ISSUE 1 - APRIL 2014 WWW.BDO.DE

GERMAN TAX & LEGAL NEWS AIFM Tax Adjustment Act gazetted Admissibility of certification by

foreign notary Treaty override referred to Constitutional Court

Editorial Welcome to the first issue of the BDO Germany Tax & Legal News. With this newsletter, we would like to keep you informed about current topics in connection with tax and legal issues which we hope are of interest especially to non-German readers with a (business) interest in Germany.

We will be covering new legislation, court decisions, ministry bulletins etc. In this issue, you will read about the latest changes in tax law as a result of the AIFM Tax Adjustment Act. The law introduced new provisions which preclude the immediate realization of undisclosed burdens as well as a provision that allows

German tax authorities to exchange information with foreign (tax) authorities without notifying the taxpayer, e.g. for FATCA purposes. Other topics include new jurisdiction on German real estate transfer tax, State aid proceedings against Germany by the EU Commission, and clarification regarding certifications performed by foreign notaries. Should you have any questions regarding these or other topics, our BDO specialists are happy to provide further information. We hope you will enjoy reading this issue and welcome any comments or suggestions.

Yours sincerely, BDO

CONTENTS

1. AIFM Tax AdjustmentAct gazetted 2

2. Levying of real estatetransfer tax (RETT) afterchange of partners in realestate-owning partnership 2

3. European Commission:State Aid proceedingsre. German surchargeaccording to RenewableEnergy Act (EEG) 3

4. Employer‘s contributionfor foreign EU/EEA/Swisspublic Health insurance ofemployee 3

5. Admissibility of certificationby foreign notary 4

6. Wage resulting from sale ofparticipation rights 4

7. Treaty override referred toConstitutional Court 5

8. Deductibility of EU fines 5

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1. AIFM TAX ADJUSTMENT ACT GAZETTED

The new AIFM Tax Adjustment Act was passed in December 2013. The new regulations regarding the international exchange of information and the limitation on utilizing undisclosed burdens will probably be especially important for foreign companies.

Exchange of information without notifying the parties concerned

Based on the new regulation of § 117c of the German Fiscal Code (AO) audit, inquiry and reporting obligations can now be arranged in consideration of the particularities of the respective agreements under international law in detail. This enables the implementation of domestically applicable agreements under international law regarding the promotion of tax honesty where international facts and circumstances are involved.

The Federal Ministry of Finance is thereby authorized to set regulations for data transmission to the Federal Tax office and the forwarding of such data to the responsible authority of another contracting state. In the scope of this data transmission, the taxpayer concerned is not to be heard.

The new regulation is especially designated to assist in implementing the FATCA agreement concluded, amongst others, between Germany and the USA. German financial institutes are obliged to make information about customers available to the IRS if said customers are subject to taxation in the USA or show any relation to US taxes. The current § 117c AO, however, is not limited to the EU or FATCA, meaning it can also be applied in relation to third countries.

Realization of undisclosed burdens

The German tax law includes various regulations governing that certain (contingent) liabilities on the tax balance sheet either cannot be recognized or have to be recognized at lesser value than on the commercial balance sheet.

This results in undisclosed burdens. In accordance with the more recent decisions of the Federal Fiscal Court, companies were allowed to realize such undisclosed burdens with a tax-reducing effect if a third party assumes such liabilities either legally or economically, as such third party assuming the liability does not have to take the recognition-related limitations into account. This jurisdiction especially enabled affiliated companies to shift liabilities and thus granted them significant structuring potential.

The legislator therefore introduced an extension of the expense realization. In accordance with § 4f of the German Income Tax Act (EStG), respective operating expenses incurred cannot be immediately deducted for tax purposes, but have to be allocated to a period of 15 years. In the first balance sheet after assuming the liability, the acquiring party needs to observe the special tax regulations regarding the recognition of the provision in the tax balance sheet that originally applied to the seller (§ 5 sec. 7 EStG). The resulting profit can also be allocated to the following 14 years by way of setting up a reserve.

The new regulations are applicable for fiscal years ending after 28 November 2013.

