PKF. Editorial. Contents PKF FASSELT SCHLAGE. Dear Readers, FOCUS

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1 PKF FASSELT SCHLAGE PKF Editorial Dear Readers, We hope that 2017 has started well for you. We have included a PKF Tax Card for 2017 with this issue which provides a quick overview of the relevant key tax data and dates. The recognition and measurement of intangible assets is assuming ever greater significance. We look at this trend in our Focus section where we deal with the topic of the licensing of intangible assets. There you can read more about the tax obligations of licensees. At the end of 2016, the legislator presented corporations with an exemption provision if a change of ownership takes place, under certain circumstances, it could still be possible to use loss carry-forwards. The second contribution in the Tax section focuses on a ruling by the Federal Fiscal Court according to which, in cases of doubt, the national definition of a permanent establishment would override the concept set out in a DTA. In the Legal section we discuss important legislative changes that employers will have to take into account in the course of Firstly, some of these changes concern the hiring out of temporary workers, whereby the rights of temporary employees have been strengthened and, secondly, we take a close look at the overdue adaptation of terms and conditions agreements to the new media. The Accounting Directive Implementing Act has made selective changes to external accounting. In our Corporate Finance series we discuss what investors should look out for in this regard. With our best wishes for a successful year, Your Team at PKF Fasselt Schlage Contents FOCUS» Withholding tax deduction when assigning rights in accordance with Section 50a of the German Income Tax Act TAX» Preserving loss carry-forwards by continuing the business operations» Foreign permanent establishments National regulations take priority over DTAs LEGAL» Reform of the German Temporary Employment Act (Arbeitnehmeruberlassungsgesetz, AÜG) New rules in respect of the maximum duration of temporary employment and of equal pay» Changes in the law pertaining to general terms and conditions - Adjustments need to be made to pre-formulated employment contracts CORPORATE FINANCE» Changes stemming from the Accounting Directive Implementing Act Analysis requirements from the perspective of investors and internal decision-makers IN BRIEF / BREXIT UPDATE» Tax evasion on a large scale» Impact on legacies and gifts

2 [ FOCUS ] Withholding tax deduction when assigning rights in accordance with Section 50a of the German Income Tax Act According to Section 50a of the German Income Tax Act (Einkommenssteuergesetz, EStG), in the case of taxpayers with restricted tax liability, withholding tax is imposed on certain types of income. This tax deduction also applies to the remuneration paid to foreign rights holders in return for granting permission to use rights (such as, e.g., industrial property rights, patents, trademark rights, image copyright, etc.). The tax should be withheld on payments made by the domestic (German) company and passed on to the respective local tax office. 1. Important cases In the following section we present two cases where, in practice, the assignment of rights plays a very significant role. 1.1 Software In the software industry, for a long time now, licensing models have been displacing the typical straightforward purchase. A distinct differentiation has to be made here between the types of distribution, as it is only the assignment of rights, which do not wear away during the period of use, that gives rise to the obligation to deduct tax in accordance with Section 50a of the EStG. This implies a time limit for the licensing - purchases are not affected by this regulation. The assignment of rights to customised software falls within the scope of application for the deduction of tax. In a second step and based on the individual features of the software product, a distinction has to be made between standard software and customised software. The former is characterised by its usability for an indeterminate group of users who can apply the software for similar matters (e.g. standard word processing programs). In contrast to this, customised software is programmed for the specific needs of users on a case-bycase basis. Furthermore, there are hybrid forms, such as in the case of standard software that can be adapted to a company s operational requirements. Please note: This distinction is crucial for the tax deduction as only the assignment of rights to customised software falls within the scope of application for the deduction of tax. Standard software is exempted from this and is treated like a movable asset. 1.2 Image material In the context of self-generated images, income that is due to non-domestic photographers, photographed models or designers, is also subject to tax deduction. In such cases, the remuneration paid has to be divided up between the part that is attributable to the active contribution to the project (no tax is deducted from the remuneration for services rendered) and the part that covers the assignment of image rights or personality rights to the work that has been produced (assignment of rights with tax deduction). Insofar as no distinction in respect of the remuneration is made in the contract but, instead, an overall fee is agreed upon then an estimate for the two components has to be provided. With respect to the assignment of personality rights in the case of models, the Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) has provided guidelines for dividing up the remuneration that depend on the size of the fee (BMF circular from ). Another condition for the deduction of withholding tax is the use of the image material within the domestic taxation domain. If the material is used both within and 2 PKF Newsletter january 2017

