german tax monthly august 2014 · 2020-06-16 · according to the view of the tax authorities, a...

German Tax Monthly August 2014

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Dr. Martin Lenz [email protected]

Published by

KPMG AG Wirtschaftsprüfungsgesellschaft The Squaire, Am Flughafen 60459 Frankfurt/Main, Germany

Editorial Team

Prof. Dr. Gerrit Adrian Corinna Bier Alexander Hahn Lena Reitz Christian Selzer

August 2014

German Tax Monthly 1. BFH (I R 36/13): Excess Transfer

caused in a Pre-Tax Group Peri-od

In order to be treated as a tax group the entities involved are required to conclude a profit and loss pooling agreement. In a profit and loss pooling agreement a controlled entity under-takes to transfer its entire profits to another company under commercial law. However, the amount to be trans-ferred according to commercial law and the profit shown in the tax balance sheet are not necessarily congruent. If, based on special tax law regulations, the profit transferred under commercial law is higher than the profit shown in the tax balance sheet (e.g. because of different depreciations/amortizations), this is considered to be an "excess transfer" to the controlling entity. Ex-cess transfers may also be caused in pre-tax group periods. Until 2004, excess transfers were treated as profit transfers from a controlled entity in the tax group to the controlling entity. Starting from 2004 the legislator intro-duced revised legal provisions, accord-ing to which excess transfers caused in a pre-tax group period have to be treated as dividend distribution from the controlled entity to the controlling entity. This may result in a higher tax burden. The revised provisions apply to fiscal years ending after 31 December 2013.

In the case at hand, the tax group was established on 1 January 2002. Even in 1991, meaning before the tax group existed, the controlled entity (plaintiff)

increased the book values of its hous-ing stock in the tax balance sheet to going concern values. In the commer-cial balance sheet the (lower) book values remained unchanged. As a consequence, the depreciations in the commercial balance sheet were lower, and therefore the profits were higher than in the tax balance sheet. This resulted in excess transfers for the tax group (years at issue 2004 to 2006) caused in pre-tax group periods, which were treated as dividend distributions according to the revised legislation.

In its decision the Federal Tax Court (BFH) underlined that excess transfers caused in a pre-tax group period must not be offset with other excess trans-fers or short transfers caused in a pre-tax group period and/or caused in a tax group period. Instead, the legal conse-quences have to be drawn for every single event that causes an excess transfer or a short transfer (so-called transaction-based perspective).

In addition, the BFH voiced doubts about the constitutionality of the appli-cation provision stipulating from when the revised legislation has to be ap-plied. The law was only adopted in the course of 2004, but the provision had to be applied retroactively starting from 1 January 2004 (fictitious retroactive effect). In the case at issue, the new legislation also impacted the years 2005 and 2006. The required profit and loss pooling agreement tied the controlled entity for at least five years to the tax group (2002-2006). The

Content

1. BFH (I R 36/13): Excess Transfer caused in a Pre-Tax Group Period

2. Lower Tax Court of Düsseldorf (6 K 4087/11 F): Write-downs to the Lower Going-Concern Value of Loans to a Foreign Subsidiary

3. BFH (I R 56/12): Non-Deductible Futile Expenses for Setting up a Fixed Place of Business in a Third Country

4. E-Balance Sheet – Publication of Taxonomy Version 5.3

5. Changes in the Taxation of Income of Deemed Commercial Partnerships

6. FATCA-USA Implementation Ordi-nance

mailto:[email protected]

2 / German Tax Monthly / August 2014


legal consequences of the revised legislation therefore also applied to these years. However, an early termination of the profit and loss pooling agreement in order to avoid negative legal consequences for the plaintiff would only have been possible for good cause. It was uncertain for the plaintiff at this time, whether the tax authorities would have recognized the legal amendment in 2004 as good cause for terminating the agreement. Hence, an early termination of the profit and loss pooling agreement could not be reasonably expected. The events which caused the excess transfers (increase of the book values in 1991 and establishment of a tax group in 2002) had therefore been completed and could no longer be changed in an appropriate manner. Therefore, the plaintiff reasonably expected protection of legitimate expectations for the years at issue (2004 to 2006).

Finally, the BFH underlined that such significant tax changes for the tax group can constitute good causes for an early termination of the profit and loss pooling agreement.

The BFH submitted the question of the constitutionality of the application provision to the Federal Constitutional Court (BVerfG), because only the BVerfG can rule on the constitu-tionality of legal provisions.

Only last year the BFH submitted a comparable matter (I R 38/11) about the constitutionality of the application provision to the Federal Constitutional Court (see October 2013 edition of German Tax Monthly, p. 2).

