German Tax Monthly
Information on the latest tax developments in Germany
March | 2017
Federal Tax Court (GrS 1/15): Grand Senate of the Federal Tax Court Rejects Restructuring Decree of Federal Ministry of Finance
A restructuring profit arises where a creditor waves its debt claims against a distressed business entity, partly or in full, with the purpose of enabling a successful restructuring of the business entity. Up to the 1997 assessment period restructuring profits were tax-exempt in their full amount pursuant to § 3 no. 66 Income Tax Act (EStG) (previous version). To qualify for tax exemption, the business entity had to be in need of a turnaround, all or part of its debt had to be waived, the creditors had to intend the successful restructuring of the business entity and the waiver of debt had to be appropriate for the restructuring purpose.
Since this rule was repealed, restructuring profits have generally been taxable. However, the socalled Restructuring Decree issued by the Federal Ministry of Finance (BMF) (BMF guidance dated 27 March 2003) allows under certain conditions, inter alia, a general cancellation of income
tax payable on a restructuring profit on objective equity reasons.
In a decision of 28 November 2016 (GrS 1/15), however, the Grand Senate of the Federal Tax Court (BFH) rejected the BMF’s Restructuring Decree, ruling that the tax privileges for restructuring profits provided for in the Restructuring Decree violate the constitutional principle of legality of administrative actions.
It is currently unclear how the German tax authorities will react to the decision of the Grand Senate and to what extent taxpayers can still invoke the Restructuring Decree. However, the German legislator has already taken first steps towards a legal provision on the tax-exemption of restructuring profits. In any case, one has to assume that in the current situation proceedings brought before the tax courts for obtaining preferential tax treatment pursuant to the Restructuring Decree will no longer be successful. Any individual equitable measures based on special reasons not covered by the Restructuring Decree remain unaffected by the decision of the BFH.
Content
Federal Tax Court (GrS 1/15): Grand Senate of the Federal Tax Court Rejects Restructuring Decree of Federal Ministry of Finance
Federal Tax Court (I R 29/15): Five Percent General Add-back of Nondeductible Business Expenses in the Case of Dividend Payments Despite DTT Participation Exemption Privilege
Lower Tax Court of Cologne on Withholding Tax in Cases of Comprehensive Provision of the Use and Enjoyment of Rights by Foreign Authors and Journalists (13 K 2205/13 and 3 K 2206/13)
Lower Tax Court of Saxony (2K 1860/15) Certification of Repayment of a Capital Contribution in the Case of a Constructive Dividend
Lower Tax Court of Munich (6 K 2548/14): Time Limit for an Application for the Assessment of a Repayment of a Capital Contribution in EU cases
Federal Tax Court (I R 29/15): Five Percent General Addback of Non-deductible Business Expenses in the Case of Dividend Payments Despite DTT Participation Exemption Privilege
In its decision of 22 September 2016 the Federal Tax Court (BFH) ruled that the 5% general addback of non-deductible business expenses in the case of dividend payments (§ 8b (5) Corporate Income Tax Law (KStG)) is also applicable if dividends paid by foreign corporations must be exempted from taxation in Germany according to tax treaty law.
In the case at issue, a GmbH (plaintiff) resident in Germany held 100% of the shares in a corporation in China and 85% of the shares in a corporation in Turkey. The GmbH received dividends from both shareholdings in the years at issue (2009-2011). According to the versions of the DTTs China and Turkey authoritative for the years at issue, dividends are exempt from the assessment basis for German taxation under certain circumstances which applied in the case at hand (DTT participation exemption privilege).
According to national law, 100% of the dividend distributions received from other corporations are tax-exempt at the level of corporations (national participation exemption privilege pursuant to § 8b (1) KStG). However, for 5% of the dividends the provision of general non-deductibility of business expenses applies, so that they have to be added back to income (§ 8b (5) KStG). As a result, 95% of the dividends are tax-exempt. An exception has been applicable in this respect since the 2013 assessment period: where the shareholding is non-substantial (i.e. less than
10%), the dividend is fully taxable (§ 8b (4) KStG).