3 01 17 outside of Germany then, e.g., the revenues have to be divided up. Please note: In this context, you should also check whether the rights have been assigned directly by the model or through a German agency. If a German agency has acted as an intermediary then the tax does not have to be deducted if the model s services were invoiced in the agency s own name and on its own account. However, if the agency invoices in the name and on the account of the model then tax has to be deducted. 2. Tax treatment If the above-described conditions for the deduction of tax in accordance with Section 50a of the EStG have been met then the following should be taken into account. The party that is liable to pay the tax is the payment creditor (the recipient of the payment). However, the payment debtor has to deduct the tax (15% plus the solidarity surcharge) at the time of payment and forward it to the respective local tax office. Furthermore, there is an obligation to submit a period-based notification of the actual amount of tax that was withheld and to have records available that make it possible to verify how the tax was assessed. If there is a DTA with the country of the recipient of the payment that restricts Germany s right to tax royalties you will have to distinguish between the following two cases: If, at the time of disbursement, the payment creditor produces a valid certificate of exemption then, depending on the DTA rules, the paying party can omit the deduction of withholding tax or can apply a lower rate of tax in accordance with the DTA. If such a certificate of exemption is not produced then the tax should be deducted in accordance with national regulations. The payment creditor may then submit an application to the German Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt) for a refund of any excess tax. Recommendation: If domestic (German) companies purchase rights more frequently from foreign suppliers of goods or services then the so-called recording procedure (Kontrollmeldeverfahren) could be an option. Then, under certain conditions, the reduced rate of withholding tax in accordance with the relevant DTA may be applied directly. More information: In this respect, the BMF circular from with the case reference IV C 3 S 2300/07/10002 is still applicable and is available online at (German version only). You can find further information about the recording procedure (Kontrollmeldeverfahren) on the website of the (German Federal Central Tax Office (Bundeszentralamt für Steuern). [ TAX ] Preserving loss carry-forwards by continuing the business operations Who for: Corporations with tax loss carry-forwards. Issue: The Act relating to the Further Development of Tax Loss Offsetting was adopted by the Bundestag (lower house of German parliament) on Through the newly introduced Section 8d of the German Corporation Tax Act (Körperschaftsteuergesetz, KStG), despite an essentially harmful (detrimental from a tax point of view) change of ownership, a tax loss carry-forward can be retained if the continuity of the business operations is preserved. The exemption from the loss being derecognised affects acquisitions of shareholdings made after You should specifically consider the following aspects: (1) Extended loss offsetting According to Section 8c of the KStG, a corporation s loss carry-forward would be fully derecognised if, within five years, more than 50 % of its subscribed capital were to directly or indirectly transferred to a new buyer. Transfers of between 25 % and 50 % would result in proportional derecognition of the loss. Exceptions have hitherto applied to restructuring within a group and in the case of hidden reserves being available. Moreover, if the business operations of the corporation were unchanged for three years prior to the harmful change of ownership then a (new) application can be made for the losses to be used in accordance with Section 8d of the KStG. In this case, the group clause and the hidden reserves clause may not be used. (2) Loss carry-forward tied to the continuation of the business If the local tax office approves the application then an assessment will be made of the losses to be carried forward that will be tied to the continuation of the business. The process is comparable to the one hitherto used to assess a corporate income tax loss carry-forward and is also applicable to trade tax. PKF Newsletter january

4 Newsletter (3) Future business operations The assessed loss carry-forward tied to the continuation of the business would be derecognised if the business operations were to be discontinued, suspended or served a different purpose. Furthermore, other measures that would be deemed to be harmful would be if the corporation were to start an additional business operation, acquire a shareholding in a partnership, become the parent company in a tax group, or if it were to acquire assets that were recorded at below their fair market value. The hidden reserves clause would be revived if the loss carry-forward tied to the continuation of the business were to be derecognised. (4) Indeterminate concept of business operations Whether or not business operations exist within the meaning of Section 8d of the KStG, as amended, shall be determined on the basis of ongoing and complementary activities sustained by a consistent aim to generate a profit. Qualitative features such as the product offering, customer base, supplier base, markets or staff qualifications should substantiate the business operations. Please note: It is unclear how this is related to other tax concepts, such as a commercial operation (income tax), economic business operations (German