PKF PKF FASSELT SCHLAGE. Dear Readers, FOCUS

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1 PKF FASSELT SCHLAGE PKF Editorial Dear Readers, The implementation of the measures laid down in the OECD s BEPS action plan into national law is slowly gaining momentum. The Federal Ministry of Finance has submitted a draft law on a controversial part of the plan Country-by-Country Reporting (CbCR). According to this, companies would have to document the key figures for sales, earnings and tax aggregated for each country. This is noteworthy because this probably also represents the start of the transition to an indirect apportionment of profits between countries. In the Focus section, you will find an overview of the planned national regulations that, once they have entered into force, will have to be applied retroactively from on. In the Tax section, first of all, we discuss the VAT treatment of intra-community deliveries to warehouses. In the second article we would like to draw your attention to the fact that it is important to fully identify special business assets in order not to lose the desired tax neutrality in cases of restructuring. After that, we continue our series on sponsorship that we started in the last issue of our newsletter and examine this issue from the perspective of the recipients. The rules in respect of settlement arrangements as set out in the articles of association of a German limited company (GmbH) cannot always deliver what they promise. The first report in the Legal section focuses on the issue of how valid provisions can become invalid and vice versa. Subsequently, we report on the legal barriers to letting out dwellings for short periods to tourists an increasingly popular sideline, particularly in urban centres. As is generally known, restructurings are not without risks. Under Corporate Finance, you will find recommendations as to what you should pay attention to from a tax perspective. A discussion of the legal aspects will follow in the next issue of the newsletter, which will appear at the beginning of September. Until then we hope you have a lovely summer and a relaxing holiday but before you go a stimulating read. Yours sincerely, Your PKF Team Contents FOCUS» New guidance on transfer pricing documentation The Country-by-Country Report TAX» Goods supply to and from consignment warehouses in the EU The tax authorities have accepted foreign simplification rules» Special business assets as a restructuring pitfall» Sponsorship as an instrument between advertising and a charitable donation Part 2: Impact on the recipient LEGAL» Scope of options in cases of ineffective settlement provisions in the articles of association of a German limited company (GmbH)» Letting out private residential premises as holiday homes can be prohibited CORPORATE FINANCE» Restructuring instruments are frequently associated with tax risks

2 newsletter [ FOCUS ] New guidance on transfer pricing documentation The Country-by-Country Report In June the Federal Ministry of Finance published a new draft law that broadens the rules on transfer pricing documentation by including key aspects. The most important planned amendment is the countryspecific documentation, the so-called Country-by- Country Report (CbCR). I. Background BEPS action plan In response to sophisticated tax avoidance strategies, the OECD published its BEPS action plan (Base Erosion and Profit Shifting) in October The recommendations for action contained therein are intended to make it more difficult to set up the respective tax structures and the resulting shift of profits into countries with low tax rates, or special exemption rules. In parallel with this, the OECD guidance on transfer pricing documentation was revised; in particular, the business relations within a group of companies will have to be presented more transparently for the tax authorities. II. The OECD s three-tiered approach for documentation The OECD s newly developed documentation recommendations follow a three-tiered approach. As previously, master documentation (master file) as well as countryspecific documentation (local file) will have to be prepared. In addition to this there will now be a CbCR. This will include information about the entire group of companies. It will be a requirement to provide a report containing a country-by-country breakdown of data relating to earnings and taxes, in particular, and also a list of the group companies with their respective main business activities. The master file should also contain an overview of the type of global business operations of the group of companies and the methodology it uses to determine transfer pricing. III. Planned national rules for the CbCR The OECD principles for transfer pricing documentation have to be transposed into binding national regulations. The draft bill shows, for the first time, the proposed rules for the CbCR in Germany. Accordingly, under the following conditions, there will be a requirement to prepare country-specific documentation for the entire group of companies and forward it to the German Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt): the