court has now found that the treaty relief available to limited companies must also be made available to unlimited ones. Its main arguments were based on the long-standing practice of the German tax authorities and courts to regard Irish (and UK) unlimited companies with share capitals as equivalent to German capital corporations. It did not analyse the Irish legal form as such, but rather held to the point that a company's corporation tax qualification must be constant for all relevant corporation tax purposes. Interestingly, the Court also made the points that

  • if, as in this case, the foreign company qualified for an EU subsidy (the Dublin Docks scheme) under the EU rules, it had sufficient operating substance to distinguish itself from a potentially abusive "letterbox".
  • if, again as in this case, interposing a domestic entity between a German investment and its German owner could not have been questioned despite German tax benefits from the arrangement, penalising a similar arrangement with entities in other EU countries would be a breach of the EU freedom of establishment. The Court based this contention on quotes from ECJ cases.

Building Valuation can be Based on Sale Three Years Later

Under the relevant provisions of the Valuation Act, the market value of commercial property is to be determined by reference to a formula wherever necessary as a basis for taxation, unless the taxpayer can furnish objective evidence of a lower value. Generally, the proceeds from the sale of the site are accepted as objective evidence if the sale took place within a year of the event in respect of which the valuation is required. If the sale falls outside this period, it is not seen by the official Guidelines as being sufficiently "recent" to serve as a reliable indication of the current value. The tax offices then automatically revert to the official formula. The Supreme Tax Court has now held, however, that strict adherence to the time limit of one year before or after the event was too rigid an approach and that earlier or later sales could still be accepted as evidence for a lower valuation if supported by other objective factors. In the case concerned these were a confirmation from the valuation service run by the land registry that local land values had not changed during the intervening period, and that rent received from the tenant had not changed either. The sale supporting the taxpayer's contention of a lower value took place three years later and was to the tenant of the building. The Supreme Tax Court did not comment on any possible influence of the tenancy on the sales price.

This case concerned an inheritance. However, it is directly relevant to real estate transfer tax levied on indirect transfers of property through the acquisition of 95% of the shares in the company owning it, as well as to events under the Reconstructions Tax Act or under other rules requiring transactions or their individual parts to be taken up at market value despite lack of formal consideration. In most such cases recourse is ultimately had to the Valuation Act, as was the case here.

Salary of Resident Employee Working Abroad Split by Time Worked

The case concerned a German resident working for a Luxembourg employer. Part of his work was done in Luxembourg and part in Germany. The German tax office assessed him to income tax on the basis of a salary split between Luxembourg for the work performed there and Germany for that done here and in third countries. This principle follows the Germany/Luxembourg double tax treaty and was not in dispute between the parties. The dispute concerned that part of the annual remuneration paid for the employee's free time - weekends, holidays and bank holidays - when no work was done anywhere. The tax office said this should be allocated to Germany as the country of residence, and the taxpayer sought to allocate it to Luxembourg as the country of the employment and the employer. The tax office' position was supported by a finance ministry decree; that of the taxpayer was (at least partly) in accordance with a Luxembourg assessment. The Court found a compromise solution of allocating the total annual employment income between the two countries in proportion to the number of days actually worked in each. Days worked in third countries fell to Germany because of the double tax treaty; free days as contractually agreed - weekends, holidays, bank holidays - were taken out of the calculation altogether and thus effectively split over the two states in proportion to the time actually worked. Days off sick were not discussed because they were not an issue in this case.

