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Statutes
Cases
Decrees
Issue 7
October 13, 2011
PwC Reports
http://tax-news.pwc.de/german-tax-and-legal-news
Withholding tax treaty with Switzerland signed
Germany and Switzerland have signed a treaty for the deduction at source of 26.375%
withholding tax (equivalent to the German level and to be adjusted if that level changes)
from the investment income of German resident account holders with Swiss banks.
Investment income includes capital gains. These are to be taken at 30% of the proceeds if
the cost of the investment cannot be determined. As it stands, the treaty is one-sided in
that there are no corresponding obligations on German banks in respect of Swiss account
holders; however, Germany is committed to reciprocal treatment on Swiss demand. The
deduction is to be paid over in full by the Swiss authorities to their German colleagues in
final settlement of the German liability of each account holder. The account holder is to
be given a receipt documenting this fact, but is not to be routinely named outside the
bank. The account holder can request inclusion of 9% church tax in the amount withheld,
again in final settlement of his German obligation.
The past is to be satisfied by a one-off payment on the account balance held six months
after the entry into force of the treaty. The rate varies between 19% and 34% depending
on the account movement since January 1, 2003. The payment is anonymous, although
the account holder is to be given a receipt identifying his person and showing the details
of the calculation. This payment absolves him from prosecution for past tax evasion in
Germany unless he "knew of or should reasonably have assumed" moves by the
authorities to investigate his affairs. The Swiss banks are to form an association to make
an advance payment of SFr 2 bn to Germany on entry into force of the treaty on account
of amounts to be collected from account holders.
An account holder may request the bank to pass his account information to the German
authorities as an alternative to the withholding tax. In this case the income is paid gross,
subject to the withholding taxes under the double tax treaty.
There is no payment to be made in respect of account holders withdrawing their balances
from Switzerland before the end of the 5th month following the entry into force of the
treaty. However the Swiss authorities have undertaken to collate such movements
following the date of signature of the agreement and to give summarised information to
Germany in the form of a schedule showing the ten most popular countries of destination
(by amount) and the number of transfers made to each one.
For the future, Germany may request specific information on named persons, provided
the German authorities have specific grounds for suspicion. Random requests are not
allowed. The overall number of requests is to be limited to a specific figure to be fixed by a
joint commission for each year but to lie within the range of 750-999 over a two year
period. Information passed may be used for tax purposes only. These can include
prosecution for tax evasion, but not for other offences, even if these are more serious. The
agreement also provides for an amnesty from criminal prosecution for those involved in
the German acquisition of Swiss bank data on account holders. However, employees of
Swiss banks are not excluded.
The treaty was signed on September 21, 2011 and is to enter into force on the January 1
following ratification in both countries. Ratification in Switzerland could be subject to

Official Pronouncements
Tax & Legal News October 13, 2011 2
referendum, especially as negotiation of similar treaties with other countries is underway
or has recently been concluded.
Agreement with Luxembourg on redundancy payments
Germany and Luxembourg have agreed under the double tax treaty to follow the principle
of taxing subsistence payments in the country of residence and remuneration payments in
the country of employment. Redundancy and other payments on termination of
employment – including those made under a “social plan” agreed with trade union and
employee representative participation, compensation for loss of office and unemployment
benefit – are to be seen as late remuneration for the former employment and thus as
taxable in the state of employment. If the former employee taxed part of his earnings in
the state of residence – because his work was deemed to have been partially performed
there – redundancy and similar payments are to be split between the two states in the
same proportion as the “active” income of the previous year.
The agreement was signed on September 7, 2011, entered into force on the following day,
and is to be applied to all cases still open.
Equal split of transport crew earnings in Germany and Luxembourg
Germany and Luxembourg have reached a mutual agreement under the double tax treaty
on the right to tax the employment income of residents of one country working as lorry,
bus or train drivers for an employer (or permanent establishment) resident in the other.
