PKF. Editorial. Contents

Transcription

1 PKF Editorial Dear Readers, Survival for companies threatened with insolvency is about to become more difficult. Up to now, the tax authorities have shown understanding in a crisis. However, the Federal Fiscal Court, in a landmark decision, has now overturned the Restructuring Decree, which has been applicable since In the Focus section you can read more about the reasons given by the constitutional court judges and the consequences for companies as well as the need for action by the legislature. The draft law on the prohibition on the tax deduction of royalty payments is further evidence that the German government is serious about counter measures to combat profits shifting to low tax countries. The report that follows in the Tax section presents the restrictive view of the Federal Ministry of Finance on the transfer of liabilities. This should be borne in mind when arranging transactions and with respect to accounting issues. Finally, we discuss a topic that for many married couples is normal practice, namely, making all their payments into a so-called either or survivor joint account where they are both authorised to have access. However, this does entail gift tax risks, at least in the case of larger deposits. In the Legal section you will find, to begin with, the key points of two draft laws. Firstly, one of them concerns the prevention of money laundering and, secondly, the protection of consumers when payments are made on the Internet. In the next article after that, we provide information about the current answers from the Federal Court of Justice to the question of whether or not a purchase is subject to existing leases and, if yes, then under what preconditions. As part of the Corporate Finance series, we present a practice-oriented approach to the valuation of companies the multiple-based method. It has been used in English-speaking countries for a long time and is now being applied more frequently in Germany, too. We hope that you will find the information in this edition to be interesting. Your Team at PKF Contents FOCUS» The Restructuring Decree is contrary to law Red alert warning for companies threatened with insolvency TAX» Prohibition on the tax deduction of royalty payments» Assumption of liabilities, accession of debt, assumption of specific responsibilities for fulfilling an obligation The risk of the Federal Ministry of Finance taking a restrictive view» Gift tax risks for spouses who keep joint bank accounts LEGAL» Governmental drafts for the implementation of the 4th Anti-Money Laundering Directive and the 2nd Payment Services Directive Who will be affected?» Purchase is (not) subject to existing leases CORPORATE FINANCE» Multiples-based method for valuing companies The choice determines the outcome IN BRIEF / BREXIT UPDATE» Is interest on additional tax payments legal?» Tax exemption for cross-border restructurings is at risk

2 newsletter [ FOCUS ] The Restructuring Decree is contrary to law Red alert warning for companies threatened with insolvency A recent decision by the Federal Fiscal Court (Bundesfinanzhof, BFH) will be of fundamental significance for the taxation of companies threatened with insolvency. According to a BFH ruling from (GrS 1/15), the tax concessions for restructuring profits (when creditors waive debt claims) that were set out in the Restructuring Decree of the Federal Ministry of Finance (Bundesministerium der Finanzen, BMF), in 2003, constitute a violation of the principle of legality of administrative actions. The Large Senate of the BFH has thus rejected a long-standing and reliable administrative practice. Will the legislature help in this respect? 1. How did the practice-friendly Restructuring Decree and the BFH case come about? Up until the end of 1997, under certain circumstances, restructuring profits were completely tax exempt in accordance with Section 3 no. 66 of the German Income Tax Act (old version). At the same time, it was possible to carry over loss carry-forwards indefinitely. The provisions of the statutory exemption for restructuring profits were repealed as of Waiving the tax on restructuring profits remained possible, upon application, in individual cases for objective or personal equitable reasons. Subsequently, on , the BMF issued the Restructuring Decree, which was supplemented on This generally binding administrative guidance opened up the possibility of tax waivers on restructuring profits for objective equitable reasons without an examination on a case-by-case basis. Then, in 2015, in this respect, the question of whether or not the financial administration had exceeded its authority by issuing the Restructuring Decree was referred by the X. Senate of the BFH to the Large Senate. In the just-published opinion of the Large Senate this is indeed the case. 2. Hitherto tax-privileged restructuring profits The tax concession available under the Restructuring Decree concerns the profits that arise for a company when its creditors waive their debt claims for the purpose of restructuring (restructuring profits). This results is an increase in business assets and thus, basically, a taxable profit. The conditions for the presumption of tax-privileged restructuring profits are: a need for restructuring by the business, a full or partial debt waiver, restructuring is the intention of the creditors, the debt waiver is appropriate for restructuring. Up to now, if there was a restructuring plan it could be assumed that the conditions for a tax concession for the profits had been fulfilled. In this respect, restructurings were tax-privileged if there was a waiver agreement, or a negative acknowledgement of debt. Even a debt waiver in exchange for a debtor s warrant would have resulted in a restructuring profit under the above-mentioned conditions. Please note: In 2009, the scope of application of the Decree was extended to profits arising from self-administered insolvency proceedings, the granting of a discharge from residual debts, or from personal bankruptcy. 3. Waiver procedure It is the view of the BMF that, for objective equitable reasons, the imposition of tax on restructuring profits is a considerable hardship. Therefore, the Decree provides for a different tax assessment, a deferral and, ultimately, a tax waiver as follows. To begin with, restructuring profits will be firstly offset against losses or negative income without regard to any restrictions on compensating or offsetting and assessed differently. If the conditions are met then the tax on the restructuring profits should be deferred. After the final review and assessment of the tax payable on the restructuring profits this tax should be waived ( narrowing of discretion to zero ). 4. The BFH decision A non-permissible generalisation The Grand Senate of the BFH has now decided that the Restructuring Decree constitutes a violation of the principle of the legality of administrative actions. The tax authorities bypass the statutory revocation of the tax 2 PKF newsletter March 2017