headquarters or management are based in Germany (German group parent company), consolidated financial statement has been drawn up, the consolidated financial statement includes at least one foreign subsidiary or permanent establishment, the consolidated revenues in the preceding financial year were at least 750 m. As a rule, a CbCR does not need to be submitted if a German company is controlled by a foreign one and if it is included in its consolidated accounts. However, a foreign group parent company may instruct a German company that is included in its consolidated financial statement as a subsidiary to prepare a CbCR. Furthermore, a German subsidiary would be obliged to submit a CbCR if its foreign parent company (e.g. because of different national rules) does not prepare and submit country-specific documentation although it would be obliged to do so if the headquarter was based in Germany. In such cases, the German subsidiary in the group has to submit a CbCR to the BZSt. With respect to the preparation of the contents, the draft law provides that the report should be divided into three parts: First of all, an overview has to be prepared that is broken down by tax jurisdictions and shows the business activities of the group. This information shall include: revenues and other income, taxes paid and accrued in the financial year, annual pre-tax profit, equity capital, retained earnings, number of employees and tangible assets. Moreover, there also has to be another list with all the companies and permanent establishments, in each case, including their most important business activities broken down according to countries. Any additional information necessary for understanding the other two documents 2 PKF newsletter July August 2016

3 has to be provided in the third part. The report has to be sent electronically to the BZSt using an officially prescribed format. It should be sent, at the latest, one year after the end of the financial year to which the report relates. If the submission is incomplete or late a fine of 5,000 may be imposed. The BZSt will forward the reports to the competent tax offices as well as to the foreign tax authorities. Recommendation: There will already be an obligation to prepare a CbCR for financial years starting after Therefore, intense preparation for the extended reporting requirements will be essential and required very promptly. More Information: The draft law entitled: Draft of an act to implement the amendments to the EU mutual assistance directive and other measures against earnings erosion and profit shifting (Entwurf eines Gesetzes zur Umsetzung der Änderungen der EU-Amtshilfe richtlinie und von weiteren Maßnahmen gegen Gewinnkürzungen und -verlagerungen) can be downloaded at (German version only) [ TAX ] Simplification rules for warehousing transactions ing evidence. It is only in a second step, namely at the time when the goods are taken out of the warehouse, that title to the goods passes to the customer. The result is a VATable supply to another EU state. In many member states there are simplification rules for these types of warehouse transactions. These provide that a VAT-exempt intra-community supply of goods (without taking into account the preceding transfer) shall be deemed to exist only at the time when the goods are removed from the warehouse. From the German perspective, however, there is then a lack of documentary evidence and it is thus not possible for the intra-community transfer to be treated as VAT-exempt. Goods supply to and from consignment warehouses in the EU The tax authorities have accepted the foreign simplifi cation rules Who for: Companies with consignment warehouses in other EU member states. Issue: The Frankfurt/M regional tax office (Oberfinanzdirektion, OFD) recently adjusted its regulation on Goods supply to and from consignment warehouses (Warenlieferung in und aus Konsignationslagern) in accordance with the latest case law. Problems had arisen from the differences in the VAT treatment of warehousing transactions in Germany and other EU member states. According to the EU Directive on the VAT system, a movement of goods out of Germany and into a consignment warehouse located abroad is deemed to be an intra- Community supply of goods (a so-called transfer event). This is generally exempt from VAT so long as there are the necessary vouchers and books for the purpose of provid- In the new regulation, the German tax authorities recognise the application of foreign simplification rules and dispense with the depiction of the transfer for VAT purposes. The upshot is that, in these cases, the intra-community supply of goods does not occur until the goods are taken out of the foreign consignment warehouse. In this way, the German tax authorities have aligned themselves with the other member states in order to avoid conflicts over tax. Recommendation: The simplification rules in the individual EU member states have not been harmonised and, in some case, differ significantly from each other. For relevant warehouse transactions the application of the rules in the respective member state should be carefully checked. More Information: The regulation from the OFD Frankfurt/M., already mentioned above, is from (case reference: S 7100a A 4 St 110); it includes additional and detailed information about selected simplification rules and your PKF partner would be pleased to let you have a copy. July August 2016 PKF newsletter 3