The agreement also applies to drivers’ mates, conductors and other crew members. The
day’s earnings are taxable in the state of residence if the entire day was spent on journeys
in that state and/or in a third country. The taxing right falls to the country of the
employer if the entire day is spent driving there. If the day is spent on journeys between
the two countries, or between the state of employment and a third country, the taxing
right for that day falls to the states of residence and employment in equal shares. The
taxing right for days off (weekends, bank and other holidays) is split in the same
proportion as the total pay for “active employment” during the year. Sick pay is taxed in
the country in which the person is registered for social insurance. Journeys to and from
work are not taken into account.
The agreement was signed on September 7, 2011. It entered into force one day later and is
to be applied to all cases still open.
Electronic filing of accounts – a year’s reprieve
Accounts in support of the tax returns must be filed electronically in XBRL format and
adhering to an officially prescribed taxonomy for all business years beginning on or after
January 1, 2012. The finance ministry has published a decree announcing the new
taxonomy and declaring that no objection will be taken to businesses who continue to file
their accounts in the traditional way (on paper and without adherence to the new
taxonomy) for the first year of the new system. Permanent establishments have been
granted a further reprieve – to business years beginning on or after January 1, 2015 –
regardless of whether they are the German branch of a foreign corporation or the foreign
branch of a German company (the accounts of the latter should show the treaty exempt
foreign trading income).
VAT reverse charge also for boards and cards
With effect from July 1, 2011 wholesale sales of mobile phones and integrated circuits are
subject to reverse charge VAT in a bid to curb “missing trader” and similar fraud involving
deliberate non-payment of VAT whilst allowing the (possibly unwitting) customer the
chance to recover the amount invoiced. The finance ministry has now revised its VAT
Implementation Decree to follow the new statute.
The decree extends the definition of „integrated circuit” to include complete boards and
cards (such as sound and graphic cards), but is more restrictive when applying the
turnover limit of €5,000. Only deals in excess of this sum fall to reverse charge. Repeat
orders are not part of the same deal, even if they are informally placed as withdrawals
from consignment stocks or call-downs within a framework agreement setting the overall
terms of sale, However, if there is doubt as to the final value of the order (e.g. because of
an adjustment clause in the agreement), no objection will be taken to reverse-charging the
sale, provided both parties agree – and act – accordingly.

Tax & Legal News October 13, 2011 3
VAT-free samples
On September 30, 2010, the ECJ held that the definition of a VAT-free sample should be
based on its purpose, rather than on its nature (case C-581/08 EMI). Thus, an item given
as a sample does not necessarily have to be distinct from corresponding items on display
in retail outlets for sale to consumers. The finance ministry has just amended the relevant
passages in its VAT Implementation Decree to follow the new definition. A sample is now
a test item given for the sole purpose of enabling the recipient to assess the nature and
quality of a product. It can be identical to a commercially available product where
necessary for customer assessment, provided it is given in the interests of sales
promotion. The object of a sample is to encourage the recipient (or others) to buy, not to
save them from making a purchase.
Intra-community supply exemption lost if customer concealed
On December 7, 2010, the ECJ held that a German dealer in luxury cars sold to
Portuguese dealers could not claim VAT exemption on the intra-community supply,
because he had invoiced the deliveries to fictitious recipients. He was, in the
circumstances, able to demonstrate delivery to Portugal, but, so the ECJ, had connived at
the Portuguese VAT fraud of his customers by deliberately concealing their identity. This
entitled the German tax office to levy VAT as though the sales had been made directly to
private individuals. Later, the Supreme Tax Court relied on this case in taking the same
stance in another case involving the sale of mobile phones by a German dealer to Austrian
and Italian customers in the same beneficial ownership as his German supplier. The
beneficial owner of the customers and the supplier had, in the meantime, been jailed for
VAT fraud. If the German intermediary was an innocent party acting with all due care, his
right to exemption on his intra-community supplies could not be denied. If he was not, he
would lose the exemption, despite apparent adherence to the spirit of the regulations.
