December 04, 2024

Recent Developments to Combat Tax Avoidance in Germany

December 04, 2024/ Ruchelman P.L.L.C.

“Paper is patient.” This is a common German saying, typically used to highlight the sluggishness of processes and plans of all kinds. However, paper can also catch up with you or even take you by surprise in a way that may be embarrassing or worse when your name pops up in leaked information relating to offshore accounts. Jurisdictions with preferential tax regimes are under the scrutiny of tax and investigative authorities in Germany. This affects multinational corporations, family offices, entrepreneurial families, and wealthy private individuals who invest their assets internationally in a diversified and international manner. Dr. Marco Ottenwälder, a partner in the Frankfurt Office of Andersen Tax, and his colleague, Andreas Gesel, a senior associate of the firm, explain recent measures taken in Germany to combat tax avoidance and follow up with recent practical experience. The tax authorities are aggressive, exit tax has a wider scope than might be commonly expected, and unhappy events occur for individuals and associated companies stemming from arrival in Germany and also departure. Not a pretty sight.

May 31, 2024

Adventures In Transfer Pricing – Practical Experience In Germany

May 31, 2024/ Ruchelman P.L.L.C.

For many years, German tax authorities suspected that M.N.C.’s transfer pricing policies were not in line with the arm’s length principle. Consequently, it comes as no surprise that Germany spearheaded international regulatory developments related to the arm’s length standard. International M.N.C.’s face ever increasing tax controversies in matters related to transfer pricing. In some cases, T.N.M.M. benchmarking is challenged under the view that a German sales entity makes intangible-related D.E.M.P.E. contributions in the field of marketing. In other cases ,C.U.T. benchmarking for intercompany license fees is challenged on grounds that the intangible property licensed to a German affiliate is unique by definition, thereby leading to a profit split. Restructures are attacked using inflated values for routine activities that remain in Germany. However, all is not bleak. In three case studies, Dr. Yves Herve, a Senior Managing Director in the Frankfurt Office of NERA and Philip de Homont, MSc, a Managing Director in the Frankfurt Office of NERA, illustrate in “plain language” the ways by which in-depth economic analysis has been used to overcome aggressive assertions by tax examiners.

March 30, 2021

The Implementation of the D.A.C.6 E.U. Directive in Germany

March 30, 2021/ Ruchelman P.L.L.C.

Because German tax authorities have not yet published the final version of the administrative, commentary by German tax advisers have filled the gap pointing out open issues for which guidance should be provided. In their article for Insights entitled “The Implementation of the D.A.C.6 E.U. Directive in Germany,” Petra Eckl and Felix Schill of GSK Stockmann in Frankfurt, address the relevant issues, including covered taxes, tax arrangements, cross-border element, intermediary, hallmarks, main benefit test, and privilege.

January 24, 2020

A gRETT-able Situation: New Trends in German Real Estate Transfer Tax on Share Deals

January 24, 2020/ Ruchelman P.L.L.C.

For decades, the German Real Estate Transfer Tax Act ("gRETT Act") has imposed a transaction tax on the sale of real estate in Germany. In recent years, the tax has applied to the sale of shares that indirectly transfer real estate located in Germany. When initially enacted, a sale of all shares was taxable under the gRETT Act. In the year 2000, the triggering percentage was reduced to 95%. Last year, proposed legislation would have reduced the triggering percentage to 90%, but the draft bill was never enacted. In 2020, the triggering percentage may be reduced to as low as 75% or some other percentage whenever new legislation is adopted. Exactly what constitutes an indirect sale of German real estate is surprisingly broad, and unlike comparable taxes in other countries, the sales need not be related nor contemporaneous. In recent years, a populist clamor has arisen to broaden the scope of indirect transfers subject to the tax. Michael Schmidt of Schmidt Taxlaw, Frankfurt am Main, Germany, explains how and when the tax is imposed under current law and how it may be modified in the coming months.

January 24, 2020

German Supreme Tax Court Rules in Favor of Taxpayer – U.S.-German Repatriation Non-taxable

January 24, 2020/ Ruchelman P.L.L.C.

In a recent decision, the German Federal Tax Court (Bundesfinanzhof or "B.F.H.") held that repayment of capital by a U.S. subsidiary to its German parent company is not taxable in Germany. While this decision is in line with prior caselaw, it is significant because the B.F.H. held that domestic rules apply when determining the extent to which a distribution by a non-E.U. subsidiary to its German parent comes from profits and the extent to which it comes from capital. Because the participation exemption rules under German law exempts only 95% of the dividend through a disallowance of deemed expenses, tax is due on the 5% of the distribution that is attributable to earnings. Under the decision, two factors control the treatment of a distribution from a non-E.U. country: (i) the domestic accounting or corporate law treatment of the residence country and (ii) the ordering rules under German tax law. Beate Erwin and Nina Krauthamer explain the decision and how it interfaces with the ordering rules of U.S. domestic law under which distributions care treated as dividends, return of capital, and capital gains.

October 31, 2018

Extension of German Taxation on Foreign Companies Holding German Real Estate

October 31, 2018/ Ruchelman P.L.L.C.

In August, the German Federal government proposed draft legislation that will expand the scope of German taxation to cover the sale of shares in “real estate rich companies” by nonresident taxpayers. The draft legislation proposes that capital gains from shares in non-German companies will be subject to German taxation if more than 50% of the share value is attributable to German real estate. The legislative proposal has wide application, reaching a shareholding that exceeds a 1% threshold at any time in the five years preceding the sale. Dr. Petra Eckl, a partner at GSK Stockmann + Kollegen in Frankfurt, explains the proposal and the practical exposure that arises from its overly broad language.