2. Lower Tax Court of Düsseldorf (6 K 4087/11 F): Write-downs to the Lower Going-Concern Value of Loans to a Foreign Subsidiary

The Lower Tax Court of Düsseldorf (FG Düsseldorf) judged on the question as to whether write-downs to the lower go-ing-concern value of loans granted to a wholly-owned foreign subsidiary have to be adjusted pursuant to § 1 Foreign Transactions Tax Law (AStG), previous version (year under dispute 2002). § 1 AStG governs income adjustments in cases where the arm's length principle is not complied with and related parties maintain cross-border business relation-ships. An explicit provision for shareholder loans between corporations was included in the Corporate Income Tax Law (KStG) for assessment periods starting from 2008 onward. According to this, profit reductions relating to domestic and cross-border loans granted by a substantial shareholder are, as a general rule, no longer tax deductible.

In the case at issue, the plaintiff granted a loan to its wholly-owned foreign subsidiary in the year 2000. The annual in-terest agreed was 5%. No provision of collateral was grant-ed. Due to poor performance, the foreign subsidiary discon-tinued operations on 31 October 2002. Thus, in the year under dispute 2002, the plaintiff wrote down the loan to EUR 0.

According to the view of the tax authorities, a repayment of the loan had never been seriously intended, so that already the granting of the loan as such has to be treated as a con-structive contribution. Such a constructive contribution in-creases the book value of the shareholding by the amount granted as a loan. Otherwise, the loan agreement would at

least have to be regarded as a business relationship accord-ing to § 1 AStG (previous version) where the arm's length principle is not complied with, so that the profit reduction would have to be adjusted off-balance sheet.

The FG Düsseldorf, however, is of the opinion that the funds had been granted to the subsidiary not as a (constructive) contribution, but as a loan. After all, the funds were provided based on loan agreements and - even if they had been granted in lieu of equity - they would, according to the case law of the BFH (ruling of 27 August 2008, I R 28/07) have to be treated not as equity but rather as debt capital of the bor-rower. Due to the over-indebtedness of the foreign subsidi-ary, the going-concern value of the loan actually was 0 EUR. Also, it is not required to adjust the profit reduction off-balance sheet pursuant to § 1 AStG (previous version), be-cause the loan agreement cannot be regarded as a business relationship within the meaning of § 1 AStG (previous ver-sion). The loan is a funding transaction in lieu of equity which does not constitute a business relationship within the meaning of § 1 AStG (previous version) for the year under dispute 2002. Moreover, in the case at issue, the write-down of the loan to the lower going-concern value does not consti-tute profit shifting to other countries in order to reduce the taxes owed in Germany. However, this is precisely the pur-pose and intent of § 1 AStG.

Please note that the Federal Ministry of Finance (BMF) guid-ance dated 29 March 2011 concerning the applicability of § 1 AStG previous version to write-downs to the lower going-concern value of loans to foreign related companies is not applicable for assessment periods before 2003 where, as in the present case, funding transactions in lieu of equity are concerned. Unlike the FG Düsseldorf, the FG Berlin-Brandenburg affirmed an off-balance sheet adjustment of a write-down to the lower going-concern value for the years 2004-2007 invoking the BMF guidance of 29 March 2011 (12 K 12056/12, see December 2013 edition of German Tax Monthly, p. 4).

Since appeal has been filed (I R 29/14) it remains to be seen how the BFH will decide.

3. BFH (I R 56/12): Non-Deductible Futile Expenses for Setting up a Fixed Place of Business in a Third Country

In its decision of 26 February 2014 the BFH held that futile expenses for setting up a fixed place of business (permanent establishment) in a third country are not deductible in Ger-many if the exemption method applies.

In the case at issue, a domestic joint practice of medical doctors in the legal form of a German professional partner-ship (“Partnerschaftsgesellschaft”) intended to start a prac-tice in Dubai (United Arab Emirates; UAE) between 2002 and 2005. As a result, the partners incurred expenses, in particu-lar travel expenses. In July 2005, one of the partners with-drew his consent to the project.

http://www.kpmg.com/DE/de/Documents/gtm-october-2013-KPMG.pdf

http://www.kpmg.com/DE/de/Documents/gtm-october-2013-KPMG.pdf

http://www.kpmg.com/DE/de/Documents/german-tax-monthly-december-2013-KPMG.pdf




Pursuant to the version of the Double Tax Treaty UAE in force in the year at issue (2004), the local tax office treated the futile expenses for the project incurred by the partnership as tax-exempt and thus non-deductible. The BFH has con-firmed this view. In line with the established case law of the BFH the scope of the tax exemption under tax treaty law applies to both positive and negative income.

According to the BFH, the expenses incurred due to the failed setting up of a fixed place of business in the UAE have to be allocated to this fixed place of business. The source state’s right of taxation does not presuppose the actual ex-istence of the fixed place of business at the time of the allo-cation of (negative) income. For the BFH the decisive factor is that the partners have already incurred expenses in order to set up a foreign fixed place of business. This allocation of expenses to the fixed place of business is final and remains even if the fixed place of business fails to be set up at a later point in time.