The finance ministry has followed up on these two cases with a decree to the effect that
intra-community supplies will not be exempt where the documentation and recording
obligations have been breached and where the supplier has attempted to conceal the
identity of the customer, thus allowing this person to conceal the acquisition in his own
country. In such cases, it will no longer be open to the supplier to demonstrate actual
intra-community delivery by other means.
The case references are ECJ C-285/09 R judgment of December 7, 2010 and Supreme Tax
Court V R 30/10 judgment of February 17, 2011.
Retail financing compensation payments within the motor trade subject to
VAT
It is customary in the motor trade to offer retail customers instalment payment terms at a
very low rate of interest, or sometimes even interest-free. The customer buys the car from
the dealer and the finance is provided by a captive bank belonging to the manufacturer.
The interest subsidy (the difference between the agreed charge in the instalment
payments and the current market rate) is split between manufacturer and dealer in a
manner set out in the dealer's franchise but of no concern to the customer. Manufacturer
and dealer pay their respective shares to the bank. The finance ministry has declared that
the payments are to be regarded henceforth as being for market support services, and are
therefore to be subject to standard rate VAT. As it stands, the decree is to have immediate
effect. However, no objection will be taken to continued treatment of the interest
subsidies as VAT-free payments by third parties for financial services up to December 31,
2011, provided all parties involved take the same approach.
Currency exchange is service for VAT
In May 2010, the Supreme Tax Court held that a foreign currency exchange booth
performed a banking service, rather than a delivery of goods, for VAT and that, in
consequence, its VAT exemption was not dependent on adherence to export recording
and documentation formalities. The finance ministry has accepted this judgment as a
precedent in a recent decree, emphasising that it applies to exchanges of legal tender
other than that dealt in for its metal value or for collectors. Sales of coins for their metal,
or of notes and coins as collectors' items, continue to be regarded as sales of goods. The
decree adds that the banking service of currency exchange does not restrict the input tax
deduction for exchanges made in the ordinary course of other business. Hotels, shops,
places of entertainment and other businesses accepting payment in foreign currency are
the addressees of this latter point.
The decree states that no objection will be taken to accounting for currency exchanges as
sales of goods up to September 30, 2011. However, the tax exemption for sales of legal

Supreme Tax Court Cases
Tax & Legal News October 13, 2011 4
tender takes precedence over the tax exemption for exports or intra-community supplies
to other businesses. Thus, recording the transaction as a sale does not open the way to an
input tax deduction.
Full rate VAT on ensemble fees charged to theatres
Entrance tickets to theatres, concerts and similar performances are subject to reduced
rate VAT. However, this does not apply to charges to theatres and other organisers by
visiting ensembles for performances under their own direction. Rather, these charges are
a standard rate service. A finance ministry decree has emphasised this position, whilst
allowing visiting companies to continue to charge reduced rate VAT for performances up
to December 31, 2011.
Foreign limited partnership does not shield non-trading income from
German taxation
The taxpayer held most of the capital in a Hungarian limited partnership (Bt. equivalent
to a German KG) as a limited partner. The only general partner had its own limited
liability as a Kft., the equivalent of a German GmbH. Had the partnership been registered
in Germany, if would thus have been a GmbH & Co. KG and its entire income would
automatically have been recast as trading income, as though it had been earned through a
corporation. In Hungary, all partnerships are taxed as corporations, with partners’
drawings against profits being treated as dividends. The partnership’s sole business
activity lay in letting a fully equipped factory to a related party. The taxpayer maintained
that the net profits of the partnership should be exempt in Germany as the trading
income from a foreign permanent establishment. He based this claim on the alternative
contentions that (a) the partnership was taxed as a corporation and therefore as a trading
entity in Hungary, or (b) the partnership’s income was trading income by German legal
definition. The Supreme Tax Court has now rejected both contentions.