3 03 17 concessions in this way. They do not have the latitude to waive tax claims at their discretion. Moreover, it is contrary to statutory provisions to offset restructuring profits against losses first of all. Equitable measures are always based on individual cases while the Restructuring Decree makes a generalisation in a non-permissible way. 5. Outlook New legal rules? Up to now, parts of case law, the literature and the tax authority have viewed the non-taxation of restructuring profits as serving the interests of economic and labour market policies. The challenge for the legislature is whether or not to support restructuring through tax concessions and by driving forward new legal rules (e.g. within the scope of Section 10d of the German Income Tax Act). Recommendation: For the time being, it will only be possible to achieve tax concessions for profits arising from restructuring on a case-by-case basis though equitable measures. The personal inequitability test will gain in particular importance in cases where there is a threat to the economic viability of the taxpayer through the tax on the restructuring profits. The new rules will therefore only be applicable if the low tax rate differs from the standard tax rate. As a result, this should in particular cover the special schemes that are operated by certain states through so-called IP box regimes. These rules will not apply if the corporate tax rate in the state concerned is generally below 25 %. The basis for calculating the share of royalties that will be non-deductible as business expenses, if applicable, would be the level of negative deviation from a low tax rate of 25 %. For example, if the effective tax rate is 10 % then the percentage of royalties that could not be deducted as a business expense would be calculated thus: (25 % 10 %)/25 % = 60 %. More information: This legislative initiative is a response to a practice by large groups aimed at reducing the group tax rate by paying royalties in states with favourable tax regimes for royalties (e.g. the Netherlands, Luxembourg). You can view the details in the Gesetzentwurf gegen schädliche Steuerpraktiken im Zusammenhang mit Rechteüberlassungen (draft of an act against harmful tax practices in connection with assigning rights) at www. bundesnanzministerium.de (German version only). [ TAX ] Prohibition on the tax deduction of royalty payments Who for: Domestic (German) taxpayers who pay royalties abroad. Issue: On , the German government passed a draft law on the introduction of a Section 4j in the German Income Tax Act. As of , royalty payments will become partially ineligible for deduction as business expenses if all of the following preconditions are met: these are expenses for the assignment of rights (royalty payments) and the licensor is a closely related party and the royalty payments are taxed at a low rate (< 25 %) that differs from the standard tax rate (but an exception is made for low tax rates if there are substantial business activities, i.e. the right has to have been completely or predominantly developed within the scope of the own business activities). Assumption of liabilities, accession of debt, assumption of specific responsibilities for fulfilling an obligation The risk of the Federal Ministry of Finance taking a restrictive view Who for: Businesses that prepare accounts. Issue: According to a circular by the Federal Ministry of Finance (Bundesministerium der Finanzen, BMF), from , when transferring liabilities that, under tax law, had been subject to a prohibition or restriction of recognition as well as measurement restrictions in the accounts of the original debtor, the following should be taken into account. (1) The transferee is obliged to recognise the liability in the same way as the original obligated party would have had to recognise it. If income arises as a result of the difference between this amount and the consideration ( acquisition costs ) then, in principle, this income can be evenly spread over 15 years by means of a tax-free reserve. (2) The transferor has to spread the expense over 15 years in the amount of the difference between what was recognised in the tax accounts and what was assumed by the transferee. March 2017 PKF newsletter 3