Three month limitation on travelling expenses to one destination not always applicable

The official Wages Tax Guidelines contend that regular visits by employees to the same site lead to the presumption of a second place of work after three months. The consequence is that the employer may no longer bear the relevant travelling expenses free of tax for the employee. The Supreme Tax Court has now held that this three-month rule is not to be taken too literally and that it can be departed from where the activity performed at the second site is clearly subordinate to that at the first. This was the case before the Court of an employed architect assigned to supervise a building project lasting several years. Frequent visits to the site were necessary, but so was his continued presence in the office. Indeed much of the work related to the site was performed from the office, including liaison with public authorities and other outsiders as well as working out the various adjustments to the building plans as the project progressed. In the circumstances it was clear to the Court that the architect continued to perform his main duties from his office and that the site visits were a necessary adjunct thereto, rather than being a distinct activity in their own right. Thus it continued to be right and proper for the employer to refund his travelling expenses free of tax for as long as the project lasted. The Court drew a distinction between the architect in the case and employees required to manage several shops, staff assigned to a long-term consultancy project, a teacher required to attend a part time university course as part of his professional development or a company director required to be present in different branches on prescribed days of the week.

The Court did not, however, finally decide the case. The tax-free meal allowances had been set under the assumption that they would not be payable for longer than three months, so they were not necessarily still appropriate where the three-month rule no longer applied. It was for the lower court to rule on whether the same allowances could still be paid and to set substitutes if necessary.

Lump Sum Payment to TV Script Writer is Current Income

The taxpayer, a script writer for a television series, was paid a fixed fee for each broadcast. The television company sought to change this to a lump sum for each script. The payment for the next following script was unusually high, as it took the remaining rights from earlier scripts into account to facilitate repeat broadcasts of the series. The taxpayer claimed that this buy-out should be taxed under the favourable rules for one-time-only payments, but the Court rejected this claim, saying that favoured payments were compensation for loss of office (i.e. compensation for the loss of future earnings) or for lump sum rewards for a single activity that had taken years to complete. This, though, was neither. Rather, it reflected an agreed change in the basis of payment for current work and the fact that it led to a temporarily high income did not justify extending the legal definition of "compensation".

Gain on Partnership Share Sold to Related Partner Charged to Trade Tax

A 70% partner sold his share to a second partnership in which he held 50%. The sale was at market value, which meant recording a significant capital gain. A provision of the Income Tax Act rules that gains on sales of partnership shares shall rank as trading income to the extent the original partner(s) remain as partners in the new partnership. The 50% share of the seller in the acquiring partnership fulfilled this criterion. 50% of the gain was thus added to the trading income of the partnership, in the hands of which it was chargeable to trade tax, before being allocated to the partners in profit-sharing ratio. The Court confirmed this position of the tax office', pointing out that the wording of the Income Tax Act requalified the relevant part of the gain to trading income and that the Trade Tax Act subjected trading income as determined under the Income Tax Act to trade tax.

Input VAT Recoverable if Relevant Foreign Outputs Could have been VATed if Performed at Home

The case before the Court was brought by the German owner, an investment fund, of Dutch commercial property. The buildings were let as office space to Dutch businesses and the owner opted to charge Dutch VAT on the rentals. The German tax office denied the owner the right to deduct the (German) input tax, on the grounds that Sec. 205 of the official VAT Guidelines excludes the right of deduction where the relevant foreign output would have been free of VAT if performed in Germany. Sec. 205 also says that a German option to waive the output tax exemption is to be ignored.

The Court held that the sentence in Sec. 205 referring to the output tax exemption waiver option was unfounded in law and ran contrary to the VAT system. It could not therefore be sustained. The fact that the rentals had been charged to Dutch VAT was conclusive evidence that a corresponding option in Germany would have been exercised. However, the existence of a corresponding option was a matter for German law, and this forced the Court to refer the case back to the lower court for further facts, in particular as to whether the identity of the tenants would have curtailed the German option. This would have been the case for office space let to a bank. The Court also made the point that the input tax could only be deducted if its charge was appropriate. The inputs were described to the Court as "services for the construction of buildings, such as the selection of a property and tax and legal advice". If this description meant that the inputs were "in connection" with a Dutch site, they should not have been subjected to German VAT in first place. The Court asked the lower court, in its referral, to clarify this matter too.