The court took the view that the Hungarian taxation of the Hungarian entity was a matter
for Hungarian law. The Hungarian tax status of an entity was not decisive for the German
taxation of its partners. This depended on the nature of their income as defined by the
double tax treaty. That income was taxable, or exempt, in Germany following the
provisions of the treaty. Similarly, the court refrained from applying the German domestic
rule redefining partnership income as trading income if earned through a partnership
with no ultimate unlimited liability, where this was in conflict with the treaty allocation of
taxing rights.
The ultimate conclusion was thus to split the income into its component parts. That
earned from letting the Hungarian property was taxable in Hungary and exempt in
Germany under the treaty. That earned from the hire of plant and equipment (from
moveable assets) was taxable in Germany in the hands of a German resident partner.
Supreme Tax Court judgment I R 95/10 of May 25, 2011 published on August 10
No write-down of fixed-interest securities below nominal value
A bank held a significant portfolio of debentures and other fixed-interest securities as
current assets. It took them up initially at cost but wrote them down in its annual
accounts to the lower stock market value on balance sheet date. This treatment was
correct under the accounting provisions of the Commercial Code, but the tax office
refused to accept it to the extent that the write-down took the net book value below the
nominal amount. It argued that the valuation provisions of the Income Tax Act only
allowed a write-down as necessary to reflect a “foreseeably lasting” loss in value. Fixedinterest
securities were generally redeemable at the end of a fixed term and at their
nominal value. Thus any current loss below this level could not be “lasting”.
The Supreme Tax Court has now held with the tax office and for the same reason. The
bank argued that securities held as current asset were for trading and there was no reason
to suppose that they would be held until redemption. The court, though, pointed out that
there was also no reason to suppose that they would be sold before redemption. This
unknown destiny meant that the loss in market value at balance sheet date might, or
might not, be “lasting”, but its ultimate incidence was certainly not “foreseeable”. This
departure of tax law from the Commercial Code was emphasised with the recent
”BilMoG” accounting reform, which required marketable securities to be carried at

Tax & Legal News October 13, 2011 5
market value on balance sheet date, abolished the strict conformity of the taxable income
and accounting profit, but which did not change the tax valuations rules in a here relevant
respect. Clearly, a divergence in treatment was intentional.
This remark suggests that this case is still relevant after BilMoG. Equally significantly, the
court made the comment that doubts as to the ultimate redemption of a fixed-interest
security could justify a write-down below the redemption value. Thus the bottom limit of
the nominal value can be overstepped, if it appears likely that the ultimate sale or
redemption proceeds will, in fact, be less.
Supreme Tax Court judgment IR 98/10 of June 8, 2011 published on August 17
Handling fee on subsidised loan immediate expense if not refundable on
early repayment
A factory took out loans from banks with interest subsidies from public funds. In some
cases the bank charged a handling fee payable when the loan was granted. The taxpayer
saw this fee as a single charge for the grant and thus as immediate expense. The tax office
saw it as a charge for the finance over the agreed term to be treated as prepaid interest.
The Supreme Tax Court has now held the treatment to be dependent on the reason for
charging the fee. If it was intended as part of the overall cost of providing finance over a
set period, it should be spread over that period. If it was intended as a one-time only
charge in recognition of a specific service, it should be taken to expense immediately. The
court saw the distinction as a question of fact, turning on the agreed provisions for early
loan repayment. If the handling fee was partially refundable on early repayment, it was
part of the charge for the provision of finance for a given period. The same applied where
the borrower had no early repayment option; that is, the contract was only cancellable for
good cause (such as the insolvency of the other party) and there was no reason at the time
of contract signature to suppose such cancelation for good cause to be anything more than
a purely theoretical possibility. If, on the other hand, the customer had an early
repayment option without a claim to partial refund of the fee, the charge was an
immediate expense. The court also called for accounting consistency between bank and
customer, but did not go into the steps needed to ensure this.
