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Tax & Legal

Tax & Legal

Multilateral Convention to counter aggressive tax avoidance arrangements has been signed.


On 7 June 2017 Germany together with the representatives of over 60 countries signed the multilateral convention, which should transpose the main recommendations of the G20/OECD Project against Base Erosion and Profit Shifting (BEPS Project) into existing bilateral tax treaties.

 

The adjustments made by the so-called “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting” (MLI) should ensure that German tax treaties are more resistant to abusive tax arrangements. The emphasis will now not only be on the avoidance of double taxation but also on the avoidance of non-taxation. The overriding principle is that profits should be taxed at the place where the entrepreneurial activities and thus the value creation take place.

The ratification of the MLI in Germany should go ahead in the coming legislative period. The first changes in the German bilateral treaties could then apply as early as 2019.

Source: Federal Ministry of Finance Press Report 7 June 2017:

http://www.bundesfinanzministerium.de/Content/EN/Reden/2017/2017-06-08-signing-ceremony.html

 

Bundesrat approves legislation introducing restrictions on the deduction of royalty payments


In its sitting on 2 June 2017 the Bundesrat (the Upper House) approved the Act to Combat Harmful Tax Practices in connection with the Licensing of Rights. The new legislation is intended to prevent multinational businesses from transferring their royalty income to countries, which offer such income preferential treatment. Such preferential tax regimes (so-called Licence Boxes, Patent Boxes or IP-Boxes) are considered not to meet the demands of the OECD and G20 BEPS Project. The new provision should be applied to expenses arising after 31 December 2017 and is to be introduced by way of a new provision in the Income Tax Act (ITA)

The new section (Section 4 j ITA) provides that expenses incurred through licensing rights from a related party (within the meaning of Section1 (2) of the Foreign Transactions Act (“FTA”)) are non-deductible or only partially deductible, to the extent that the payment – in the hands of the recipient – is subject to a low tax rate (income tax rate of <25%) and the low tax rate is not a result of the standard tax rate in the country in question but rather arises from a special preferential regime (e.g. a Licence Box, Patent Box). Where there is more than one creditor, the lowest tax charge will be relevant.

The provision also applies to situations under which additional related parties are inserted in between. Furthermore branch undertakings may also be considered as payers and recipients within the meaning of the provision.

Insofar as the conditions apply, only that proportion of the expenses will be deductible that corresponds to the ratio that the income tax rate borne by the recipient bears to a tax rate of 25%. This means that the higher the tax burden on the recipient the greater the deductible proportion by the payer.

Under the provision, a foreign partnership treated as a transparent entity, e.g. a check-the-box transparent corporation will also be considered to be a creditor.

The restrictions will not apply if the foreign preferential regime follows the nexus approach of the OECD (see Chapter 4 of Action 5 the Final Report of the BEPS Project).

Bundesrat approves the legislation to combat tax avoidance.


 

In its sitting on 2 June 2017 the Bundesrat (the Upper House) approved the legislation which the government introduced at the end of last year following the publication of the Panama Papers.

The aim of the new legislation is to achieve more transparency in cross-border business transactions. Further the tax authorities’ options for detecting the use of foreign domiciled companies for tax avoidance should be increased. Whilst the Federal States have expressly greeted the measures for more transparency, they also demanded the introduction of further steps to combat international tax avoidance.

Here a brief summary of some of the measures:

Obligation to report the acquisition of qualified holdings

The existing rules regarding reporting obligations relating to the acquisition of qualified holdings in foreign entities are to be changed so that the treatment of direct and indirect holdings are standardised. The legislation also provides for an extension of the reporting deadline up until the date on which the corporation tax or income tax returns are filed.

Reporting obligations for non-EU directly or indirectly controlled partnerships, companies, associations and estates

In future taxpayers are also obliged to report business relationships to non-EU partnerships, companies, associations and estates which they directly or indirectly control irrespective of whether they have a formal interest in the enterprise or not. A breach of this obligation will lead to an extension of the statute of limitations. In addition a breach can lead to a penalty of up to € 25,000.

Financial institutes to be liable for tax shortfalls

In future financial institutes will, under certain conditions, be obliged to report to the tax authorities, business relationships of German taxpayers with non-EU entities, where the financial institution established the relationship or acted as an agent. A failure to report can result in the financial institution becoming liable for any tax shortfalls resulting from its omission. Furthermore a breach can lead to a penalty of up to € 50,000.

Abolition of bank secrecy rules

The so-called bank secrecy privilege has been abolished. This is to be distinguished from the civil law bank secrecy privilege according to which data transmission by banks to other enterprises is protected. Whilst this bank secrecy privilege did not entitle the banks to refuse to provide the tax authorities with information, it did limit the tax authorities’ powers of investigation. It may be noted that investigations without cause will continue to be prohibited.

Extension of Automatic Access Procedures

The procedure for the automatic access to accounts for tax purposes is extended. Under the new rule it will be possible for the tax authorities to investigate cases where a German taxpayer has either the sole power of disposal over or is the economic beneficiary of an account or depot belonging to an individual, a partnership, a company, an association or an estate with his/its residence, registered office, headquarters or place of management outside Germany. In addition the data retention period for banks should be extended to 10 years after account closure.