4 (4) Taxable commercial business activities A nonprofit entity engages in commercial business activities when it generates income that goes beyond the scope of asset management. If the entity s activity does not connewsletter Special business assets as a restructuring pitfall Who for: Business owners and companies that are planning a restructuring in relation to commercial partnerships Issue: In order to achieve tax neutrality for contributions within the context of the German Reorganisation Tax Act, the key prerequisite is that the current or future contribution of a so-called group of operating assets (such as, e.g., a business) has to consist of all the assets or, depending on what is being contributed, has to include all the business assets that are essential for operations. It should be noted that special business assets are also included in the group of assets and, if applicable, also have to be contributed. In so doing, should any special business assets be forgotten this would result in the realisation and taxation of all the hidden reserves of the transferred assets. A distinction has to be made by reference to the legal form: In the case of commercial partnerships it would be sufficient if the asset were part of the special business assets of the receiving partnership, i.e. it can remain with the previous owner under civil law. In the case of corporations ownership under civil law (or at least the economic ownership) has to be transferred. It does not matter whether or not, in the past, the special business assets were shown in the balance sheet. Accordingly, with every contribution there is a risk that unrecognised special business assets could result in the taxation of all the hidden reserves of the transferred assets. In order to minimise the risk at this point there is the option to make use of a so-called catch-all clause according to which all assets that are treated as special business assets (that are essential for operations) will be also contributed whether or not they are shown in the balance sheet. However, it should be noted that the tax authorities are very sceptical towards such catchall clauses and could potentially not recognise them. Recommendation: When contributing a commercial partnership, great importance should be attached to the (as far as possible) full identification of special business assets. Any mistakes at this stage could prove to be very expensive for the company. If there are any doubts as to whether one or other asset (that is essential for operations) should be treated as a special business asset, or if catchall clauses should be used as a backup, it would be advisable to obtain an advance ruling from the local tax office. Sponsorship as an instrument between advertising and a charitable donation Part 2: Impact on the recipient Who for: Non-profit entities that would like to finance themselves through sponsorship. Issue: With sponsorship, non-profit and economic interests work together with the tax exempt and taxable spheres. The tax optimised structuring of a sponsoring activity in the case of the sponsor was the subject of the Focus section in the PKF Newsletter 06/2016. In this issue, we consider six tax aspects that are particularly important from the perspective of the recipient. (1) Sponsorship as an economic activity by a charitable institution In the case of sponsorship, a charitable institution becomes more or less actively involved in order to obtain income. Unlike donations, membership fees and subsidies, with advertising an institution provides a service in return to the sponsor. Such economic activity by an entity can result in the sponsorship income being subject to corporate and trade taxes. (2) Tax-exempt asset management Economic activity by an entity that does not go beyond the scope of asset management remains exempt from tax. This includes, e.g., leasing of advertising space in a football stadium to an advertising company, or the transfer of advertising business. Furthermore, if a textile manufacturer, for example, uses the logo of an environmental foundation as an indication of its sponsorship then the foundation will generate tax-exempt income by permitting the use of naming rights. One third of the surpluses generated from sponsorship within the scope of asset management may be allocated to an entity s free reserve. (3) Discretionary sponsorship An entity s income also remains tax-exempt even if it itself simply makes a reference to, or thanks the sponsor in posters or event catalogues. These references should be as discrete as possible without there being an advertising emphasis for the sponsor. Such income from discretionary sponsorship is not assigned to asset management. In fact, the tax authorities grant an exemption from taxes for this activity for reasons of fairness because, in their view, which is not uncontroversial it would otherwise be a taxable activity. Only 10% of income from discretionary sponsorship is reservable. 4 PKF newsletter July August 2016