September 26, 2018

German Anti-Treaty Shopping Rule Infringes on E.U. Law

September 26, 2018/ Ruchelman P.L.L.C.

When do attacks on cross-border tax planning move from enough to too much? The European Court of Justice (“E.C.J.”) provided an answer in connection with German tax rules limiting access to the E.U. Parent Subsidiary Directive for dividends leaving Germany. For many years, German law provided an irrebuttable presumption of fraudulent or abusive tax planning when a multinational structure failed to meet a “one size fits all” set of factual parameters. The provision was struck down by the E.C.J. last year, modified slightly in response, and struck down again in July of this year. Pia Dorfmueller of P+P Pollath explains why the German tax law was found to violate European law – it provided a response that was not proportional to the alleged wrong-doing.

July 30, 2018

Joint Audits: A New Tool for Cross-Border Tax Evasion

July 30, 2018/ Ruchelman P.L.L.C.

When a large corporate taxpayer receives an audit notification letter from the tax authority in its country of residence, the taxpayer typically knows what to expect: a lengthy process of documenting and defending its tax position. It also knows the process under domestic law for appealing adverse tax adjustments, and if cross-border issues are raised, it knows how to take advantage of Mutual Agreement Procedures between competent authorities under an income tax treaty. The full process can take years to resolve. Now, however, a pilot program between German and Italian tax authorities empowers a joint cross-border audit team to conduct a single joint audit of cross-border operations between the two countries. The joint audit is intended to be more effective for resolving issues of double taxation in cases involving complex facts related to (i) transfer pricing issues, (ii) residency or permanent establishment issues, and (iii) aggressive tax planning schemes. Marco Orlandi of Ludovici Piccone & Partners, Milan, examines the actual process followed in the pilot program and comments on whether the goals of the joint audit have been achieved.

November 30, 2017

The New Transparency Register in Germany

November 30, 2017/ Web Admin

October 1, 2017, was the due date for entering information on Germany’s beneficial owner registry. The register brings transparency to all sorts of entities, including private law foundations and trusts, as data will be open to public inspection from December 27, 2017. Dr. Andreas Richter of P+P Pöllath + Partners, Berlin, sheds light on the registration requirements.

August 15, 2015

European Commission, State Aid, and Tax Transparency – More Steps in One Direction

August 15, 2015/ Web Admin

The EDF experience in France demonstrates that State Aid in Europe comes in many forms, and it can be harshly treated when discovered. Beate Erwin looks at the case against France’s main electricity provider and other developments in the European Commission’s attack on State Aid through private tax rulings. She finds that the result in the EDF case is not an anomaly.

August 15, 2015

The (Non) Recognition of Trusts in Germany

August 15, 2015/ Web Admin

Have you ever thought of using a trust to hold property for the benefit of a German resident or to hold property in Germany? Your first roadblock: Germany is a civil law jurisdiction that does not recognize common law trusts. However, the path need not end there. Guest author Alexander Fürwentsches of Baker Tilly Roelfs, in Munich, explains the pitfalls and possible benefits.

July 15, 2015

Tax Rulings in the European Union – State Aid as the European Commission's Sword Leading to Transparency Rulings

July 15, 2015/ Web Admin

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The European Union’s plan on putting an end to corporate tax breaks granted by means of letter rulings ran into German privacy concerns as E.U. Finance ministers met on June 19, 2015. The initiative, aimed at implementing an automatic exchange of letter rulings granted by E.U. Member States, will affect E.U. businesses as well as European operations of foreign multinationals, including those based in the United States. Examples of the latter are already under review by the E.U. Commission with regard to letter rulings issued by Ireland and the Netherlands, respectively, to local operations of Apple and Starbucks. Although the E.U. Commission, the executive body of the European Union, has no direct authority over national tax systems, it can investigate whether certain fiscal regimes, including those that issue advance private tax rulings, constitute an infringement of E.U. principles, in particular “unjustifiable” State Aid to companies. Such allegedly incompatible State Aid would comprise, inter alia, selective tax advantages granted by an E.U. Member State to companies with operations in its jurisdiction.

The Commission is very clear on its intent to use its powers and pursue its initiative vigorously. The financial press has widely reported a statement made by a spokesman for Competition Commissioner Margrethe Vestager that combating tax evasion and avoidance is a top priority of the Commission. In line with that concern, the Commission is taking a structured approach when using its State Aid enforcement powers to investigate selective tax advantages that distort fair competition.

The following provides an overview on the legislative framework with respect to State Aid, developments and an outlook on the future of tax rulings in an environment of increased tax transparency.

September 15, 2014

Inbound Investment in German Real Estate

September 15, 2014/ Web Admin

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INTRODUCTION

Investments in German real estate are attractive to international investors. Low interest rates and positive economic conditions exist in Germany. The demand for commercial and residential rental properties has increased in urban centers such as Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich, and Stuttgart. In these circumstances, it is expected that Germany will remain an attractive market for real estate investments.

Germany provides reliable political conditions, which are advantageous for a successful investment. However, there is an increasing complexity to the general legal conditions, and the success of a real estate investment strongly depends on proper structuring of the investment in a tax-efficient way.

This article provides an overview of the tax consequences of inbound investments in German real estate.

Different investment structures are compared:

Holding the property directly,
Holding shares in a property company, and
Holding interests in a property partnership.

In addition to income tax, German real estate transfer tax aspects are discussed, and planning opportunities to reduce or eliminate German trade tax are explored.