Supreme Tax Court judgment I R 7/10 of June 6, 2011 published on September 7
Foreign tax credit on hedged loan interest takes hedge costs into account
A bank bought two short-term Brazilian notes in cruzeiros with a cruzeiro loan from a US
bank. It hedged this liability with a forward exchange contract with the same bank and
with the same maturity. Its net result from the transaction was thus the difference
between the interest income and the loss on the hedge. The Supreme Tax Court has now
held that where the two transactions are mutually intermingled to the extent that the one
is preconditioned by the other, they must be seen as two parts of a single whole. This
meant that the Brazilian withholding tax at 20% (including a "tax sparing" notional uplift
on the actual deduction of 15%) on the gross interest could only be credited against the
corporation tax due on the net income recorded in Germany. This was the corporation tax
at the then rate of 50% on the margin between the gross interest received and the hedge
loss. The fact that the withholding tax had been levied on the gross interest was irrelevant,
as was the fact that the hedge loss did not arise in Brazil, but rather in Germany on a
transaction with a US bank. The excess of credit for the Brazilian withholding tax (20% of
the gross interest) over the German corporation tax of 50% on the net margin (interest
less hedging costs) was irrecoverable.
In the meantime, the case has gained in importance as a guide to the foreign tax credit
calculation with the fall in the German corporation tax rate to 15%. On the other hand, it
lost in relevance to Brazil, when the double tax treaty with that country expired in 2006
(withholding taxes) and 2007 (year of assessment).
Supreme Tax Court judgment I R 103/10 of June 22, 2011 published on August 31
No trade tax double dip within Organschaft
An Organschaft subsidiary held and managed business property let to other members of
the Organschaft. Companies in property management generally qualify for trade tax
exemption if they do not have other sources of income. The subsidiary claimed this
exemption – granted in the form of a full deduction of the net rental income from trading
income, i.e. from the trade tax base – and thus reported trading income of nil to be added
to the trading income of the parent. The tax office contested this position, as it would

Tax & Legal News October 13, 2011 6
effectively lead to a rental “double dip” within the Organschaft – the tenants’ rent costs
would be allowed, but the landlord’s income would not be taxed – and has now won its
case before the Supreme Tax Court.
The court held that within an Organschaft it was correct to establish the trading income
of each subsidiary separately and then to accumulate the results in a grand total.
Effectively, the members of an Organschaft were to be regarded as branches of the
parent, so trade between them could not lead to additional deductions or add-backs
resulting from third-party transactions. In this the court is consistent with a previous
ruling exempting an Organschaft from the interest add-back on internal charges.
Supreme Tax Court judgment X R 4/10 of May 18, 2011 published on August 10
Real estate transfer tax on capital contribution of shares to be written off
A sole shareholder contributed its holding in another company as a contribution to capital
reserve. This contribution was (correctly) taken up at market value. Its effect was to
increase the transferee’s holding in the other company to “at least 95%”, the threshold for
levying real estate transfer tax on the deemed value of any property the company
transferred might own. Accordingly, the transferee paid the transfer tax and wrote-off the
amount as a business expense. However, the tax office insisted that it be capitalised as a
cost of acquiring the new holding.
The Supreme Tax Court has now declined to answer the contentious question – whether a
charge to real estate transfer tax can be part of the cost of acquiring a shareholding – as
irrelevant in a case concerning an investment to be taken up at market value. It has,
however, held that the charge has no influence on the market value of the shares and thus
cannot be taken into account in establishing the amount. The market value of the
investment was the sum of the market values of each share held, and these were not
influenced by the incidence of real estate transfer tax on reaching a given threshold. The
tax was a consequence of the acquisition and not a cost of the transaction.
It is worthy of note that the Supreme Tax Court has already held that real estate transfer
tax was not to be capitalised as a cost of acquiring an investment by contribution at book
value in settlement of an increase in share capital (judgment I R 2/10 of April 20, 2011).