5 currently serve to realise its purposes in accordance with its statutes then the income shall be taxable. However this shall not apply if, in a calendar year, the sum total of all the income, including VAT, generated from commercial business activity does not exceed 35,000. The provision of advertising space on sporting apparel and, likewise, a conspicuous printed image of the sponsor s logo or pictures of a sponsor s products in a conference brochure would constitute taxable advertising services for an entity. Donating a vehicle with advertising placed on it would only be taxable if the entity has undertaken to use the vehicle more than is strictly necessary, or to park it in such a way that it becomes a promotional tool. Amounts from framework agreements, e.g. between a sports club and an insurance company should, if necessary, be divided up in advance into taxable and tax-exempt components of the service, as otherwise it is likely that all the income would be taxable. (5) Value added tax For a non-profit entity, an exchange of services will always be deemed to be subject to VAT if the entity undertakes to perform a specific advertising service (e.g. on-shirt advertising). Conversely, if the sponsor were explicitly granted the right to market the sponsoring activity, then this would also be deemed to be an exchange of services. The standard VAT rate of 19% should be applied to this. The reduced rate of 7% is applicable to the transactions effected by the non-profit entity in the area of asset management. However, in the case of discretionary sponsorship, there is a lack of binding eligibility criteria. In the opinion of the tax authorities, this should not be treated as a taxable exchange of services. This view is disputed. Otherwise, it is likely that taxation at 7% (the reduced rate in the case of asset management), or even 19% (according to the the Federal Fiscal Court) could be applicable. Please note: In this respect, currently, there is a significant risk of miscalculation for the recipient of sponsorship. (6) Liability for donations in cases of discretionary sponsorship Based on the assumption that no exchange of services took place, the question that arises is whether or not a receipt for a donation can be issued. The requirements for an amount to be deemed a donation would not be met if, in addition to the altruistic goals, there is also a benefit for the sponsor in terms of advertising. Please note: You should bear in mind that sponsorship recipients are liable for the correctness of the donation receipts that are issued by them. Concluding Recommendation: Non-profit entities should be contractually protected against tax risks. In particular, it is advisable to have VAT clauses. The PKF experts with their specific practical knowledge would be pleased to help you with this. [ LEGAL ] Scope of options in cases of ineffective settlement provisions in the articles of association of a German limited company (GmbH) Who for: GmbHs and their shareholders. Issue: A shareholder s right to a settlement upon leaving a GmbH constitutes one of the fundamental membership rights. If the articles of association of a GmbH stipulate that the amount of the settlement for the shareholder has to be calculated on the basis of fair market value, then a valuation of the GmbH s business has to be performed. The result of the valuation will make it possible to provide a calculation for the pro rate shareholding and therefore, to determine the amount of the settlement on the basis of the fair market value. Within the scope of the autonomy of the articles of association, the shareholders are free to regulate the settlement at their discretion. However, rules that restrict the settlement should be reviewed. If a settlement is seriously disproportionate to the fair market value and if this is not justified by any predominant interests of the company then the rules could be unconscionable and, therefore, invalid. Here, a distinction has to be made as follows: (1) Rules that are invalid from the start The unconscionable rule shall be replaced by a statutory provision according to which a settlement amount has to be paid that corresponds to the fair market value. (2) Rules that start off being valid but subsequently become invalid This will be the case if, for example, in the articles of association the settlement is restricted to the book value but, in the meanwhile, significant hidden reserves have accumulated. These rules have to be adjusted in accordance with the contractual interpretation so that, ultimately, an adequate settlement is achieved. In the course of this, both the outgoing shareholder s interest in the settlement being as high as possible as well as the company s interest in its continued existence should be taken into account. (3) Rectification of invalid rules However, a share- July August 2016 PKF newsletter 5