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2. LEVYING OF REAL ESTATE TRANSFER TAX (RETT) AFTER CHANGE OF PARTNERS INREAL ESTATE-OWNING PARTNERSHIP

Certain legal acts, like the purchase of real estate or the conveyance of property in other cases are subject to real estate transfer tax (RETT). Many of these legal acts require a certain form that involves a notary, who will also inform the parties of their obligations regarding RETT.

On the other hand, a purchase of an interest in a partnership that owns real property is possible without observing a certain form, just like joining or leaving such a partnership or transferring an interest in it. In the absence of a notary, the partners must pay attention to their RETT obligations themselves. The purchase of an interest is generally not subject to RETT, because there is no change of ownership. However, if the partnership situation changes in such a way that, directly or indirectly, 95 % of the interest in the partnership is transferred to new partners within five years, then this is deemed to be a transfer of the

real estate to a new partnership, resulting in RETT (§ 1 sec. 2a RETT-Act).

Partnerships are not considered to be legal persons. However, they can have legal ownership in real estate or other business assets, in which case the partners have joined ownership over these assets (Gesamthand).

When real estate is transferred from the joint ownership of one partnership to another joint ownership (possibly just due to the fiction in § 1 sec. 2a RETT-Act), the tax is not levied to the extent the ownership structure is identical (§ 6 sec. 3 sentence 1 RETT-Act). This privilege will lapse retroactively, however, if the interest of a partner involved in such a transfer changes within the following five years. In its decision of 25 September 2013, the Federal Fiscal Court (case no.

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II R 17/12) had the opportunity to comment on two problems occurring in this context.

1. If a partner/joint owner disposes of his interest in the partnership in favour of his spouse or a relative in the direct line or by gift, this action does not affect the privilege and will not lead to the levying of RETT, provided the beneficiary himself maintains an unreduced interest in the partnership/joint ownership for a period of five years. This period is calculated from the (fictitious) transfer of ownership from the one joint ownership to the other - not the transfer to the beneficiary.

2. The opposite applies, if the partnership/joint ownership which acquires real estate performs a change in legal form into a corporation. In this case, the conditions for non-levying of RETT lapse retroactively. By the change in legal form the entitlement in the assets of the joint ownership is lost, which is essential for the RETT exemption.

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3. EUROPEAN COMMISSION: STATE AID PROCEEDINGS RE. GERMAN SURCHARGE ACCORDING TO RENEWABLE ENERGY ACT (EEG)

The German Renewable Energy Act (EEG) provides for the preferred feeding of electricity produced from renewable energy sources into the electricity grid and guarantees to its producers a fixed feed-in tariff.

With the EEG-surcharge, costs arising from the promotion of electricity production from renewable energy sources are divided among the end consumers of electricity. The amount of the surcharge results from the difference between receipts and expenditures that arise from the use of electricity from renewable energy sources. However, energy-intensive users from the manufacturing sector as well as track railways are exempt completely from the EEG-surcharge due to a special compensation scheme in the EEG in order to protect their international and intermodal competitiveness.

In December 2013, the European Commission initiated State aid proceedings against the Federal Republic of

Germany. It is expected that the EEG and especially the cap on the EEG-surcharge in favour of energy-intensive users constitutes an unlawful and incompatible State aid. In contrast, the German Federal Government considers that no direct or indirect transfer of State resources is concerned, since the benefit granted is solely financed from private resources. The government stresses furthermore, that the EEG does not impose the EEG-surcharge on the end users as it is up to the electricity companies whether they will pass on these costs to the end consumers.

The Federal Republic of Germany has meanwhile brought an action against the State aid proceedings in order to protect its rights. Nevertheless, it still aims at finding an amicable solution together with the European Commission.

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4. EMPLOYER‘S CONTRIBUTION FOR FOREIGN EU/EEA/SWISS PUBLIC HEALTH INSURANCE OF EMPLOYEE

The intense connection of markets results in an increase of cross-border secondments, especially where groups of companies are concerned. Employees and employer need to take the tax and social security laws of the “destination country” into account just as much as those of the home country. In Germany legal uncertainties arose in cases where employees, especially on management level, were sent to Germany from abroad and the domestic employer continued payments to the foreign insurance.