4 newsletter (3) The same applies in the case of an accession of debt and the assumption of responsibility for fulfilling an obligation with a release from debt. Particularities are envisaged for, among other things, pension liabilities. According to the draft from , which should apply to financial years ending after , the provisions of Sections 4f and 5(7) of the German Income Tax Act (Einkommenssteuergesetz, EStG) would have to be interpreted restrictively. The transferee will have to take account of the provisions of the German Commercial Code and the EStG even if the original obligated party was not at all subject to these provisions. If a liability is transferred a number of times then its recognition shall be based on the accounting rules that were used to show the liability for the first time. The transferor should be allowed to exercise tax-related options (e.g. when valuing provisions for anniversaries or pensions) independently and differently from the original obligated party. In the case of pension liabilities, the prohibition on subsequent recognition for any shortfalls from the predecessor-in-title shall not apply to the transferee s initial set of final accounts. More information: The BMF draft from is available online at www. bundesfinanzministerium. de. (German version only). individually. This authorisation to draw on the account means that both spouses are legally entitled to withdraw a deposit that is made into the account. In a recent case, the husband paid an amount in millions the proceeds from the sale of an investment that had belonged to him into the joint account. The Federal Fiscal Court (Bundesfinanzhof, BFH) acknowledged that, when the amount was deposited into the account, half of it had been gifted to the other spouse because the wife was also able to have access to this money. Consequently, there is a gift tax risk in the case of larger deposits because gift tax is applicable if the tax-free allowance of 500,000 is exceeded within a 10-year period. By contrast, ongoing salary transfers, or similar payments, which cover the appropriate living costs, are not relevant for gift tax purposes. Recommendation: A gift tax risk can only be excluded by switching to an individual account with a power of attorney in favour of the other spouse. In cases where the either or survivor account is maintained we would recommend having, at least, a clarifying agreement between the spouses that states that deposits made by one of the spouses will continue to count as his/her assets and both spouses are entitled to withdraw joint living costs. Any withdrawals over and above this amount (in particular, for investments) would have to be compensated for by the other spouse. Gift tax risks for spouses who keep joint bank accounts Who for: Spouses with either or survivor joint accounts. Issue: For many spouses it is quite natural to share their assets with each other. That is why many married couples maintain a joint current account as an either or survivor account where both holders are each authorised to access the account Risk of gift tax on withdrawals from an either or survivor joint account? 4 PKF newsletter March 2017

5 03 17 [ LEGAL ] Governmental drafts for the implementation of the 4th Anti-Money Laundering Directive and the 2nd Payment Services Directive Who will be affected? Who for: Consumers and service providers as well as credit institutions based in Germany. the principle of naming and shaming, the supervisory authorities will have to make public disclosures on their websites, after informing the addressees and without delay, about binding measures and decisions on fines that have become definitive and that have been imposed because of a breach of this law and its related regulations and, in the course of this, also provide information about the type and nature of any violations. (2) Important changes resulting from the act to implement the 2nd PSD: Issue Two recently submitted governmental drafts are intended to adapt existing national laws to EU directives. These are (1) an act to implement the fourth EU antimoney laundering directive, to execute the EU transfer of funds regulation and to reorganise the central agency for financial intelligence (abbreviated to 4th AMLD) and (2) an act to implement the prudential rules for the second payment services directive (abbreviated to 2nd PSD). (1) Important changes resulting from the act to implement the 4th AMLD: Transparency register this will create a central platform that will help to identify potential business partners. Furthermore, it will enable identity checks of business partners. For example, it is envisaged that it will be possible to confirm business relationships via the register and have them verified by a third party. Internal risk management To-date, only credit and financial services institutions as well as gaming operators and intermediaries had obligations in this respect. In future, all obliged parties will be subject to this obligation. The German Anti-Money Laundering Act (Geldwäschegesetz, GWG) will see the introduction of an obligation for companies to implement internal risk management, thus, e.g., the introduction of procedures, processes and guidelines, or perhaps the appointment of an anti-money laundering officer at the company. Public notification of breaches In accordance with The further use of account information will be restricted Regulated payment services The introduction of new offences into the Act on the Prudential Supervision of Payment Services (Zahlungsdiensteaufsichtsgesetz, ZAG) is envisaged. In future, for the purposes of consumer protection,,so-called payment initiation services and account information services will be included in the group of activities that will be regulated by the ZAG. Non-discriminatory access to account information The aim of this is to ensure that, e.g online banking service providers are only allowed to use the account information of their customers strictly for the purpose intended and even in those cases only if consent has been given for this within the scope of online banking. More information: You can find more information (in German only) about the planned and, in some cases, very specific new rules on the BMF website under Referentenentwürfe (draft laws). Upon request, we would be pleased to provide you with information about the further progress of the legislative procedure. Please do not hesitate to contact us if you have any questions. Purchase is (not) subject to existing leases Who for Tenants and landlords as well as those involved in property transactions. Issue: Generally, the buyer of a let property takes the place of the seller as the new landlord. In this regard, March 2017 PKF newsletter 5