Property fund partnership entitled to VAT input tax deduction

The case was brought by a closed property fund formed and registered as a limited partnership. On formation, it paid a lawyer's bill for the legal work involved in setting up the fund. This included not only the formalities of registration, but also consultancy, business planning and initial steps towards the search for investors. The tax office denied the partnership the right to deduct the VAT, as its only "turnover" during the year in question was the VAT-exempt sale of a limited partnership share. The Supreme Tax Court turned to the ECJ for guidance and then found in favour of the taxpayer that

  • the partnership formed for the sole purpose of building and then letting a building incurred its legal consultancy costs during the formation and start-up phases as part of the general expenses of running the business.
  • the admission of a new partner and the receipt of his investment are not taxable events for VAT and are therefore not VAT-free transactions restricting the right to recover input tax.
  • the input VAT at issue was incurred under the Sixth Directive too as business expenses directly connected to the economic activities of the partnership. Deduction was to be allowed in full, since the partnership had neither VAT-free turnover in the relevant year, nor any intention of making any in the future.


European Ministers Confirm July 1, 2005 Effective Date for the Savings Tax Directive

The European Council of Ministers has confirmed its agreement with the Commission's proposal to allow the Savings Tax Directive to take effect as of July 1, 2005. The formal withholding tax agreements with European and other tax havens should enter into force at the same time. Further delays are, however, possible, especially if it becomes necessary to hold a referendum in Switzerland.

Capital adequacy for banks - European Commission proposes new directive

After extensive consultations with interested parties, the European Commission has proposed a new directive on the minimum capital needed by banks to meet the capital adequacy requirements. This directive is intended to ensure faithful implementation of the Basel II accord by member states whilst taking the changing needs and circumstances of the European economy into account. The Commission has also taken the opportunity of combining various items of EU legislation into a single directive in the interests of clarity. Among the key features of the proposal:

  • Each bank or investment business will be able to choose between three different models for calculating the capital required for its business. The simple and intermediate variations will be available at the end of 2006, whilst the advanced model will not be on stream for another year.
  • SME (small and medium-sized enterprises) financing will be governed by its own capital adequacy rules. Certain types of venture capital are also to enjoy preferential treatment. It is thus hoped to avoid stifling lending to smaller projects with containable, even though not fully quantifiable, credit risks.
  • Retail lending - housing and other loans to private individuals will also fall under a lower capital adequacy requirement.
  • The various national supervisory authorities are to be encouraged to cooperate more closely, e.g. through the Committee of European Banking Supervisors, in the interests of ensuring a common approach within a common market. The text of the proposed directive and related documentation can be downloaded from

EU ProposesPscheme of Home State Taxation for SME´s

The European Commission has proposed a five year pilot scheme to test the concept of home state taxation for small and medium-sized businesses (SME's) active in more than one EU member state. The basic idea is to simplify the taxation environment for a smaller business wishing to expand across its own national borders by allowing it to compute and report its entire EU-wide income according to the rules and procedures of its home country. Part of the tax base so determined would then be allocated to the other states on the basis of the relative wages totals. The other states would then tax their share at their own national rates. The Commission has outlined its scheme in some detail, although the status at the moment is still very much that of a discussion draft. Comments are invited from anyone interested by September 15.

The Commission's brief announcement and the links to the outline of the scheme and to the questionnaire can be bound at

Income from letting a farm leasing, not farming, income for VAT - ECJ

The ECJ has confirmed the view of a German tax office that the income from the lease of part of a farm is to be charged to VAT under the normal rules, rather than under the flat-rate scheme for farmers. The case concerned a mixed dairy and crop farm which the farmer chose to split into two units. He let out the dairy herd, the cow sheds and milking equipment, the EU milk quota and a third of the land as a self-contained dairy farm and kept the remainder for himself for crop growing. He sought to treat the rental income for the dairy farm as incidental to the "main" income from the crops, maintaining that his entire revenue was from farming - "agricultural services" in EU parlance - and therefore subject to the flat-rate VAT. Only if he had ceased farming altogether, would VAT under the general rules to which lessors are subject be appropriate. The court, though, agreed in effect with the tax office, holding that leasing/letting and farming were different businesses. Agricultural services implied the use of assets and labour (that of the farmer himself and/or his employees), whereas rental income was passive. In this case the two businesses were not only different, they were also clearly distinct.