In the opinion of the Federal Tax Court (BFH), the 5% add-back is mandatory despite the DTT participation exemption privilege. Although the national participation exemption privilege pursuant to § 8b (1) KStG and the DTT participation exemption privilege are originally independent and do not preclude each other, the exemption based on the DTT has finally no impact. In particular, according to the existing regulatory framework, the DTT participation exemption privilege is only applicable if an exemption of dividends does not automatically follow from the application of German law. According to the BFH the national participation exemption prevails in cases to which both the national and the DTT participation exemption apply.
Lower Tax Court of Cologne on Withholding Tax
in Cases of Comprehensive Provision of the Use and Enjoyment of Rights by Foreign Authors and Journalists (13 K 2205/13 and 3 K 2206/13)
The Lower Tax Court of Cologne decided in two cases that the comprehensive provision of the use and enjoyment of rights by foreign authors and journalists is subject to withholding tax. In both cases a domestic media company obtained the comprehensive use and enjoyment of rights by means of a “total buy out” against a lump sum consideration.
A precondition for the withholding of tax at source in Germany in the case of licenses is that a consideration is paid for the provision of use or the enjoyment of rights. This applies, in particular, to copyrights (§ 50a (1) no. 3 Income Tax Law, EStG). However, where rights are sold, the withholding of tax at source is
not obligatory. In the cases at hand, the lower tax court had to decide whether the rights in question were provided for use and enjoyment subject to withholding tax or whether they were sold without being subject to withholding tax.
In both cases the plaintiffs classified the provision of the use and enjoyment of rights as allencompassing and therefore argued for a sale of the rights in the work for the purposes of tax law, thus precluding the withholding of tax at source. This view was not shared by the lower tax court. In both cases the work is protected by German copyright law which precludes a sale of rights. German copyright law merely allows the provision of rights of use. Since intellectual property rights and the entitlement to defend such rights against the use by others cannot be transferred under German copyright law, the provision of the full use and enjoyment of rights is precluded.
Appeal against both decisions has been filed with the Federal Tax Court (I R 69/16 and I R 83/16).
Lower Tax Court of Saxony
(2K 1860/15) Certification of Repayment of a Capital Contribution in the Case of a Constructive Dividend
Pursuant to German tax law, corporations must make a distinction between profit distributions on the one hand and repayments of capital contributions on the other hand. Repayments of capital contributions are not taxable at the level of shareholders whereas profit distributions are treated as dividends which are taxable at the level of the shareholders. German tax law specifies a so-called “appropriation sequence” (Verwendungsreihenfolge),
according to which profits must always be distributed first (distributable profit). Capital contributions may not be repaid as long as distributable profit is still available.
Corporations maintain a “taxspecific capital contribution account” (steuerliches Einlagekonto) in order to record contributions which have not been made to the subscribed capital. The tax-specific capital contribution account is maintained outside the balance sheet for tax purposes only. A separate assessment notice regarding the tax-specific capital contribution account of the corporation is issued by the tax office at the end of each fiscal year. Where repayments of capital contributions are effected along with distributions, the tax-specific capital contribution account is reduced.
In this case the corporation is obliged to certify the repayment of the capital contribution against its shareholders. Where such a certificate has not been issued by the end of the fiscal year, the capital contribution amount repaid is deemed to have been certified as EUR 0.
In its decision of 8 June 2016, the Lower Tax Court of Saxony dealt with a case where the external auditors in a tax audit retrospectively assessed a constructive dividend paid for the years 2009 and 2010. The question was whether it is possible to retrospectively use the tax-specific capital contribution account for the constructive dividend so that it is tax-exempt.
The Lower Tax Court of Saxony denied this. In its reasoning the court concludes that the certificate confirming the use of the taxspecific capital contribution account is a material requirement
for the annual assessment of the tax-specific capital contribution account by the tax authorities. According to the court, no distinction is to be made between open and constructive dividends. Consequently, the capital contribution repayment is fixed at EUR 0, since the distributing corporation did not issue a certificate confirming the use of the tax-specific capital contribution account. This also applies where a constructive dividend is determined only retrospectively, in the context of a tax audit.