6 newsletter in property transactions, particular attention should be paid to the ruling from (XII ZR 9/15), delivered by The Federal Court of Justice (Bundesgerichtshof, BGH), on the scope of this principle. The background to this is that the German Law of Obligations provides for rights and duties that may only arise between those who have contractual obligations. In this respect, the above-mentioned principle of German tenancy law constitutes a breach of the German Law of Obligations. This serves to protect the tenant who should not lose the rented property because it has been sold. Moreover, this provision is frequently in the interests of a buyer, too, as the seller s lease claims are often transferred to the buyer in this way. In the case in question, which was brought before the BGH, the owner had granted the tenant the right to acquire the rental property in the rental agreement. Furthermore, this set out that the right to acquire the property would continue to be effective vis-à-vis any respective legal successor if the landlord were to sell the property. After some time, the landlord sold the property to an interim owner who also expressly recognised the tenant s right to acquire it. When, in turn, the interim owner sold on the property, the recognition of this right was not expressly agreed upon. The BGH now had to decide whether or not the tenant was able to point out the right to acquire the property to the new buyer. It was undisputed that with the purchase of the property the buyer had become the new landlord and, in principle, was bound by the original rental contract in terms of its contents vis-à-vis the tenant. Therefore, the crucial point was whether or not this binding effect also extended to the right to acquire the property. In its ruling, the BGH argued that the principle under German tenancy law that a purchase is subject to existing leases should be narrowly interpreted. The main thing is the material content of the respective agreement that has to be objectively determined. Accordingly, the right to acquire the property is not covered by this principle of German tenancy law and, consequently, the tenant would not able to enforce his right to acquire the property. Recommendation: The ruling makes it clear that, as part of a property transaction, it cannot be assumed from the outset that any agreements made in the rental contract will indeed be automatically transferred to the buyer. [ CORPORATE FINANCE ] Multiples-based method for valuing companies The choice determines the outcome In the US, multiples-based valuation methods have long been among the most frequently used techniques for valuing companies. In Germany, too, they are increasingly being applied in the practice of valuation. The basic principle consists in comparing the company to be valued with one or more reference companies. 1. Basic principles of the multiples-based method When applying this method, a company s value is calculated through the multiplication of a key figure (e.g. earnings, cash flow or sales) by a market multiple. The multiple is developed on the basis of market or transaction prices for one or more reference companies. The company to be valued is assigned to a particular sector and the standard multiple for this industry is then applied in this method. 2. Frequently used ratios To begin with, a distinction has to be made between ratios that are based on equity and those based on the overall capital or entity. Equity multiples set equity-related performance metrics in relation to market capitalisation, e.g.: Price-Earnings Ratio (PER), Price-Earnings to Growth Ratio (PEG Ratio), Price-Cash Flow Ratio (PCR), Price to Book Ratio (PBR). By contrast, entity multiples look at the market value of the debt capital, in addition to the market value of the equity capital, in the numerator of the respective ratio. The result constitutes the so-called Enterprise Value (EV), which is applied, for example, as follows: EV / Earnings before Interest and Taxes (EBIT), EV / Earnings before Interest, Taxes, Depreciation and Amortisation (EBITDA), EV / Sales. In practice, the multiples method is based on many more ratios still (for a discussion of the factors that influence a specific choice please see section 3). 6 PKF newsletter March 2017

