German Tax & Legal News - August 2004

PwC REPORTS

Cabinet Initiates Ratification of Supplement to the Dutch Tax Treaty

Germany and Holland signed a third supplementary protocol to the double tax treaty on June 4. The protocol requires ratification before it can enter into force and the German government has started the ratification process with a cabinet resolution on August 18. It covers four matters of substance:

Companies with their head offices in joint German/Dutch trading estates located on the border; the place of management depends upon where the border passes through the building in which the management is located. In principle, the country of residence is the country of location of the managerial offices. If the border passes through these offices, residence is in the country in which the greater part of that building is located. Free standing buildings with no managerial offices, e.g. an adjacent factory or store, are ignored even if they are on the same trading estate. Employee wages are taxable in the country responsible for the employee's social security. Either country may carry out a tax audit on such premises but the authority responsible should inform its opposite number of its intention to do so. These provisions only apply to joint trading estates specifically defined as such.

Branches or other facilities located in such a border trading estate; a company resident in one state (other than on a border trading estate) will not be deemed to have any tax liability in the other by reference to an establishment in a border trading estate even if the facility is entirely within the other country.

Invalidity and disability pensions paid by Germany to former Dutch forced labourers conscripted during WW II; these are already tax-free in Holland, but will now be taken out of the calculation of the marginal rates to be applied to other, taxable income. In effect, these pensions will be ignored for Dutch tax purposes altogether from 2003 onwards.

German withholding tax deducted from dividends on portfolio investments held by Dutch owners; this is now to be credited against any Dutch tax payable on that income.

New Tax Treaty with Singapore Signed

A new double tax treaty with Singapore was signed there on June 28. It will replace the existing treaty of 1972 once it has been ratified by both countries. It follows the OECD model with the following variations:

A building site or assembly project becomes a permanent establishment after six months.

The withholding tax on dividends is 5% if the shareholder is a corporation holding at least 10% and 15% in all other cases.

The withholding tax on interest is 8%.

The withholding tax on royalties is 8%. Royalties are paid for the use of all intellectual property and for the hire (leasing) of equipment.

Germany will grant a credit of 8% against the tax liability of her taxpayers on Singapore source interest and royalty income even if the tax actually deducted in Singapore is less than this. This "tax sparing" credit ceases to be available from January 1, 2005. The present tax sparing credit is 10% in line with the present withholding taxes on interest and royalties.

Capital gains on the sale of property are taxable in the state of location and on the sale of shares in the state of residence. If a person changes his residence between the two states, the first country may levy an "exit" tax on the appreciation in value of his investments if he has been resident there for at least five years. Any such tax will be relieved by the acceptance of a correspondingly higher base cost in the second country.

Qualification conflicts are avoided by crediting the source country's taxation against that due in the country of residence where the exemption method - the general rule for the avoidance of double taxation - would lead to "white" income, that is to income items not being taxed at all.

The new treaty will take effect for business years starting on or after the 1st of January following the exchange of instruments of ratification. It will also apply to all income paid from then on.

OECD Enhances Model Treaty Exchange of Information Clause

The OECD has revised the information exchange article of its model tax treaty together with its commentary thereto with immediate effect. Essentially, the changes bring the article into line with the increasingly demanding attitudes of many governments in the face of an apparently rising tendency for taxpayers to invest in foreign countries in the hope of not declaring their income at home. More specifically, the changes reflect the substance of the information exchange agreements which the OECD is pressing on tax haven countries for conclusion with its members. The three main items are

Information may be shared by the recipient tax authority or court with its own supervisory authority; this latter is to be bound by the same conditions of secrecy and restrictions on usage.

A request for information may no longer be declined because the authority requested has, itself, no interest in the information asked for and therefore no domestic legitimation to collect it.

A request for information may not be declined solely because the information is held by a bank or similar institution or because it relates to ownership interests in an entity.

Austria, Belgium, Luxembourg and Switzerland have reserved their agreement to the last point.

Dividend Withholding Tax in 2005 Due Immediately

The Bundesrat gave its assent on July 9 to a number of amendments to the Tax Management Act and other statutes. The change of most interest to international business is the new requirement that the dividend withholding tax be paid concurrently with the payment to the shareholders. This applies to withholding taxes on certain other forms of profit distribution, e.g. on cooperative dividends, but not to other withholding taxes, e.g. on interest and royalties. These latter will continue to be governed by the present rule requiring return and payment of withholding taxes by the tenth of the following month. The change applies to dividends paid on or after January 1, 2005.

Other changes agreed to by the Bundesrat during the same session include granting tax relief for the first 4,000 of costs for a first decree or commercial qualification, extending the circle of persons entitled to single parent relief, and extending for a further year the upper turnover limit of 500,000 below which businesses in eastern Germany may base their output VAT on cash receipts.

Revised Unfair Competition Act in Force

The Unfair Competition Act has been completely rewritten. The revised version was promulgated by publication in the Bundesgesetzblatt on July 7 and entered into force on the following day. It continues the trend of liberalising the retail trade, this time by removing all restrictions on end-of-season or other sales, and modernises the rules on advertising. It also brings the invasion of privacy ban on "annoyance" up to date. The advertising rules require respect for the copyrights, marks and styles of others, prohibit misleading or malicious advertising, and demand that comparative advertising meet high standards of objectivity. The ban on annoyance extends the previously existing prohibition on unsolicited telephone marketing to faxes and e-mails delivered to private addresses, unless the holder has given the supplier his address as a customer and has been cautioned that he may opt - at no further cost - not to receive advertising messages. The ban also covers advertising with "automatic dialling machines", which presumably curbs mass SMS advertising. The act introduces confiscation of profit as an additional measure to the fines and other penalties for flouting the rules. This new concept was designed particularly with widescale, but individually minor, infringements in mind, and is intended to dissuade managements from cynically comparing the potential benefits of wrongdoing with the likely fine.

OFFICIAL PRONOUNCEMENTS

German Application of Parent/Subsidiary Directive to New EU Members from May 1 Confirmed

The finance ministry published on August 2 its decree of June 29 confirming that the provisions of the EU Parent/Subsidiary Directive apply to dividends to and from all new member states of the EU from May 1, the date of accession. The relevant provisions of the Income Tax Act will not be changed until 2005, but the ministry does not see this as problematic since the Directive can in any case be directly applied by taxpayers. The only exception to the immediate application concerns dividends from Estonia; Estonia may continue to charge these to income tax up to the end of 2008, provided she does not change beforehand her system of not taxing business profits until distribution. Dividends from Estonia continue, though, to rank for tax treaty relief; if the German treaty applies, 5% is the maximum tax that may be imposed in Estonia on a dividend to a corporate shareholder with at least 25% of the shares. 15% is the limit on dividends to other shareholders.

Sale of a Business for an Annuity

Those who sell their...