Therefore, the constructive dividend is subject to corporate income tax and trade tax in full as it was not considered in the assessment of the tax-specific capital contribution account as per 31 December 2009 and 31 December 2010.
Appeal against the decision is pending with the Federal Tax Court (I R 45/16).
Lower Tax Court of Munich (6 K 2548/14): Time Limit for an Application for the Assessment of a Repayment of a Capital Contribution in EU cases
In a decision of 22 November 2016, the Lower Tax Court of Munich ruled that the time limit for requesting the assessment of a capital contribution repayment in EU cases does not infringe procedural principles guaranteed by EU law, specifically the principle of effectiveness and the principle of equivalence.
Pursuant to § 27 Corporate Income Tax Law (KStG) corporations resident in Germany maintain a “tax-specific capital contribution account” (steuerliches Einlagekonto) in order to record contributions which have not been made to the share capital. Any payment made
by the corporation to its shareholders out of the taxspecific contribution account (repayment of a capital contribution) is generally taxexempt at the level of the shareholder. However, the payment will not be qualified as non-taxable repayment of a capital contribution until the distributable profit is used completely (appropriation sequence).
Pursuant to § 27 (8) KStG companies resident in the EU may also make repayments of capital contributions. One requirementamong others - is the separate assessment of the repayment of a capital contribution, which, however, is only carried out at the request of the EU company. The corresponding application must be filed before the end of the calendar year following the year in which a repayment of a capital contribution was made.
In the case at issue, a domestic corporation received a distribution from its EU subsidiary in Austria. No application for the separate assessment of the repayment of a capital contribution was filed. The local tax office treated the payment as taxable dividend.
The Lower Tax Court of Munich denied the treatment of the payment as tax-neutral repayment of a capital contribution since no application for a separate assessment had been filed. The time limit for the application is preclusive according to the court. Upon expiry of the time limit, the omission to file an application cannot be corrected. Unless the repayment of a capital contribution is assessed separately, it is treated as taxable dividend (§ 27 (8) sent. 9 KStG).
According to the Lower Tax Court of Munich, the procedure for the separate assessment of the repayment of a capital contribution in EU cases does not infringe
European procedural principles. The area of procedural law lacks EU regulation so that it is generally up to the individual Member States to provide for a national procedural framework (principle of procedural autonomy). However, according to the CJEU, Member States must adhere to the principle of effectiveness and the principle of equivalence when doing so.
Pursuant to the principle of effectiveness, national procedural rules may not render the exercise of rights conferred by EU law virtually impossible or excessively difficult. With regard to the principle of effectiveness, the CJEU has ruled that it is compatible with EU law to lay down reasonable time limits and that this does not render the exercise of rights granted under the EU legal framework virtually impossible or excessively difficult. The time limit laid down in § 27 (8) KStG is not unreasonably short in the view of the Lower Tax Court of Munich. In the most unfavourable case it is one year, and in the most favourable case it is just under two years. According to the court, filing an application within this period is a reasonable requirement.
In accordance with the principle of equivalence, Member States may not stipulate procedural time-limits to be observed for the exercise of rights conferred by EU law which are more unfavourable than in proceedings affecting only national law. According to the opinion of the Lower Tax Court of Munich, the different procedures applying to domestic corporations, EU companies and third country companies for the recognition of a tax-neutral repayment of a capital contribution are not comparable. Domestic corporations must issue a declaration for the separate assessment of the balance of the tax-specific capital contribution
account each year. However, this obligation does not apply to EU companies. Instead, an application-based procedure applies to EU companies which is only required once a repayment of a contribution has actually occurred. A third country company is not subject to separate assessment at all. Rather, the shareholders themselves may furnish proof that a distribution received from a third country company - invoking foreign commercial and company law - is in fact a repayment of a capital contribution. Since already these initial conditions are not comparable from the point of view of procedural law, the court concludes that the principle of equivalence is not violated.
The judgment of the Lower Tax Court of Munich is final.
Imprint
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