Fiscal Code), or established business operations (German Law to Prevent International Fiscal Evasion). Recommendations for tax returns from 2016: You should bear in mind that reorganisations that have already been carried out or that are planned could possibly involve a harmful discontinuation of the business operations. The extension of loss offsetting, which in itself is a welcome development, harbours, e.g., in particular, the following uncertainties and risks: How can you ensure that business operations will not be relinquished inadvertently? In what cases would it be preferable to apply the group clause and the hidden reserves clause rather than to apply to be tied to the continuation of the business? Foreign permanent establishments National regulations take priority over DTAs Who for: Companies with foreign operations at a fixed place of business that qualifies for an exemption listed in a DTA (e.g. supporting and auxiliary activities). Issue: Most double taxation agreements (DTAs) include exemptions for permanent establishments. According to article 5(4) of the OECD Model Agreement, even if there is a fixed place of business (e.g. an office), a permanent establishment shall be deemed not to exist if it is used solely for activities that are preparatory and auxiliary in nature. By contrast, the national (German) definition of a permanent establishment in section 12 of the Fiscal Code of Germany (Abgabenordnung, AO ) does not provide such an exception. According to Section 9 no. 3 of the Industry and Trade Tax Code (Gewerbesteuerverordnung, GewStG), income from commercial operations and the add-backs pursuant to Section 8 of the GewStG have to be reduced by the share of the trading profit of a domestic (German) company that is attributable to a permanent establishment that is not located in Germany. Recently, the Federal Fiscal Court (Bundesfinanzhof, BFH) dealt with a case where it had to decide whether the definition of the concept of a permanent establishment should be determined by the provisions of Section 12 of the AO, or whether the stricter rules in the respectively applicable DTAs should have priority in this respect. In the specific proceedings, the claimant (a German limited company (GmbH) headquartered in Germany) explained the reduction in accordance with Section 9 no. 3 of the GewStG and, thus, the trade tax exemption by pointing out that the German tax authorities were bound by their own definition of the concept, based on Section 12 of the AO and, in this respect, could not tax the income as it had to be allocated to a foreign permanent establishment. Change of ownership at a ski manufacturer loss carry-forwards can be saved The BFH, in its ruling from , confirmed the opinion 4 PKF Newsletter january 2017

5 01 17 that in the context of Section 9 no. 3 of the GewStG what matters is the definition of the concept based on Section 12 of the AO with the result that the earnings from the foreign permanent establishment were not subject to trade tax. More information: The BFH ruling of (case reference: I R 50/15) is available at (German version only). [ LEGAL ] the declaration had been received by the staffing agency or the hiring company no later than three days after it had been presented at the Federal Employment Agency. The maximum duration of the temporary employment assignment may vary under a collective agreement for the sector where the temporary workers are deployed (but not for the temporary employment sector). The maximum duration period of temporary employment will recommence if the temporary worker interrupts his/ her work at the hiring company for at least three months. Reform of the German Temporary Employment Act (Arbeitnehmerueberlassungsgesetz, AÜG) New rules in respect of the maximum duration of temporary employment and of equal pay Employers who hire temporary workers have to comply with the Law amending the Temporary Employment Act and other Acts that was passed by the Bundesrat (upper house of the German parliament) on It stands under the motto An orderly labour market and, starting in April 2017, it will introduce new rules, particularly as regards the maximum duration of temporary employment and so-called equal pay. 1. Maximum duration of temporary employment Employees will now only be allowed to work a maximum of 18 months for the same hiring company. If this period is exceeded then an employment relationship will automatically be deemed to exist between the temporary worker and the hiring company. However, there are exceptions to this: temporary workers can prevent an employment relationship arising automatically with the hiring company by providing a written declaration that they wish to remain with their existing employer (this is referred to in German as a Festhaltenserklärung). However, such a declaration would only be valid if: prior to submitting it, the temporary worker had presented it in person at an office of the German Federal Employment Agency, the office of the German Federal Employment Agency had added the date on which the declaration that was to be submitted had been presented and also an indication that the identity of the temporary worker had been established and Temporary workers now have to be treated with greater care 2. Equal pay principle Generally, the equal pay principle already applies now for the entire period of the temporary employment assignment. This can vary (downwards, too) on the basis of a collective agreement for the temporary employment sector. As of , this option will be limited to nine months from the start of the temporary employment assignment. From now on, temporary workers will have to be paid the same as the hiring company s regular workforce as of the tenth month of the temporary employment assignment. Exceptions will only be possible through a supplementary sectoral collective agreement or if there is an interruption of at least three months (see above). Please note: The hiring out of temporary workers by way of a so-called secondment as well as between group companies, however, does not require a licence so that the restrictions mentioned above do not apply. 3. Prohibition on deploying temporary employees as strike-breakers The controversial prohibition on deploying temporary employees during a strike to carry out the work of the striking regular workforce has also become law. Vio- PKF Newsletter january