On 12 January 2011, the Federal Fiscal Court (case no. I R 49/10) decided that health insurance allowances paid by a domestic employer for the employee’s statutory French health insurance are not tax exempt in terms of § 3 no. 62 of the German Income Tax Act (EStG). The court stated that a relevant legal obligation of the employer to pay the allowance necessary for the tax exemption does not exist.

With circular dated 30 January 2014 (Gz. IV C 5 – S 2333/13/10004), however, the Federal Ministry of Finance announced that contrary to the opinion of the tax courts the Federal Ministry of Health and the Federal Ministry of Labor and Social Affairs believe that the employer is obliged to pay allowances under social law. Being a voluntary member of a foreign statutory health insurance has to be treated like being a (voluntary) member of a domestic health insurance at least within the EU, the EEA and where Switzerland is concerned.

Thus, allowances paid to an employee for his insurance with a foreign statutory health insurance at least within the states listed above are subject to the tax exemption of § 3 no. 62 EStG.

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5. ADMISSIBILITY OF CERTIFICATION BY FOREIGN NOTARY

Notary fees in Germany have been raised notably with effect from August 2013. This raise also affects actions required by corporate law. Consequently, more attention will again be paid to thoughts of performing the transfer of shares in a German limited liability company (GmbH) abroad, especially in Switzerland, for financial reasons. A transfer of shares performed abroad is formally effective, if it either meets the formal requirements prescribed by German law or if it meets equivalent formal requirements established by the foreign state.

The Higher Regional Court of Munich (OLG München, case no. 31 Wx 8/13) had held in February 2013 that a foreign notary is not entitled to prepare a new list of the shareholders in accordance with § 40 sec. 2 Limited Liability Companies Act (GmbHG) after certifying an assignment of shares outside Germany. In these cases, only the managing directors were competent and obligated to prepare the list. In contrast to this opinion, in 2011, the OLG Düsseldorf (case no.I-3 Wx 236/10) had granted this power to a

foreign notary and with that also confirmed the admissibility of certifications by foreign notaries in general.

With a decision of 17 December 2013 (case no. II ZB 6/13), the Federal Court of Justice (BGH) has now explicitly clarified that foreign notaries are also allowed to hand in lists of shareholders to the commercial register. There has been no change resulting from amendments of the GmbHG of 23 October 2008 (MoMiG) with regard to the effectiveness of certifications that are performed abroad. The registration court is not entitled to reject a list of shareholders solely because it was submitted by a notary who has his seat in Basel/Switzerland.

Even after the MoMiG entered into force a certification required by the GmbHG may be performed by a foreign notary as long as the foreign certification is equivalent the German one.

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6. WAGE RESULTING FROM SALE OF PARTICIPATION RIGHTS

In the course of the reorganization or acquisition of an enterprise it is often intended that employees participate in the future success of that enterprise. This measure may serve to strengthen employee loyalty to the enterprise. In addition to profit-sharing schemes a participation in the equity or debt capital can be considered. A mixture of the two is the granting of participation rights. Depending on the chosen arrangement there are different tax implications - especially but not only with regard to the return of the participation rights.

The Federal Fiscal Court (BFH) decided a case on 5 November 2013 (case no. VIII R 20/11) in which a managing director was supposed to participate in the long-term success of the company and received a certain number of participation rights. At the end of the agreed term, these rights could only be sold to the company. Additionally, the surrender value had been fixed at very low value in case the employment relationship was terminated by giving notice.

After the end of the term and upon ending the employment by mutual agreement, the managing director received the agreed surrender value. He claimed that the resulting surplus was an - at that time non-taxable - increase in the shareholding of the company. The BFH did not agree with this. In the

Court’s opinion, the surplus generated by the retransfer of the participation rights was induced by the employment relationship of the managing director and was therefore to be taxed as wages.

