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Article no. 134 on the final directive on the Tax Reorganisation Act called attention to the tax authorities' refusal to recognise a step-up in basis for trade tax purposes when a corporation is reorganised as a partnership (see sec. 2.1 of the cited article; for more detail on the step-up process itself, see article no. 28).

Because of changes made in sec. 18 (2) of the Tax Reorganisation Act by the tax reform legislation passed in March 1999 (see in particular sec. XIV of article no. 167), there is no question but that the tax authorities are correct for reorganisations which fall under the new law.

Under the prior law in force from 1995 through 1998, however, good arguments can be advanced in favour of recognition of the step-up for trade tax purposes.

In what is bound to become a test case, the Münster Tax Court has rejected the position of the tax authorities with respect to a reorganisation falling under the old law (judgement of 22 January 1999, file no. 11 K 7980/98 G, as yet unpublished). The tax authorities are expected to appeal to the Federal Tax Court.

The court's decision is based essentially on the wording of the statute in force prior to the 1999 amendment. However, the court also gave weight to arguments that the position advocated by the tax authorities would lead to double imposition of trade tax, hence that, absent a clear expression of legislative intent, which is beyond doubt not present until the 1999 amendment, the statute should not be construed as the tax authorities desire.

Since the tax authorities maintain that the 1999 amendment to sec. 18 (2) UmwStG merely clarifies what the statute meant all along, they refrained from including any specific transition provisions in the new tax legislation. The general provision on entry into force states merely that the law is effective from 1 January 1999 onwards. Assuming the Federal Tax Court upholds the Münster Tax Court on appeal, this will raise the question of where to draw the line between reorganisations falling under the old law, for which the step-up on reorganisation in partnership form is recognised for trade tax purposes, and reorganisations falling under the new law, for which such recognition is denied.

Since reorganisations are transactions taking place over time, any number of events are conceivable as demarcation points. Article no. 159 is illuminating in this respect. It deals with a high court ruling on where to draw the line between reorganisations subject to the tax reorganisation law which took effect in 1995 and reorganisations falling under the pre-1995 law. The prior law was generally less favourable to taxpayers. In this decision, the Federal Tax Court held that the time of the legal actions which lay the groundwork for the merger was controlling, not, for instance, the date of entry in the Commercial Register or the retroactive effective date of the merger.

The same approach may well be taken with respect to the new version of sec. 18 (2) UmwStG. This would locate the controlling event at the outset of the reorganisation process, causing many reorganisations consummated in 1999 to fall under the more favourable 1998 law. On the other hand, it would also rule out any present tax planning possibility.

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