6 Newsletter lations could result in the imposition of fines of up to 500k. Recommendation: The new AÜG shows in greater detail what the limits of hiring out temporary workers will be from now on. However, it remains to be seen whether or not and how exactly the collective agreements will be adjusted, in the future, in respect of the maximum duration of temporary employment, equal pay, or secondment. Temporary staffing agencies and companies that hire temporary workers will be obliged to undertake extensive revision of their contracts. More information: You can find background information about the reform of the AÜG on the website of the Federal Ministry of Labour and Social Affairs (Bundesministerium für Arbeit und Soziales, BMAS) ( Changes in the law pertaining to general terms and conditions Adjustments need to be made to pre-formulated employment contracts Who for: Employers. Issue: With a view to strengthening consumer protection, the legislature amended the law pertaining to general terms and conditions (GTC) and revamped the rules of Section 309 no.13 of the German Civil Code (Bürgerliches Gesetzbuch, BGB). These came into effect on and are generally applicable to employment contracts. This amendment affects so-called preclusive periods which are used to ensure that claims have to be asserted within specific time limits. This results in limitation periods usually of three months, which is considerably shorter than the standard statute of limitations of three years. If these clauses are included in a pre-formulated standard employment contract and were not individually negotiated between the parties by way of exception, as GTC they are subject to a substantive review. According to the regulations up to now, GTC clauses that tie notices or declarations vis à vis the contractual partner to a more stringent form than the written form have been unenforceable. From now on, clauses that provide for a more stringent form than the text form will already be unenforceable. The difference is that the written form is only fulfilled if the declaration bears a personal signature on the original. With the text form, only the sender has to be identifiable, therefore, an that includes the name of the sender would be sufficient. The new rules will not have any effects on employment contracts that were concluded prior to ( old contracts ). The exclusion clauses with the agreed written form will remain valid. There could be a valid exception insofar as these contracts have been amended. In such a case, as a precautionary measure, they should be adapted to the new legal situation this will apply to contracts as of Exclusion clauses except for those in collective agreements may not provide for a more stringent form than the text form in order to assert a claim. Therefore, if the clauses are violated then any notification (even oral) would be sufficient in order to remain within the time limit. Recommendation: Employers should adjust the exclusion clauses in standard employment contracts so that these should only include the reference to the text form. [ CORPORATE FINANCE ] Changes stemming from the Accounting Directive Implementing Act - Analysis requirements from the perspective of investors and internal decision-makers Legislative changes that affect a company s bookkeeping and accounting are of paramount importance for the companies concerned themselves. Moreover, new rules could also be significant for potential buyers and/or investors. In the following section we analyse the relevant changes that stem from the Accounting Directive Implementing Act (Bilanzrichtlinien- Umsetzungsgesetz, BilRUG) from the perspective of internal and external decision-makers. 1. The main changes resulting from the BilRUG 1.1 The expansion of sales revenues at the expense of other operating earnings In future, by widening the definition of sales revenues,,income that hitherto had to be reported as other operating earnings will have to be reported under sales revenues. This includes rental income or income from group services (cf. issue 12/2016 of the PKF Newsletter). However, proceeds from the sale of assets still should not be reported as sales revenues. 6 PKF Newsletter january 2017

7 will be partially offset The requirement to report extraordinary expenses and income separately in the profit and loss statement (P&L) has been dropped. In future, the respective expense and income items will have to be reported expressly as personnel expenses, material costs or other operating costs or income and will be a component of EBIT(DA). 1.3 Disclosures in the notes to the financial statements According to Section 285 no. 31 of the German Commercial Code (Handelsgesetzbuch, HGB), as amended, the amount and type of such individual expenses and income that are of exceptional significance have to be specified. In this regard, it should be borne in mind that the term exceptional implies a more comprehensive consideration of circumstances than those that have hitherto been subsumed under extraordinary income and expenses. 