German Tax & Corporate Insights
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Flick Gocke Schaumburg German Tax & Corporate Insights — Issue #03 / March 2014 1 Contents Editorial International tax Much has happened in German tax and corporate law since German Federal Fiscal Court voices doubts about the the last issue of our newsletter. So once again we have com- German constitutionality of tax treaty overrides ................... 2 piled a variety of legislative developments and court rulings which we think may be of particular interest to international International tax Tax & Corporate companies doing business in Germany. New German government intends to tackle cross-border In the first article, we take a look at a decision by the Federal profit-shifting by multinational enterprises (MNEs) .... 3 Insights Fiscal Court that has expressed substantial doubts whether Updates on recent business trends, International tax treaty overrides contravene fundamental principles of Ger- legislation and case law in Germany German exit taxation rules assumed to be man constitutional law. The new German government has in line with European law . 4 unveiled its proposed future tax policy; our second article sets out why foreign MNEs investing in Germany are well- Income tax advised to keep an eye on legislative developments in 2014. Matrix structures from a tax perspective ................. 5 Several rulings by the European Court of Justice have Indirect tax rejected exit taxation rules of individual Member States as New administrative principles regarding construction irreconcilable with EU law. We analyse a recent judgment in services received after 14 Feb. 2014 ........................ 6 which the ECJ has declared a specific German exit taxation Bonn Berlin rule relating to reorganisations compatible with EU law. Johanna-Kinkel-Straße 2-4 Friedrichstraße 69 Employment law 53175 Bonn 10117 Berlin Matrix structures represent a key topic in this issue: we Matrix structures from an employment-law Phone +49 228/95 94-0 Phone +49 30/21 00 20-20 describe certain tax restrictions with regard to matrix struc- [email protected] [email protected] perspective ............................................... 8 tures and explain matrix structures from both an employ- Frankfurt Munich Corporate law ment-law and a corporate-law perspective. MesseTurm, Friedrich-Ebert-Anlage 49 Brienner Straße 29 60308 Frankfurt/Main 80333 Munich Matrix structures from a corporate-law perspective ..... 9 We take a look at new administrative principles regarding Phone +49 69/717 03-0 Phone +49 89/80 00 16-0 construction services relevant to foreign project- and prop- Corporate law [email protected] [email protected] erty-development companies holding German real estate. Delisting of public stock corporations: no need for Representative offices Finally, we examine the Frosta decision by the German Fed- shareholders’ approval or cash compensation ........... 10 Vienna Zurich eral Court of Justice on the delisting of public stock corpo- Am Heumarkt 7 Bahnhofstraße 69a Competition law rations, which was welcomed by listed companies. 1030 Vienna 8001 Zurich Austria Switzerland Competition and the Internet — Mind the gap! .......... 11 Phone +43 1/713 08 14 Phone +41 44/225 70-10 We hope you will enjoy our latest newsletter. [email protected] [email protected] FGS seminar Italy–Germany — Joint seminar on cross-border The FGS editorial team tax issues facing multinational groups ................... 13 German Tax & Corporate Flick Gocke Schaumburg Insights German Tax & Corporate Insights — Issue #03 / March 2014 2 German Federal Fiscal Court for their activities undertaken on behalf of the partnership stricted right to tax the income in Germany by making (such as remuneration for management services, granting reference to sect. 50d (10) ITA. This provision explicitly voices doubts about the consti- of loans, or licensing of other assets). Income so derived by reclassifies Sondervergütungen as business profits for tutionality of tax treaty overrides the respective partners, e.g. salary, interest on loans, or roy- the purposes of treaty-law provisions allocating taxation alties, is — from a German tax perspective — always rights; conveniently, Germany is usually entitled to tax Over the past few years, the German tax legislator has treated as business profits of the partnership. such profits under art. 7 OECD MC. As a result, repeatedly used tax treaty overrides as an instrument to sect. 50d (10) ITA deliberately detaches from treaty provi- safeguard Germany’s right to tax. At the same time, there Such arrangements prove problematic whenever a partner- sions the qualification of income for tax purposes. has been longstanding controversy as to whether such ship maintains a permanent establishment in Germany