ECJ Overturns Council Suspension of Deficit Proceedings Against Germany and France

By November 2003, it had become clear that Germany and France were running budget deficits in excess of the 3% of GDP allowed under the Maastricht treaty - in Germany's case for the second year in succession. The European Commission proposed to the Council of Ministers in advance of the November 25 "ECOFIN" meeting that they pass a formal resolution threatening both countries with penalties unless they reduced their deficits by at least 0,8% of GDP in 2004 and brought them below the 3% level altogether by 2005. However, "ECOFIN" did not find a majority for this proposal, but did pass a somewhat weaker resolution "welcoming the public commitment" by the two countries to "take all necessary steps" to ensure that the deficit would be below 3% of GDP in 2005. The resolution went on with a number of concrete suggestions to each country and concluded with an item suspending the excessive deficit proceedings pending the results of compliance. The European Commission claimed that the Council was not authorised to pass such a resolution and sued before the ECJ for its annulment. The Court has now found in the Commission's favour, at least in so far as the Council decision to suspend the proceedings was concerned. On paper, this re-establishes the legal position obtaining on November 24, 2003, but the practical implications of this for Germany in July of 2004 after the last parliamentary sitting before the summer recess (the Bundestag does not reconvene until September 6) are not entirely clear. The Commission has announced that it "will study very carefully the full decision of the Court before making more detailed comments or proceeding in any other action".

News from PwC Seminars and Events

EU Enlargement - PwC Book on Business Opportunities

The PwC EU Enlargement Team in Belgium has written a book entitled "The Enlargement of the European Union - Opportunities for Business and Trade" explaining in considerable detail the state of implementation of EU law in each of the member states. Copies are available direct from the publisher, John Wiley & Sons Ltd see However, those preferring a personal discussion of this complex but rewarding subject are cordially invited to contact Monika Diekert at or by phone at ++49 30 2636 5225.

Transfer pricing seminar - Europe meets Asia

We have joined with our Asian colleagues to offer a transfer pricing seminar, Europe meets Asia - Aligning tax opportunities across continents, to discuss transfer pricing issues arising from business transacted between the two regions. The one-day seminar will be presented by PwC specialists from China, Germany, Malaysia, Singapore, Switzerland and Thailand and will be held on September 8 in Singapore and on September 14 in Düsseldorf. The morning will be reserved for plenary sessions, whilst the afternoon will be devoted to workshops to discuss more specific issues in smaller groups. Participants will have time to attend three out of the six workshops, China -Opportunities and Challenges, ASEAN Region - Effective Documentation and Cash Repatriation Strategies, Financial Services, Worldtrade Management Services, Switzerland outbound, and Germany outbound. The seminar will be held in English.

Those interested in attending are invited to contact their usual PwC people or Lilli Jundt-Becker of our Frankfurt office (, phone ++49 69 9585 6568, fax ++49 69 9585 4568) at the earliest opportunity.

Tax seminar for bank employees

This autumn, we are again offering our banking clients the opportunity of sending their employees with lending, analysis and investment responsibilities on a two-day seminar on business and property taxation. The level is elementary, that is previous technical knowledge of tax will not be assumed. After the seminar, participants will be able to recognise the existence or possibility of any serious tax problems faced by corporate customers or investments. They will also be able to make an initial appreciation of the likely consequences for the bank and of the need for professional advice. The seminar will be held in German on

September 20 and 21 in Düsseldorf

October 12 and 14 in Essen

October 19 and 20 in Bielefeld.

Those interested in places for their staff are invited to turn to their usual PwC contacts or to Lilli Jundt-Becker at

phone ++49 69 9585 6568

fax ++49 69 9585 4568.

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.

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