Although the case at issue dealt with the setting up of a fixed place of business of a professional partnership, the principles of the BFH’s decision may apply analogously to cases deal-ing with permanent establishments of commercial enterpris-es.

Since the case on hand concerned the intention to set up a fixed place of business in a country outside the European Union, there was no need for the BFH to deal with the ques-tion as to whether the loss incurred in connection with setting up a fixed place of business may be considered as final loss within the meaning of CJEU case law and whether disregard-ing such losses in Germany would constitute a violation of the freedom of establishment enshrined in European Union law.

4. E-Balance Sheet – Publication of Taxonomy Version 5.3

Reporting companies are required to transmit their balance sheets and their income statements electronically to the German tax authorities (e-balance sheet). In case of a cal-endar-based fiscal year, companies are obliged to transfer an e-balance sheet for fiscal years beginning after 31 De-cember 2012 at the earliest. Foreign companies maintaining a permanent establishment in Germany are also required to submit an e-balance sheet for the German permanent estab-lishment to the local tax office if they are subject to reporting obligations or have opted for voluntary reporting. However, according to a transitional rule foreign companies have to transmit the e-balance sheet for German permanent estab-lishments for the first time for the fiscal years beginning after 31 December 2014.

At the end of June 2014 the BMF published the updated version 5.3 of the taxonomy (predefined tax chart of ac-counts for the e-balance sheet to be used by the preparer). The update brought only minor changes to the existing com-ponents of the taxonomy. One of the main changes is, that the subdivision of the position “wages and salaries” has been

optimized. To achieve this, the catch-all position “other mis-cellaneous wages and salaries” was replaced by two posi-tions: “other wages and salaries” and “other miscellaneous wages and salaries”. It should be verify if the ongoing map-ping fulfill the requirements of the current taxonomy. The changes also include improvements in the taxonomy for German permanent establishments of foreign corporations because the above-mentioned transitional rule will expire by the end of the year.

In a guidance dated 13 June 2014 the Ministry outlined that the new version 5.3 is mandatory for the preparation of an e-balance sheet for fiscal years beginning after 31 December 2014. However, there will be no objections if the new ver-sion is also used for the prior fiscal year 2014 or 2014/2015.

5. Changes in the Taxation of Income of Deemed Commercial Partnerships

§ 50i Income Tax Law (EStG) has been amended pursuant to the “Act for the adjustment of national tax law to the ac-cession of Croatia to the EU and for amending other tax provisions”. The adjusted version intends to prevent bypass-ing § 50i EStG.

Notwithstanding an existing Double Tax Treaty (DTT), § 50i EStG allows the taxation of later profits derived from the sale or withdrawal of business assets contributed or transferred to a deemed commercial partnership as well as taxation of the current income of such deemed commercial partnership in Germany under certain circumstances. These may, under certain conditions, not only include business assets but also shares in corporations, which were contributed or transferred from private assets to the business assets of the partnership. The personal scope of application covers taxpayers who reside in another DTT country and who are partners. Deemed commercial partnerships do not pursue genuine commercial business activities. Instead, the classification as commercial partnership depends on certain characteristics of the partnership.

The amendment of the provision is to ensure exit taxation of hidden reserves also in cases of reorganization or contribu-tion. The amended provision essentially focuses on the assessment of the assets that are transferred and makes it mandatory that their fair market value be used.

The Act for the adjustment of national tax law to the acces-sion of Croatia to the EU and for amending other tax provi-sions was promulgated in the Federal Law Gazette on 30 July 2014 and the new § 50i EStG will enter into force on 31 July 2014.

6. FATCA-USA Implementation Ordinance

As published in a previous edition of German Tax Monthly, the FATCA Agreement has entered into force on 11 Decem-ber 2013. To ensure that Germany is able to comply with all the requirements stipulated in the Agreement, the AIFM Taxation Adjustment Act (see December 2013 edition of German Tax Monthly, p. 2) created the basis in German tax




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Our services are provided subject to our verification whether a provision of the specific services is permissible in the individual case.


law according to which the BMF can enact legal ordinances with the consent of the Bundesrat in order to meet the obliga-tions arising from such agreements. The Implementation Ordinance is adopted within this frame of empowerment for purposes of the FATCA Agreement with the USA. Contentwise the ordinance stipulates, among other things, the registration of banks, identification and diligence obliga-tions, collection and transmission of data, and rules on fines.

The FATCA-USA Implementation Ordinance was promulgat-ed in the Federal Law Gazette on 28 July 2014 and entered into force on 29 July 2014.

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