The Düsseldorf Tax Court has decided that a so-called bond stripping model involving a partnership limited by shares (KGaA) as a shareholder in a Luxembourg Société d’Investissement à Capital Variable (SICAV) constitutes an abuse of legal form under Section 42 of the German General Tax Code (Abgabenordnung). Does this really mark the end of the legal proceedings that have been ongoing since 2018?
The review to determine the taxpayer’s intention at making a profit for income to qualify as business income under Section 17 German Income Tax Act must be with regard to the taxpayer's entire shareholding in the corporation. An isolated analysis based on the single business share sold is not possible. In its current ruling, the Supreme Tax Court also comments on the question of abuse of rights with the intention to create tax losses in a case of increased acquisition costs because of a (paid) premium.
The distribution of profits by a Luxembourg subsidiary (in the legal form of a SARL) to its German parent company (a partnership limited by shares – KGaA) may be an abuse of legal forms where the KGaA provided SARL with a loan and shortly thereafter waived repayment, thereby putting SARL in a position to actually make the profit distribution. Even more when the losses arising from the impairment of the value of SARL because of the distribution are to be used by the shareholders in a tax-effective manner.
If the taxpayer has arranged for the sale of a property to a third party, there is generally no abuse of tax law (abuse of legal forms) if the property was initially transferred to the children free of charge and subsequently sold by the children to the ultimate buyer. According to the decision of the Supreme Tax Court the capital gain is subject to income tax in the hands of the children based on their individual income tax situation.
According to the decision of the Supreme Tax Court the offset of losses in case of an upstream merger with the profits of the transferring company accrued during the period of retrospective application was not abusive and in accordance with the legal (tax) provisions in force in the year of dispute (2008).
Dividend withholding tax paid by a foreign intermediary company may not be deducted from the taxable income of the local shareholder of a German company if the entire arrangement is abusive and if, therefore, the dividend income is to be allocated to the German shareholder.
The finance ministry has published a draft tax amending bill, basically to enact ECJ judgments against existing provisions and to react to perceived abuses and anomalies.
The Supreme Tax Court has allowed a manoeuvre effectively avoiding forfeiture of a loss carry-forward on change of shareholder through the sale of a worthless shareholder loan to a new shareholder followed by recovery from the injection of new capital.
The Supreme Tax Court has held that a concerted sales action by shareholders among themselves to realise losses was not abusive despite unchanged holding ratios.
