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Tax & Legal

Insolvency: no right of protection for legitimate expectations following an enforcement of a VAT claim


VAT claims may also be asserted in insolvency proceedings against a GmbH, if the GmbH, which had previously been treated as a controlled company in a fiscal unity (Organschaft), which was subsequently not deemed to exist, actually received the VAT owed by it from the assumed controlling company (Organträger). According to the Federal Tax Court, no protection of legal expectations may be claimed in this situation despite a change in the application of the law on the Organschaft through a decision of the Supreme Tax Court in the interim.

Tax authorities register a VAT claim in the insolvency table

The shareholders of a GmbH, over whose assets insolvency proceedings had been opened in June 2009, comprised individuals and a GbR (a civil law association), who were also the sole members of a limited partnership (KG). The KG had leased assets from the GmbH for the purposes of its trade. Up until the end of 2008 the GmbH and the KG had assumed that the KG was the controlling enterprise of the GmbH. In May 2009 the KG informed the tax authorities that the organisational integration necessary for an Organschaft was missing. The tax authorities then registered the VAT claims for 2009 in the insolvency table.

The receiver, as plaintiff, raised an objection. The Tax Court refused the related appeal and held the GmbH liable as taxpayer for the supplies carried out by it, on the grounds that there was no financial integration for the recognition of an Organschaft.

The GmbH and the plaintiff attempted to rely on the right of protection for legitimate expectations, because the Supreme Tax Court had altered its case law vis-à-vis the existence of an Organschaft between sister companies in a decision (V R 9/09) made on 22 April 2010. The GmbH could not, they said, be held accountable for the fact that the KG had assumed at the beginning of 2009 that no Organschaft existed. The Supreme Tax Court, however, could not accept the plaintiff’s argument.

No Organschaft possible between sister companies.

The Court confirmed its judgment in the above-mentioned case (i.e. no Organschaft possible between sister companies), noting that the decision was also in line with EU law and with case law of the European Court of Justice on the issue. However, the Court also considered itself obliged to refuse the appeal for the following reasons:

  • Setting aside the question of financial integration and assuming for a moment that despite Supreme Tax Court case law the Organschaft had existed at an earlier point in time, the GmbH would in any event no longer have met with the conditions to (potentially) be a controlled company (Organgesellschaft) as soon as a temporary receiver with a right to reserve his approval was appointed.
  • The Court stated that consideration should also be given to the fact that the tax authorities had already refunded the VAT, which the KG had paid over to the tax office at the time it had assumed that an Organschaft existed and that the Plaintiff had already successfully required the KG – on the basis of existing contracts between the KG and the GmbH – to pay the VAT refund received into the insolvency estate. (The Federal Supreme Court reached a decision on 15 October 2014 XII ZR 111/12).

Supreme Tax Court decision of 24 August 2016 (V R 36/15) published on 14 December 2016

Deadline for the filing of an application for recording at tax book values in the case of a contribution


The Supreme Tax Court held, in a decision published on 27 October 2016, that:

  • In the case of a contribution and a share exchange, the transferee entity must file its application to be permitted to record the contributed asset at a value below its fair market value before it submits its “end-of-period tax balance sheet”(the term applied in Section 20 (2) 3rd Sentence of the Tax Reorganisations Act 2006). The term “end-of-period tax balance sheet” means the transferee’s end-of-period tax balance sheet for the period in which the date of the contribution fell.
  • It is immaterial when determining the deadline whether the submitted balance sheet was prepared on the basis of general accounting rules or the special rules applicable to tax balance sheets.

The appellant, a limited partnership (“KG”) held the entire stock in a German limited company (GmbH). The special business assets (Sonderbetriebsvermögen) of the KG’s majority limited partner (“A”) included shares in a US corporation (“A-Inc.”) recorded with a tax book value of € 1. On 4 August 2008 A contributed the shares in A-Inc. into the GmbH and received new shares in the GmbH. In the statutory financial statements of the GmbH to 31 December 2008, the shares in A-Inc. were recorded at their fair market value (ca. € 2.6 million). The GmbH enclosed these statutory financial statements, when it submitted the tax returns to the tax authorities on 25 May 2009; also enclosed was a reconciliation to tax values (with higher depreciation from the supplementary balance sheets) and an attachment showing corrections according to Section 60 of the Income Tax Implementation Regulations. By a letter of 24 March 2010 the GmbH submitted to the tax office a separate tax balance sheet to 31 December 2008, according to which the value of the shares in A-Inc. was recorded at their original tax book value of € 1.

During tax audit the question was raised as to what extent the GmbH had properly applied its right to record book values. The tax office took the view that this subsequent election of the tax book values was not permissible. This view was shared by both the Tax Court at first instance and by the Supreme Tax Court.

