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1. Repeal of the statute
In article no. 178, we reported on the government's announced intention to repeal retroactively the foreign contractor withholding provision (§ 50a (7) EStG) added to the income tax code with effect from 1 April 1999 by the Tax Relief Act for the Years 1999/2000/2002. Our article also discussed the withholding provision itself at length.
The 1999 Tax Adjustment Act (see article no. 183) repeals § 50 (7) EStG retroactive to the date on which it first took effect.
A directive issued by the Federal Ministry of Finance on 11 August 1999 (BStBl I 1999, 728) instructed the tax authorities to refund tax which has already been withheld and remitted provided the requirements were met for a withholding exemption or for a refund.
Following repeal of the law, the tax authorities can be expected to refund all tax collected under the repealed statute.
2. EG Treaty violation proceedings
In late July 1999, the European Commission instituted proceedings under Article 226 of the EG Treaty against the Federal Republic of Germany for violating its treaty obligations by enacting § 50 (7) EStG (BB 1999, 1640). While the repeal of the statute will put an end to these proceedings, it is interesting to note the Commission's objections to the repealed statute:
• The statute as enacted applied not just to construction work by foreign contractors, which at least often involves creation of German permanent establishment, but also to numerous other types of contractual relationships where creation of a permanent establishment is the clear exception. Thus, the statute imposed a substantial administrative burden on foreign contractors who have no German tax liability to begin with. The Commission considered the scope of the statute excessive for this reason.
• The withholding amount (25 % of gross payments) assumed taxable profits to amount to approx. 50 % of sales. Since this was unrealistically high for many of the contracts covered by the statute, the Commission considered the withholding rate excessive. It also questioned the requirement that tax be remitted within 8 days of the relevant contractual payment, whereas for other withholding purposes (§ 50a (5) EStG) a more liberal deadline applied.
• The procedures whereby contractors with no German tax liability or liability under the withholding amount could secure exemptions from withholding or withholding at a lower rate were considered too burdensome and rigid.
While the objective pursued by the Federal Republic of Germany (securing compliance with its tax laws) was legitimate, the means chosen were in the Commission's view unreasonable (disproportionately harsh) in light of the objective and hence in violation of Article 49 of the EC Treaty (freedom to provide services).
3. German government liability for costs incurred?
Schauhoff (IStR 1999, 499) raises the possibility that the Federal Republic of Germany may be liable to firms for the costs they incurred in connection with the repealed statute (legal and tax consultants' fees; possibly, in cases where tax was remitted, interest charges or other damages). Schauhoff notes that governmental liability for violation of EU law is recognised in certain circumstances under the case law of the ECJ, though only for acts in contravention of a clear legal provision. The state also has liability under German law for violations of official duties (Art. 34 GG). Enactment of a clearly unconstitutional law could constitute such a violation. Given the stiff requirements for governmental liability, Schauhoff seems to believe that the firms affected will end up paying their own costs after all.
For further information, please send a fax or an e-mail stating your inquiry to KPMG Frankfurt, attn. Christian Looks: Fax +49-(0)69-9587-2262, e-mail cLooks@kpmg.com. You may also send an e-mail to KPMG Germany by clicking the Contact Contributor button on this screen.
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