2. Consequences for analyses by decision-makers 2.1 A differentiated approach to sales revenues In future, analysing sales revenues as part of a due diligence process or for business planning purposes will require a very precise approach in order to be able to distinguish between sales revenues that have a direct connection with ordinary business activities and a company s typical service offering from those that, in the past, were classified as other operating earnings. Please note: Potentially, it might be necessary in the future to adjust or tighten up the definition of sales-related parameters that are used to calculate bonuses, for example. 2.2 The effects on key figures and performance indicators The new classification rules will have an impact on a large number of corporate key figures and performance indicators. This includes indicators such as, e.g., return on sales, gross profit or loss but also working capital ratios. Against the background that extraordinary income and expenses will have to be reported above the EBITDA line, it will be necessary to examine financial covenant ratios where EBITDA is included as the numerator or the denominator. The relevant financial covenants, among others, are EBITDA interest cover and the leverage ratio which, usually, are also the most important ones used in credit agreements. Furthermore, it will be necessary to review contractual provisions where the earnings indicator EBIT(DA) for which there is basically no legal definition is used as a reference value, among other things, for agreed targets, a sliding scale interest rate, determining the purchase price and earn-out rules. Please note: It should be noted that because of the change in the presentation of the P&L, results from ordinary business activities as defined in Section 275(1) no. 14 and. Section 275(2) no. 13 of the HGB, as amended, will be eliminated in the future and, therefore, will have to be ruled out as a reference value for agreed targets. Performance indicator systems and the regular reporting during the course of the year especially to financing banks or other loan capital providers should be examined with a view to a potential need for amendments. Furthermore, agreements under company law such as, e.g., the entitlement to a financial settlement for outgoing shareholders, or also corporate acquisition contracts should undergo an appropriate analysis. Recommendation: The consequences of the changes stemming from the BilRuG should be carefully examined from the perspectives of internal corporate steering and external investors, in particular, with respect to existing loan agreements or those currently being negotiated. [ IN BRIEF ] Tax evasion on a large-scale The criminal offence of tax evasion, in especially serious cases, can lead to increased penalties with prison sentences ranging from six months up to ten years. An especially serious case is one where large-scale tax avoidance can be presumed to have taken place. In its rulings to-date, the Federal Court of Justice (Bundesgerichtshof, BGH) had made a distinction between contingent loss and loss incurred. If the taxpayer had been in breach of his/her duty by failing to report income to the tax authorities this was deemed to be on a large scale starting at an amount of 100k. In its ruling of (case reference: 1 StR 373/15) the BGH dropped this differentiation. With immediate effect, tax evasion will be deemed to have been on a large scale starting from an amount of 50k. PKF Newsletter january

8 Newsletter (2) Business assets Generally, the concessions also apply to the business assets of a German sole trader or of a partnership in an EU-based permanent establishment. Shareholdings in corporations are accorded tax privileges if the headquarters or the management are located in a foreign EU state. Under the current laws, the transfer of such assets will only be tax-privileged up to the time of Brexit. Impact on legacies and gifts Who for: Business owners and private individuals with assets in the United Kingdom (UK). Issue: In Germany, there are different concessions applicable to inheritance and gift tax that also affect assets in a foreign EU state. When the UK leaves the EU this will have consequences for future transfers of such assets. Retroactive aspects should also be taken into account. (1) Private assets In the UK, there are tax-free allowances or full exemptions on the transfers of residential real estate and family homes. If necessary, the time up to Brexit should be used to effect transfers. (3) Aggregate wage test The concessions for business assets are based on the assumption that, for several years after the transfer, in companies with 20 or more employees (in the future, after the inheritance tax reform, this will be 6 or more employees) aggregate wages and salaries will be maintained at a minimum wage total (aggregate wage test). This minimum wage total will be a multiple of the aggregate wages of the last five years prior to the transfer (starting level of the wage total). Wage and salary payments from EU-based permanent establishments or corporations are included in each case in aggregate wages. If there are wage and salary payments that are included in the starting level of the wage total but which will not feature in the paid minimum wage total on account of Brexit then the outcome of the aggregate wage test could be negative. It remains to be seen whether or not the legislator will make an exception for wages and salaries that are paid in the UK and which should not be included any longer after Brexit. [ AND FINALLY...] Politics has to make simple truths out of multi-layered ones if it does not want to lose its ability to act. Jutta Limbach, jurist, politician, President of Federal Constitutional Court , 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 Bildnachweis: S. 2 pichet_w, monsitj; S. 4 SolStock; S. 5 Jirsak ; alle istock.com 8 PKF Newsletter january