The contribution constituted a qualifying share exchange, so that the GmbH had the option of recording the shares in A-Inc. at their tax book value or at a higher value not exceeding the fair market value. However, the GmbH had failed to exercise this option in time.

The relevant application must be submitted before the applicant files its “end-of-period tax balance sheet”. The term “end-of-period tax balance sheet” refers to the transferee’s end-of-period tax balance sheet for the period in which the date of the contribution fell; it does not refer to a balance sheet which is separate and independent from the end-of-period tax balance sheet.

 

Note: By submitting the 2008 statutory financial statements together with the reconciliation, the GmbH was treated as submitting a 2008 tax balance sheet and thus an “end-of-period tax balance sheet”. Section 60 of the Income Tax Implementation Regulations requires that a taxpayer, who is obliged to keep accounting records, attaches to his tax returns at least a statutory balance sheet and profit and loss account, which should be applicable for tax purposes. Where the balance sheet contains entries or amounts, which do not correspond to tax regulations, these are to be adjusted through additions or annotations to correspond to the tax regulations. Alternatively, however, the taxpayer may also submit a tax balance sheet. Any one of these reporting alternatives (1. Statutory balance sheet with a statement that these are also the relevant basis for tax purposes; 2. Statutory balance sheet with additions or annotations relevant for tax purposes; 3. Tax balance sheet.), which the taxpayer submits to the tax office with his tax returns is- according to the Supreme Tax Court – to be regarded as an “end-of-period tax balance sheet” and thus constitutes the cut-off date for making the application.

 

Supreme Tax Court decision of 15 June 2016 (I R 69/15)

No trade tax loss carry-forward with merger of two-tier partnership


In its decision of 12 May 2016 the Supreme Tax Court held that -in the case of a two-tier partnership structure- the trade tax loss carry-forward of the lower-tier partnership is fully eliminated, if the upper-tier partnership, which holds a 100% -interest in the income and assets of the lower-tier partnership, is merged down-stream and thus ceases to exist. Referring to previous case law, the Court’s reasoning was that the upper-tier partnership, as co-entrepreneur of the lower-tier partnership, was also the holder of the partnership’s trade tax loss-relief.       Continue reading

Negative Goodwill in the case of a contribution


The Federal Supreme Tax Court upheld a decision of the MĂĽnster Tax Court and held:

Where the total value of the goodwill of a business/business unit, which has been contributed into a corporation as a contribution-in-kind under the terms of the Reorganisation Tax Act, does not exceed the total book values of the individual business assets because of the existence of negative goodwill, the acquiring company may not step-up the book values of the individual assets of the business property to a higher value, even if the fair market value of those individual assets exceeds their book value.

 

The case in question related to a contribution of a business unit into a corporation in exchange for new shares under the Reorganisation Tax Act 1985. (This Act has since been amended, but the judgment should still be relevant to the Reorganisation Tax Act 2006.)

Under Section 20 of the Act the acquiring company may elect to record the contributed assets at their tax book value or a higher value, provided the value recorded does not exceed the fair market value of the business/business unit.

In the instant case, the acquiring company (the appellant) recorded in the relevant balance sheet the assets of the contributed business unit at a value higher than their tax book value, but not in excess of their fair market value. The business unit in question was as a whole loss-making with a negative goodwill, so that the fair market value of the business unit as a whole was less than the total market value of the individual assets together. It had been accepted by the lower court (following the agreement of the parties) that the value of the business unit as a whole corresponded to the previous tax book values of the individual assets applied previously by the contributor.

The Court held that in the case of the contribution of a business/business unit, it was not only the values of the individual capitalised assets that were relevant, but also the value of the contributed business/business unit as a whole. Thus, it was not possible for the acquiring company to step up the value of the individual assets contributed to a value which would be higher than the going concern value of the assets as a whole, taking into account the negative goodwill.

The Court, following settled case law, further held that the contribution of a business, of a business unit or of share in a partnership for new shares in the acquiring company amounts to a barter transaction, and is thus a sale on the one side and an acquisition on the other. It follows, therefore, that the value which the company attributes to the contributed assets in its books, constitutes the sales proceeds for the contributor (as well as the acquisition costs for the new shares) and the relevant acquisition costs of the individual assets for the company.

Referring to its earlier dicta, the Court stated that, in the case of a contribution, available hidden reserves relating to particular business assets cannot just be allocated at will, but rather any available good will to be stepped-up is to be allocated equally among the assets. As a consequence, the Court stated, in calculating the maximum step-up, the value of the contribution as a whole must be observed and any negative goodwill should be considered.

 

Supreme Tax Court judgment I R 33/14 of 28 April 2016, published on 4 August 2016