Supreme Tax Court judgment I R 40/10 of March 14, 2011 published on August 10
Contributions under Reconstructions Tax Act 1995 always at recipient’s
valuation
The Reconstructions Tax Act 1995 provided that contributions in kind of an entire
business unit, or, as in this case, of an investment leading to a majority holding in a
subsidiary, were to be taken up by the recipient company at the former book value in the
books of the contributor, at current market value, or any value in between. The choice was
that of the recipient but was binding on the contributor. The Supreme Tax Court has now
held that this applied not only to the exercise by the recipient of valuation options, but
also to valuation adjustments made by the tax office when reviewing the returns of the
recipient. In this case, the tax office found that the recipient had valued the contribution
received above its market value and ignored the excess when issuing the corporation tax
assessment. It informed the tax office of the contributor accordingly. That tax office made
a corresponding adjustment to the assessment of the contributor. He protested on the
grounds that the revised valuation was not the result of an accounting option – in
particular, the recipient had not amended its accounts – but rather a “unilateral” act of a
tax office. However, the Supreme Tax Court has now confirmed that the valuation
provisions of Reconstructions Tax Act refer to the accounting basis for taxable income,
including any adjustments made in the course of assessment. Otherwise, there would be
no certainty of correlation between the two (usually related) parties to the transaction.
The court explicitly left open the question of the binding effect on the contributor of a
value taken up by the recipient above market, but accepted – or at least not queried – by
the tax office.
The Reconstructions Tax Act was substantially revised in 2006. Transactions reported to
the trade registry on or after December 13, 2006 fall under new law and the continuing
relevance of this judgment must remain an open question, given that the recipient not
longer has the sole choice in the valuation option. The same value must, however, still be
taken up by both parties.

Tax & Legal News October 13, 2011 7
Supreme Tax Court judgment I R 97/10 of April 20, 2011 published on August 17
Regular weekend trips home do not break habitual abode
A Swiss resident was under contract to moderate a TV programme. She was required to
start her working week in the studios on Monday morning, but was free to return home to
Switzerland on Thursday or Friday for the weekend. The programme was interrupted for
two months in the summer and for some two weeks at Christmas, during which time she
was free of all duties. Whilst in Germany she stayed in an hotel under a semi-permanent
booking arrangement; however, she did not acquire or rent living accommodation. The
tax office claimed she was under full German tax liability by virtue of her German
habitual abode, notwithstanding her Swiss residence under Swiss law. The Supreme Tax
Court has now confirmed the tax office in this view.
Under the Tax Management Act, a person has a habitual abode if he or she is physically
present for longer than six months. Short-term absences do not interrupt this period;
however short-term in this connection is undefined. The Supreme Tax Court has now held
that it should not be defined by specific time limit, but rather by purpose of the absence
away. In the present case, the moderator was in Germany to work. She regularly returned
home to Switzerland for the weekend, but with the intention of coming back for the start
of the next working week. These trips did not interrupt the six-month period as they did
not detract from the overall appearance to a third party of a regular return to Germany for
a specific purpose - to work. The Christmas break fell into the same category. Whether
this also applied to the longer summer break, was no longer relevant to the decision, as
the six months had already been exceeded in each year under review. The court
emphasised that the six months were not tied to specific dates. Temporary absences
apart, the period should be continuous, but could span a year-end.
Supreme Tax Court judgment I R 26/10 (NV) of June 22, 2011, published on October 12
No income from stock option exercise if disposal of shares legally
impossible
An employee of a GmbH exercised his rights under a stock option plan to acquire shares
in the US parent company. The stock was quoted on the New York stock exchange,
although the shares in question were "restricted" under SEC rules to the extent that they
could not be sold or pledged during the first year following the acquisition and could only
be disposed of during the second year if the issuing company published the fact. The tax
office, however, felt these restrictions on disposal to be irrelevant; the employee had
acquired the other rights of ownership (dividend and voting) and had thus received
taxable income in the amount of the difference between the payment made and the
market price of the shares when issued.
The Supreme Tax Court has now followed previous cases in holding that the income from
the exercise of a stock option is generally earned on receipt of the shares. Legal
restrictions on disposal do not detract from this if their breach would merely expose the
seller to a penalty. However, they are relevant where they prevent the disposal altogether.
