Many European companies are attracted to Malta because of its full imputation system, more commonly known as the international holding company regime. In fact, a vast majority of German blue chips run a Malta holding or finance company. The current full imputation system has been in force since January 1, 2007, after being approved by the European Commission, which had targeted the previous imputation system as a harmful tax practice. (For prior coverage, see Doc 2007-26985 or 2007 WTD 250-12.) Under the Malta model, a standard onshore Maltese company is taxable on its income at the standard rate of 35 percent. This is also true for profits derived by a Maltese company from passive sources situated outside of Malta and for profits allocated to a foreign permanent establishment of a Maltese company. However, the Maltese company’s shareholder — either another Maltese company or a foreign company or individual — can claim a tax refund of either 6/7 or 5/7 of the corporate taxes paid by the Maltese company. That means that the shareholder receives a reimbursement of 25 percent or 30 percent of the taxes paid. This sort of legal tax planning used to work both with a two-tier structure: and even with a single-tier structure in which the German parent company claims the Maltese tax refund.
The Latin principle pacta sunt servanda (‘‘agreements must be kept’’) serves as a cornerstone of social interaction, peace, and justice. If a breach of contract did not have some sort of ramification, the motivation to stick to the stipulations of the treaty would decrease greatly, the ultimate consequence being that the party bearing the detrimental effects of the contractual relationship is the one not breaching the contract. That’s why a breach of contract without a sound justification is punished in all areas of law — well, except for international tax law.
If German tax law was a river flowing over all business transactions and commercial accounting, the last words of Norman Maclean in A River Runs Through It best suit the traditional relationship between commercial and tax accounting. For more than 100 years the principle of strict book-tax conformity (or the authoritative principle, or Maβgeblichkeitsprinzip) was the most striking feature of German tax accounting. In fact, since the enactment of the German Commercial Code (Handelsgesetzbuch, or HGB) on January 1, 1900, this principle was a pillar that survived all storms of reforms until the last reform, the Accounting Modernization Act (Bilanzmodernisierungsgesetz) went into force on May 29, 2009.
Many of our previous columns dealt with the framework and the aftermath of the major corporate tax reform (Unternehmenssteuerreformgesetz) in 2008. The reform included a fundamental modification of the German thin cap rule, or Zinsschranke (see Tax Notes Int’l, July 16, 2007, p. 263, Doc 2007-15373, or 2007 WTD 141-9), and the change-of-ownership rule, or Mantelkauf (see Tax Notes Int’l, Dec. 10, 2007, p. 1045, Doc 2007-26131, or 2007 WTD 242-14). The tax issue causing uproar in Germany and Switzerland has all the ingredients for a good story. It is about tax law, those who break it, and the ultimate question whether the government itself is infringing on the law when buying stolen data. Moreover, it is about the opinion of the vast majority regarding the conduct of a few. May, or even must, the government purchase stolen bank data for €2.5 million with the prospect of collecting €400 million in additional revenue from 1,300 potential German tax evaders who used Swiss banks as a way to escape from their tax liabilities?
Foreign partners in German partnerships should take note of the new statutory treatment of special payments (Sondervergütungen) now codified in section 50d paragraph 10 of the Income Tax Act (Einkommensteuergesetz, or EStG). The question is whether these special payments qualify as business profits according to article 7 of the OECD model treaty or as interest according to article 11 of the OECD model.
The fight against tax havens has caused some major distortions in the relationship between Germany and Switzerland. Similar to the approach used in the United States in the Stop Tax Haven Abuse Act, Germany intensified its measures to prevent tax evasion by its own citizens starting with a German intelligence agency’s purchase of data on Liechtenstein bank accounts. (See Kessler and Eicke, ‘‘Germany’s Fruit From Liechtenstein’s Poisonous Tree,’’ Tax Notes Int’l, Mar. 10, 2008, p. 871, Doc 2008-3969, or 2008 WTD 52-9.) As a result of that purchase, there were some verbal battles not only between Germany and Liechtenstein but also between Germany and Switzerland. The peak was reached when the German Minister of Finance, Peer Steinbrück, let loose with his much-cited Wild West rhetoric. Reportedly, Steinbrück said at the April G-20 meeting in London that the OECD gray list of tax havens is like the 7th Cavalry at Yuma in that it need not necessarily go into battle, but it is important that ‘‘the Indians know that it is there.’’
It was a close call, but eventually the German legislative body managed to save the Inheritance and Gift Tax Act (Erbschafts- und Schenkungssteuergesetz) from being automatically abolished. In fact, abolishing the inheritance tax is not an uncommon measure in Central Europe. As of August 1, 2008, Austria no longer enforces inheritance tax, because the Austrian government did not comply with guidelines of the Austrian Constitution Court (Verwaltungsgerichtshof), which set a deadline to remove the deemed unconstitutionality of the inheritance tax base.
In Shakespeare's play The Taming of the Shrew, the protagonist tames his beloved one. Lately, German politics has presented The Taming of the Heuschrecken (grasshoppers). Heuschrecken is the politically incorrect description for private equity companies, so named by Franz Müntefering, the leader of the Social Democratic Party. Müntefering's outcry was related to the private equity takeover of a company producing bath armatures in his electoral district. Germany passed legislation on September 19 that modifies the GmbH Act (GmbH-Gesetz), the Insolvency Act (Insolvenzordnung), and the Stock Company Act (Aktiengesetz). The legal measure, called MoMiG (Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen), will enter into force on November 1.
International tax law is going through a period of remarkable change. Trends come and go frequently; however, three trends have been steady and durable in the last years. Yet this category of trends has another offspring: The preferential treatment of research and development activities and the income derived from patents and other forms of intellectual property (IP).