According to the respective contracts the value of the participation rights granted could not develop separately and independently from the employment relationship. Here, the special contractual conditions are decisive: the participation rights could only be returned to the company and the surrender value was, from the start, dependent on the kind of termination of the employment relationship. Had the employment relationship terminated without observing any notice period due to culpable conduct by the managing director, the relationship regarding the participation rights would also have ended with immediate effect. As far as the rights holder received an advantage from the repurchase of the participation certificates this advantage was not induced by a separate and independent special rights relationship. The amount of the advantage was dependent on the managing director’s conduct as an employee of the company. It was therefore remuneration for his performance and was to be taxed as wages.

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7. TREATY OVERRIDE REFERRED TO CONSTITUTIONAL COURT

In accordance with German law, a non-resident partner of a German partnership can receive so-called special allowances from the company, e.g. for his work for the company or the granting of a loan. With § 50d sec. 10 of the German Income Tax Act (EStG), Germany has a provision that is supposed to govern the taxation of such special allowances in cross-border cases. If a DTT applies, special allowances are deemed company income instead of salaries or interest “for the purpose of the application of the treaty”. Germany would then have the right of taxation regarding such income.

This provision is highly disputed and has now become subject of a referral to the Federal Constitutional Court. The dispute concerns an Italy-based partner of a German KG (Kommanditgesellschaft – limited partnership) who granted a loan to said KG. He wanted to pay taxes on the interest income in Italy. The German tax office (also) imposed taxes in Germany on the basis of § 50d sec. 10 EStG.

In accordance with German case law, the decisive provision does not comply with the German

constitution, but unilaterally overrides the internationally agreed qualification of interest payments on loans; the international treaty is thus violated. In accordance with the respective applicable DTT, such income much rather constitutes salary or interest. As a result, the partner’s country of residence, not Germany, would have the right of taxation.

With resolution of 11 December 2013 (case no. I R 4/13), the Federal Fiscal Court thus (again) referred the question whether the legislator violates constitutional law with a so-called treaty override to the Federal Constitutional Court.

Note: Since the German legislator has been using the disputed means of the treaty override again and again in the recent past, it can be expected that other regulations will also have to be measured by these standards.

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8. DEDUCTIBILITY OF EU FINES

Fines imposed by the institutions of the European Union, e. g. the European Commission (EC), constitute business expenses; nevertheless, they are non-deductible for tax purposes according to the German Income Tax Act (EStG). However, this restriction does not apply insofar as the fine only “skims” the economic advantage received from breaking the law and insofar as the income tax regarding the economic advantage has not been deducted. Thus, the exception from the non-deductibility rule requires that the fine contains a so-called “skimming-amount”.

The idea that elements of general and specific deterrence both play a part in the fines imposed in order to punish the infringement of competition law does not exclude the possibility of having a “skimming-amount”.

The EC is entitled to impose fines against enterprises and associations of undertakings, inter alia, if they - like in the case at issue - deliberately or negligently infringe EU law. In these cases, the fine for each enterprise or each association of undertakings involved in the infringement must not surpass 10 % of their respective total turnover of the preceding year. This limitation to a maximum amount is supposed to prevent the imposition of fines that enterprises will presumably not pay; a connection with skimming economic advantages cannot be gathered from the provision.

The case which was decided by the Federal Fiscal Court on 7 November 2013 (case no. IV R 4/12) did not

involve a “skimming-amount”. The amount of the fine was first calculated on the basis of certain criteria (basic amount). Since the basic amount was surpassing the limit of 10 % of the total turnover, the fine was subsequently reduced to this maximum amount. However, as stated above, the maximum amount does not intend to skim the economic advantage. In such a context, a potential skimming off of excess profits may only occur if “aggravating circumstances” are taken into account, which lead to an increase of the basic amount. In the case at issue, however, no such increase of the basic amount existed.

If the basis of assessment for a fine that the EC imposes for an infringement of competition law only depends on the basic amount (possibly reduced to the maximum amount), there is no “skimming-amount” to be found and the fine therefore cannot be deducted partially as business expense.

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Andrea Bilitewski Partner Head of Policy Department Tax and Business Law Consulting Hamburg Phone: +49 40 30293-209 andrea.bilitewski@bdo.de

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