6 newsletter holder cannot rely on the fact that the rules in respect of the settlement were unconscionable from the start. In a similar application under the German Stock Corporation Act, the Federal Court of Justice (Bundesgerichtshof, BGH) ruled that a clause that started off being unconscionable could, nevertheless, become effective if no objection is raised in this respect within three years after the signing of the company agreement in which the clause about settlements was included. In this case, the unconscionable rule was said to be rectified (ruling from , case reference: VIII ZR 73/99). (4) Claims in the case of rules that have been rectified If the unconscionable rule is rectified under company law, nevertheless, the outgoing shareholder is entitled to bring a claim under civil law. This shareholder may require the remaining shareholders to remove the invalid provision in the articles of association or, possibly, to pay compensation for breaching their corporate fiduciary duties. Furthermore, equal treatment also has to be considered in the case of clauses that have subsequently become invalid and which have to be adjusted to an adequate level in accordance with the principles of contractual interpretation (cf. under (2)). Please note: Therefore, the clauses that are usually used in practice to regulate the amount of a settlement on a pro rata basis of the fair market value are generally invalid. However, these can be taken into account as an indicator for an adequate level. Recommendation: Please do not hesitate to contact us for support in reviewing the above-mentioned clauses in existing articles of association, or also structuring the respective clauses. Letting out private residential properties as holiday homes can be prohibited A proliferation of providers of holiday homes (1) Provider is the owner of the home Homeowners may be subject to particular legal barriers, e.g. put up by a city. For instance, there might be regulations against the so-called repurposing of residential properties (e.g in Berlin, Hamburg, Cologne and Munich). In such places there is usually a requirement for authorisation for a property to be used as a holiday home on a regular basis. Violations can result in the imposition of fines. Yet, even without special local regulations, permanently letting to holidaymakers can constitute a change in use under building code regulations. In such cases, planning permission should first be obtained. In any case, this was what the Supreme Administrative Court of Berlin- Brandenburg (Oberverwaltungsgericht Berlin-Brandenburg, OVG BE-BB) recently decided, on (2) Residential property provider is him/herself a tenant Furthermore, tenants who wish to offer their homes require the express permission of their landlords, The general permission to sub-let contained in a rental contract is not sufficient for this (Federal Court of Justice (BGH) from , case reference: VIII ZR 210/13). If sub-letting continues when permission has not been granted and despite warnings there is a risk of the landlord terminating the rental contract without notice. Who for: Individuals who (sub-)let their privately used home to variously different holidaymakers. Issue: With the support of the respective internet portals, short-term rentals of private residential property have been enjoying growing popularity among tourists. In the next section, we provide a brief outline of the basic legal framework that (sub)landlords should take into account: Recommendation: Before reassigning residential properties as tourist accommodation there should be a careful review of the legal situation and, in particular, the local authorities should be contacted. Besides the legal issues, there will also be tax questions that will require clarification. Sub-letting in return for payment results in income that is liable to tax and is generally subject to VAT. Please do not hesitate to contact your PKF consultant for more details. 6 PKF newsletter July August 2016

7 More Information: The ruling of the OVG BE-BB (case reference: OVG 10 S 34.15) can be downloaded at (German version only). [ CORPORATE FINANCE ] Restructuring instruments are frequently associated with tax risks Who for: Business owners and companies in a crisis situation. Issue: When companies are restructuring, typical measures include: subordination, debt waivers and admitting new shareholders. When structuring an appropriate reorganisation measure with a view to making it as taxefficient as possible attention should be paid to the legal situation, which is often not clear. Below we discuss the tax issues that are currently important: (1) Subordination: Providing a company with shareholder loans instead of equity capital simplifies the repayment of funds and can avoid changes to the share ownership. The background to such an arrangement is that, in the case of corporations, over-indebtedness is one of the reasons for filing for insolvency. A shareholder loan to a corporation would, like any loan, be viewed as a liability of the corporation. Under insolvency law, in the event of a crisis situation, the loan would be included in the calculation of the company s possible over-indebtedness. However, loans Sanierungen erfordern ein abgestimmtes