Procedures for compilation of collective of information defined

The tax authorities’ options to gather collective information are codified in accordance with Supreme Tax Court case law.

Collection and recording of tax identification data

As part of their identification procedure, banks must also collect and record the tax identification data of the account holder and of each person with a power of disposal. This information will be provided exclusively to the tax authorities as part of the procedure for collection of information. Previously the so-called legitimation examination was limited to the name and address.

New obligations for the retention of documents

A new obligation for the retention of documents should be imposed on taxpayers, who, alone or with related parties, can exercise directly or indirectly a controlling or dominant influence over a non-EU entity in company law matters or in financial or business matters. In future, it will be open to the tax authorities to carry out a tax audit of these taxpayers’ affairs without requiring special justification.

Catalogue of tax evasion offences considered as extremely grave extended.

Tax evasion arising through a hidden business relationship with a non-EU entity controlled by the taxpayer is now included in the catalogue of tax evasion offences considered as extremely grave. As a result the limitation period for the investigation such offences will be extended to 10 years.

Furthermore there is a general extension of the limitation period applicable to the payment of tax from 5 years to 10 years in cases of tax evasion

 

OECD publishes International VAT/GST Guidelines


The International VAT/GST Guidelines now published present a set of internationally agreed standards and recommended approaches to address the issues that arise from the uncoordinated application of national VAT systems in the context of international trade. The Guidelines were adopted as a Recommendation by the Council of the OECD in September 2016. Continue reading

Bundesrat gives its assent to the packet of measures against profit reduction and profit shifting.


In its last session of the year, the Federal Assembly (Bundesrat) gave its assent today to the Act to Implement the Amendments to the EU Mutual Assistance Directive and to Introduce Further Measures to Combat Profit Reduction and Profit Shifting

This packet of measures, which will come into effect on 1 January 2017, will give almost € 25 billion worth of relief to taxpayers. In particular low earners, families and lone parents will benefit.

The Bundesrat also gave its assent to the law amending the rules regarding the utilisation of losses upon change of control. (See our Blog:  http://blogs.pwc.de/german-tax-and-legal-news/2016/12/06/bundesrat-set-to-approve-draft-for-relief-from-curtailment-of-loss-utilization)

Impact of tax treaty definitions on domestic law


The Supreme Tax Court held, in a decision published on 19 October 2016, that the term “permanent establishment” set out in Section 9 No. 3 of the Trade Tax Act should follow the domestic law definition and not the tax treaty definition.

The taxpayer, a GmbH, carried on business as an import agent; specificaly it acted as the agent for another GmbH, sourcing all its goods from Turkey. The company had no other income source save for the provisions received. For this purpose, the taxpayer kept a purchasing office in Turkey.

In its trade tax returns for the years 2004 to 2008, the taxpayer deducted the income arising from the Turkish purchasing office from the trade tax base according to Section 9 No. 3 of the Trade Tax Act (TTA). This provision provides for the deduction of that part of the trade tax base, which emanates from a permanent establishment located outside Germany (as defined by the TTA). The tax office initially followed this treatment, but revised its view at a subsequent tax audit.

The basis for the tax office’s revision was that under the terms of the German/Turkish tax treaty, a purchasing office was excluded expressly from the definition of a permanent establishment.

The taxpayer argued, however, that the treaty did not apply in these circumstances and the relevant definition was the domestic one.

The Supreme Tax Court held that the domestic definition should be applied to the term as set out in Sec. 9 No. 3 TTA.

The Court stated that it was settled case law that tax treaties merely determined the extent to which the liability to tax under domestic law should be restricted. The definition of “permanent establishment” as set out in the individual tax treaties is, thus, generally only applicable within the framework of the tax treaty. This view is confirmed by the wording of the German/Turkish tax treaty itself, with such phrases as “For the application of this Treaty the following applies…” or (in Article 3 (1)) “Within the meaning of this Treaty…the expression … shall mean”. In contrast questions such as whether earnings from abroad should be deducted when calculating income or to which cases such a deduction should apply, are ones of domestic law.

The concept of the “coexistence” of bilateral agreements as it concerns tax treaties and domestic tax rules presupposes a coexistence of the factual prerequisites with the result that terms defined in the treaty, which differ to the definition in domestic law, must be interpreted on a stand-alone basis according to treaty.

It is open to the legislator to set aside this coexistence of the separate sets of rules but it has chosen not to in this case. No connection with treaty law is evident in the case of Section 9 No. 3 TTA.

Supreme Tax Court decision of 20 July 2016 (I R 50/15)

Tax neutral repayment of capital contributions by companies tax resident outside the EU also possible


The transfer of shares to German-residents shareholder as part of a US spin-off generally constitutes investment income under Section 20 (1) No. 1 of the Income Tax Act (ITA); Section 20 (1) No. 1 Sentence 3 ITA is to be interpreted in line with EU law, so that companies resident outside the EU may also repay capital contributions on a tax neutral basis, even though they do not maintain a contributions account for tax purposes under Section 27 of the Corporation Tax Act (CTA). Continue reading

Further relief from curtailment of loss utilization planned


The present curtailment of loss relief on changes of shareholders shall be modified to allow for a continued utilization of losses, provided the business operation does not change. The German government has taken the initiative and – for this purpose – agreed on a draft law. The respective draft was published on September 14, 2016. Continue reading