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Tax & Legal

Tax & Legal

VAT grouping and input VAT deduction for holding companies


Following decisions of the European Court of Justice and the German Supreme Tax Court the Federal Finance Ministry has issued guidelines on the VAT grouping and the input VAT deduction for holding companies. In a special VAT Newsflash our tax experts take a closer look on the situation as a whole. Continue reading

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. Continue reading

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). Continue reading

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