In this article, we use the expression ‘‘holding haven’’ to describe a tax jurisdiction with a very attractive legal framework for holding companies. Holding haven regimes are more sophisticated than conventional tax haven regimes, demanding more infrastructure and business activities. Holding haven regimes are extremely fast changing because of competition, which forces holding havens to continuously incentivize multinational corporations (MNCs).
It used to be almost certain that the European Court of Justice would follow the opinion of the advocate general in its judgment, but those days are gone. The latest examples of this change in heart are Columbus Container (C-298/05) and Lidl Belgium (C-414/06). (For the ECJ judgment in Columbus Container, see Doc 2007-26756 or 2007 WTD 236-11. For the ECJ judgment in Lidl Belgium, see Doc 2008-10739 or 2008 WTD 96-18.)
Some consider the issues in the European Court of Justice’s Lidl Belgium (C 414/06) case to be a question of symmetry in tax law. Others call the case ‘‘Marks & Spencer revisited on the branch level.’’ In fact, both statements are correct. The question is whether the country of the head office must take into account losses of a foreign branch, even though the applicable double taxation convention provides for an exemption of the branch profits in that country. Contrary to Marks & Spencer (C-446/03), which dealt with losses incurred by foreign subsidiaries (a different legal entity), Lidl Belgium involves losses incurred in the same legal entity.
Not all fruits are healthy; some fruits are poisonous. German prosecutors must wonder which of their collected ‘‘fruits’’ they can use against the hundreds of individuals that could be indicted for failing to declare savings in Liechtenstein. What could turn out to be the biggest tax evasion case in German history started with a simple DVD. A Liechtensteiner offered and sold a DVD with stolen bank data to the German Intelligence Service (Bundesnachrichtendienst, or BND) for €4.2 million. The identity of the Liechtenstein
No doubt Christopher Columbus would have felt shortchanged if he knew the continent he discovered does not carry his name. In 1507, when the cartographer Martin Waldseemüller designed his famous world map, he searched for a name for the Terra Nova (New World) and chose America, after the adventurer Amerigo Vespucci from Florence. That map is the birth certificate of the United States of America. The only surviving original is displayed in the Library of Congress in Washington. A couple of months ago the seller revealed that the Library of Congress paid $10 million for it, the highest price ever paid for a cartographic piece of work. The presentation of the map in the Treasures Gallery of the Library of Congress cost another $1.5 million.
It is more than just a rule. A statutory general antiabuse rule is a statement — a statement of tax jurisdictions, whether the lawmaker or the judges are primarily in charge of targeting the cases that lack both substance and business reasons.
All good comes at a price. The German corporate tax reform is good overall,1 but the major benefit, the tax rate cut, comes with a tightened and highly detrimental change of ownership rule.
Even if a tax planning structure is legal, still be ‘‘unwanted.’’ However, those structures might soon be wanted — for disclosure. ‘‘Unwanted’’ structures do not violate the letter of the law, still might infringe on the spirit of the law.
‘‘Old taxes are good taxes’’ might have been the conviction of the German lawmakers that supported the German trade tax. The survival of this tax was
This is a short tale of those who play the game and those who don’t. The name of the game is ‘‘function shifting,’’ often played moderately, sometimes aggressively, by multinational corporations, but always under the alert eyes of the tax authorities. Those who play the game argue that function shifting (that is, moving production and know-how abroad) is necessary in a global market environment to build up market volume abroad. Frequently, it is simply used to cut costs. Those who do not participate in this game are small and midsize companies, which are subject to lifelong taxation on any asset they purchase or develop, with no chance of relief or at least a lower tax rate.
August 27, 2007, p. 837 The northern lights are a spectacular sight and one of the features that make the Nordic countries of Norway, Sweden, and Finland special. Another unique aspect of those countries is the way they tax labor and capital income. In the 1990s, they
August 6, 2007, p. 587 You can't blame everything on the Romans. Even though they introduced the legal framework of partnerships and corporations in Germany and far beyond, the reason why the taxation of partnerships is so complex is not their fault. Put simply, once individuals with different characteristics are taxed based on their business activities and only on a single level, the complexity begins.
July 16, 2007, p. 263 Full of enthusiasm, the preacher in Ecclesiastes advised his listeners to trade overseas because they would have a good return: "Cast your bread upon the waters, for after many days you will find it again." There is no doubt that international trade is a worthwhile venture. However, one might rethink that assessment after triggering the new German thin cap rule, Zinsschranke (literal translation: "interest barrier").
May 8, 2006, p. 501 Time and again, a decision of the German Federal Tax Court (Bundesfinanzhof, or BFH) makes an international tax planner's heart beat faster. Such a cause for celebration occurred on May 31, 2005, when the BFH repealed its strict view on the German anti-treaty-shopping rule in the landmark Hilversum II decision.
June 11, 2007, p. 1135 One of America's most beloved poets, Robert Frost, described in his poem "The Road Not Taken" how he struggled to decide which road to take "in a yellow wood". Eventually he chooses the "one less traveled by" and proclaims:
The German legislature had to decide which road to take after the need for tax reform was confirmed - either the mainstream or the road less traveled.
April 23, 2007, p. 377 Being freshmen in this club of TNI correspondents, we promise not to squander readers' precious time. Instead, we are dedicated to presenting topics that make our columns worthwile reading. Our focus will be on European and international tax law issues analyzed from a German perspective, yet presented in a very non-German manner - with irony and humor.
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Wolfgang Kessler
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