7 03 17 Example of a multiple-based valuation A multiple (e.g. 7) is calculated on the basis of the quotient obtained from dividing the market value (e.g. EV 70 m) by a reference figure (e.g. EBIT 10 m) of the reference company. By multiplying this with the EBIT of the company to be valued (e.g. EBIT 5 m) an indicative EV of 35 m is derived. 3. Selecting the multiples In the practical application, a fit-for-purpose selection of market multiples is important for the derivation of company values. Criteria for the selection of multiples are, in particular, the sector, growth, life cycle, accounting standards, earnings situation and data availability. In this case, there are multiples based on comparable quoted companies (comparable companies) and comparable transactions, for example, acquisitions, sales or IPOs (trading multiples). The meaningfulness of the value of a company will depend heavily on which reference companies and which multiples are selected. Some of the current approaches that are used in practice that can be mentioned include the following. The PER is generally an option in the case of profitable companies in order to carry out a rough estimate. In the case of start-up companies, which are usually not yet very profitable, and other growth companies, higher valuations can usually be generated through the PEG ratio because, here, growth is included as a key parameter. For companies that have been established in the market for a long time, such as, e.g. large consumer goods manufacturers or utilities with high cash flows, the PCR is a suitable multiple. For the valuation of companies where equity is strongly characteristic such as, in particular, banks and insurance companies, you should select a multiple where the reference value remains stable over time and is subject to slight fluctuations. The PBR is most likely to meet these requirements. For companies that are operating at a loss (e.g. start-ups or companies in turnaround situations), the use of the EV / Sales multiple could be of interest. Recommendation: In view of the specific characteristics of the individual multiples, any guidance on the Growth potential as an important influencing factor in the valuation of a company use of particular multiples can only ever be understood as a principle with broad application. Specific cases will require a thorough analysis and we would be pleased to provide you with support in this respect. [ IN BRIEF ] Is the interest on additional tax payments legal? There is a pending question at the Federal Fiscal Court (Bundesfinanzhof, BFH) as to whether or not the interest rate pursuant to section 238 of the Fiscal Code of Germany (Abgabenordnung, AO ) in the amount of 6 % p.a., the rate at which additional tax payments accrue interest, violates the rule of law principle or the ownership guarantee for the periods as of January 2012 (III R 16/16). The Munich Tax Court established, on (6 K 1144/15), that full interest pursuant to Section 233a of the AO is indeed constitutional, however, an appeal before the BFH was permitted. Recommendation: You should lodge an objection to the assessment for interest on additional tax payments in order to keep these cases open up to the decision by the BFH. March 2017 PKF newsletter 7

8 newsletter the subsequent pro-rata taxation of the hidden reserves. (2) The transfer of the business assets of a German company to a permanent establishment in a foreign country within the EU does indeed lead to the taxation of the hidden reserves, however, up to now, it has been possible to spread the tax payments over five years. Tax exemption for cross-border restructurings is at risk Who for: Companies planning restructurings relating to the United Kingdom (UK). Issue: On , Prime Minister Theresa May announced that there was going to be a hard Brexit. Thus, the UK would exit not only from the EU but also from the European Economic Area (EEA). Many EU directives on cross-border restructurings within the EU and the EEA have become an integral part of German tax law. In the case of restructurings, a hard Brexit could lead to hitherto unexpected consequences, in particular, with respect to the following aspects: (1) Cross-border contributions to corporations These can be conducted in a tax-neutral way by observing a blocking period of seven years. If the UK were to exit from the EU/EEA within this blocking period this would result in (3) Furthermore, if a shareholder with a holding interest in a corporation of more than 1% moves to a foreign country within the EU/EEA, up to now, the tax on the appreciation in value has been deferred. Recommendation: As these tax advantages would no longer apply in the event of a hard Brexit, you should review any contributions, transfers and moves in relation to the UK that have taken place recently, or that are planned, with respect to the tax risks. [ AND FINALLY...] The market is not an end in itself. The market is a system one in which either the ruthless celebrate triumphs, or where responsibility is able to prevail. Dr. Frank-Walter Steinmeier, SPD politician, Federal President as of Impressum PKF Deutschland GmbH Wirtschaftsprüfungsgesellschaft Jungfernstieg Hamburg Tel Fax +49 (0) Please send any enquiries and comments to: pkf-nachrichten@pkf.de The contents of the PKF* Newsletter do not purport to be a full statement on any given problem nor should they be relied upon as a subsitute for seeking tax and other professional advice on the particularities of individual cases. Moreover, while every care is taken to ensure that the contents of the PKF Newsletter reflect the current legal status, please note, however, that changes to the law, to case law or adminstation opinions can always occur at short notice. Thus it is always recommended that you should seek personal advice before you undertake or refrain from any measures. * PKF Deutschland GmbH is a member firm of the PKF International Limited network and, in Germany, a member of a network of auditors in accordance with Section 319 b HGB (German Commercial Code). The network consists of legally independent member firms. PKF Deutschland GmbH accepts no responsibility or liability for any action or inaction on the part of other individual member firms. For disclosure of information pursuant to regulations on information requirements for services see Picture credits: Title shutter_m, p.4 Geber86; p. 5 MarsBars; p. 7 aluxum; all istock.com 8 PKF newsletter March