treaty overrides contravene fundamental German consti- while a partner who holds an interest in it is resident not in As mentioned earlier, in the view of the Federal Fiscal tutional law principles. The Federal Fiscal Court has Germany but in a state that has entered into a double taxa- Court, sect. 50d (10) ITA contravenes the German constitu- recently voiced substantial doubts in this regard, and has tion treaty (›DTT‹) with Germany. The background is that if tion. Under that court’s established case law, the classifi- therefore submitted the matter to Germany’s Federal Con- partners resident abroad (i) grant loans, or make available cation of Sondervergütungen is based solely on the distri- stitutional Court for a decision of principle. other assets to, or (ii) perform managerial tasks for, their bution provisions contained in the applicable DTT; in the partnership in return for consideration, then the relevant case at hand, which involves loan interest payments, this The specific provision at stake in this case is sect. 50d (10) payments made out of Germany are usually taxable under approach leads to an applicability of art. 11 (1) DTT Italy – German Income Tax Act (›ITA‹). In its decision dated 11 Dec. treaty law pursuant to the special provisions of art. 11 (inter- Germany. Mirroring art. 11 (1) OECD MC, said DTT article 2013 (case I R 4/13, published on 12 Feb. 2014), the Federal est), art. 12 (royalties) or art. 15 (income from employment) attributes the right to tax interest income to the recipient’s Fiscal Court referred to the Federal Constitutional Court the of the OECD Model Convention (›OECD MC‹). As a result, in state of residence — in this case, to Italy, not to Germany. question whether a treaty override as with the above statu- principle, the right to tax such income lies with that part- tory provision breaches Germany’s constitution. This action ner’s state of residence. In other words, since — under the Applying sect. 50d (10) ITA inevitably entails a certain dis- by the Federal Fiscal Court is in keeping with its earlier view OECD MC and DTTs modelled after it — Sondervergütungen regard for treaty provisions and is ultimately tantamount in its landmark decision dated 10 Jan. 2012 (case I R 66/09). are not classified as business profits (art. 7 OECD MC) of the to advocating a breach of an international treaty — in that In that case the court had, for the first time, expressed con- partnership but as income falling within the scope of spe- the German legislature unilaterally seeks to override a stitutional-law misgivings regarding treaty overrides, and cific other OECD MC articles, Germany loses its otherwise legal classification agreed under international law. In this had referred the matter to the Federal Constitutional Court — existing unlimited right to tax such income. This is the very connection, the Federal Fiscal Court argues in particular albeit in respect of a different provision of the German ITA. scenario at the heart of the most recent case now pending that a unilateral revision of treaty provisions — as with before the Federal Constitutional Court, which involves a sect. 50d (10) ITA — runs contrary to the system of objec- The current case is about the classification of Sonder- partner in a German partnership who was resident in Italy tive values set forth in art. 25 of the German constitution, vergütungen (special business income) under treaty law. and had granted a loan to his partnership. Invoking art. 11 (1) which explicitly stipulates that the general rules of interna- This is an issue of great practical relevance as it involves a DTT Italy – Germany, that partner maintained that the inter- tional law take priority over purely domestic legal provisions. prominent feature of German income-tax law concerning est accrued was subject solely to Italian taxation. the taxation of partnerships. Put simply, these Sonder- Beyond sect. 50d (10) ITA, the German legislature has vergütungen are payments by a partnership to its partners The German tax authorities, however, asserted their unre- been using the treaty-override »technique« in a number of German Tax & Corporate Flick Gocke Schaumburg Insights German Tax & Corporate Insights — Issue #03 / March 2014 3 other provisions. Accordingly, the issue remains of funda- After the Sept. 2013 general elections in Germany, the legislative action against tax avoidance effected via mental importance well beyond the present case. This is Christian-Democratic Union (CDU), Christian-Social offshore financial centres. true all the more given that, in an (unofficial) press release, Union (CSU) and Social-Democratic Party (SPD) entered (2) The government plans to push legislation aimed at the Federal Fiscal Court stated that henceforth any legal into a coalition agreement and formed a ›grand-coali-