Verhalten der Beteiligten for which a subordination structure has been agreed that is in accordance with the bankruptcy law criteria would not be included. From a tax point of view, there is a risk of the loan being profitably derecognised. If, in order to repay the loan, the company s free net assets will be used in addition to future profits, then the company will be deemed to be encumbered and the loan will be recorded as a liability. The Federal Fiscal Court (Bundesfinanzhof, BFH) recently confirmed this distinction (ruling from , case reference I R 44/14). It is probably not possible to recognise a mere agreement to repay a loan solely out of future net retained profits. Such subordination can be tax neutral if, from the shareholder s point of view, the loan receivable is recoverable. In such a case, according to the BFH s ruling, a tax neutral contribution may exist. (2) Restructuring profits If a company s creditor waives a loan receivable then the resulting restructuring profit is taxable. Minimum taxation regulations mean that offsetting the restructuring profit against tax loss carry-forwards would only be possible to a limited extent and, therefore, the restructuring profit can lead to an outflow of liquidity in the amount of the tax charge. Possible relief can be provided by the so-called Restructuring Decree from According to this, tax on a company s restructuring profit may be deferred, for equitable reasons, and subsequently abated. A tax burden is currently associated with following aspects, in particular: At present, the BFH is working on establishing the lawfulness of the Restructuring Decree currently, there is legal uncertainty. Whether the application for relief from trade tax should be submitted to the local tax office (usually simpler) or to the respective municipality (complicated if there are numerous operating units) remains unclear. Before abatement is granted, the tax liability arising from the restructuring is included in the over-indebtedness report and places a burden on the balance sheet. Restructuring costs for future years retroactively reduce the restructuring profit and not the profit in future periods. (3) New shareholders The restructuring of a commercial partnership can also be achieved by means of a debt waiver by the partners and/ or by admitting new partners. In many cases, it is unclear which partner should pay tax on any possible profit arising from a debt waiver that is apportioned and this also depends on the specific structure. An existing shareholder could potentially compensate for the debt waiver July August 2016 PKF newsletter 7

8 newsletter with offsettable attributable losses so that this would be the preferred option if required. According to the latest BFH ruling, the taxable profit arising from a debt waiver should be apportioned to the shareholder who is supposed to bear the financial liability. The BFH, in its ruling from (case reference IV R 38/10), recommends setting out the appropriate arrangements in the share sale agreement. Recommendation: Loan relationships with shareholders should be carefully structured in such a way so that, in a crisis, the resulting tax burdens will be as low as possible. In view of the current legal uncertainties, the recommendation is to consult your tax adviser. Please note: The insolvency law-related aspects of restructuring will be discussed in the next issue of our newsletter. [ IN BRIEF ] Special remuneration should be offset against the minimum wage the Federal Labour Court has confi rmed the decision of the court of fi rst instance In the 5/2016 issue of our newsletter, we reported on a ruling from the Berlin-Brandenburg Regional Labour Court (Landesarbeitsgericht, LAG), from , according to which special remuneration, such as a holiday bonus or a Christmas bonus, should be offset against the minimum wage. The BAG has ruled unusually swiftly on the appeal against this ruling and adopted the opinion of the LAG. If the special remuneration should be viewed as payment for work that has already been performed and if the payments are irrevocable and unconditional then they should be taken into account accordingly for the minimum wage (ruling from , case reference 5 AZR 135/16). [ AND FINALLY ] A nation that sees its future in the past is bound to fail. Walther Leisler Kiep, , German CDU politician. Impressum PKF FASSELT SCHLAGE Partnerschaft mbb Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft Rechtsanwälte Berlin EUREF-Campus 10/11 Torgauer Str Tel Hamburg Jungfernstieg 7 Tel Haldensleben Hagenstr. 38 Tel Rostock Am Vögenteich 26 Tel Braunschweig Theodor-Heuss-Str. 2 Tel Köln Gereonstraße Tel Halle Bernburger Straße 4 Tel Zell (Mosel) Schlossstraße 34 Tel Duisburg Schifferstraße 210 Tel Helmstedt Bötticherstr. 51 Tel Frankfurt Ulmenstr Tel Montabaur Aubachstraße 13 Tel 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 Fasselt Schlage 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 Fasselt Schlage 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 Copyright: Picture credits: p. 1 ewg3d, p. 3: cybrain, p. 6: Nikada, p. 7: baona, all istock. 8 PKF newsletter July August