For example, if a disposal is conditional on the approval of the company, it may not be
legally possible without that approval. This is a matter of fact, to be adduced from the law
and regulations to which the issuing company is subject. If the shares are not disposable
in this sense, the full rights of ownership have not been acquired through the option
exercise and the option discount has not yet been earned as income. The court then went
on to elaborate that if the disposal were dependent upon the company’s approval, the
acquisition could be seen as complete if the approval had already been given. If, however,
the approval had not yet been given, the acquisition should be seen as being in suspense;
if it had already been refused, the acquisition was not, itself, a valid transfer of full
ownership rights and thus not a valid flow of taxable income.
Supreme Tax Court judgment VI R 37/09 of June 30, 2011 published on September 21,
2011
No multiple regular workplaces with same employer
Travel between home and regular place of work is only partially recognised for tax in the
form of a distance-based deduction independent of the actual cost or mode of travel.
Other business travel not reimbursed by the employer is deductible at cost (public
transport) or at a fixed rate of 30 ct. per km driven (private car). The private car business
travel rate is double the deduction for getting to work. The distinction has been explained
in various ways over the years; the version currently favoured by the Supreme Tax Court
is that the employee can get used to a regular journey to the same place of work. This

Tax & Legal News October 13, 2011 8
enables him to reduce his costs by taking short cuts, clubbing together with colleagues to
go to work in the same car, and other measures not immediately open to an employee
sent on an occasional trip.
The Supreme Tax Court has previously held that an employee’s regular place of work
must be central to his functions and must be somewhere to which he regularly returns in
the course of his duties. It is therefore possible for an employee to have more than one
regular place of work with the same employer, such as in the case of a bus driver
operating from various depots, or an ambulance crew member on shift work between
various stations. The court has now reconsidered its position in two cases just published
and redefined the regular place of work as that place forming the centre of an employee’s
functions. An employee may therefore be without a regular place of work at all (all
unreimbursed travel is then deductible as business expense), but can never have more
than one (there can no longer be unrecognised expense of travelling between two regular
places of work). In the view of the court, this new definition fits better the explanation for
the distinction between the two categories of deduction, as a person with more than one
workplace is unlikely to be able to regularly travel to work in the same car as a colleague.
The first case concerned the managing director of a GmbH. He lived some distance away
from GmbH’s main office; however, he had it rent a cellar for the company’s computer in
the same building as his home. He regularly visited the computer and claimed the cellar
to be his regular place of work. Journeys between his home and the GmbH’s main
premises were therefore business trips. The Supreme Tax Court referred the case back for
further investigation of the director’s working style as a basis for finding his one and only
regular place of work. However, it also made the point that the regular place of work had
to be a business establishment of the GmbH, and that the GmbH could not have a
business establishment in an employee’s home. The director would therefore have to
leave home in order to get to his regular place of work. If he were able to get to the cellar
through the garden, for example, he would not leave home to get there and it could not
qualify as a business establishment of his employer or as his regular place of work.
The second case was brought by a district manageress of a supermarket chain. She was
directly responsible for 15 stores, in each of which she had an office, and each of which
she visited regularly. Her regular place of work was the office she mainly used, i.e. the one
at the centre of her functions. If no single office was central in this manor – that is, she
communicated and performed her admin duties from where ever she happened to be at
the time – she would have no regular place of work and all travel for her employer would
rank as being on business.
Supreme Tax Court judgments VI R 55/10 (managing director) and VI R 36/10
(supermarket manageress) of June 6, 2011 published on August 24
Second rental cost on move to new job deductible as business expense
A married couple were both employed. The husband took up a new job in another town,
where he rented a flat suitable for the family. His wife and child joined him in the new
home some two and a half months later. He claimed a full deduction of the rent cost of the
new flat until the end of the month of the wife’s move. The tax office sought to reduce the
deduction to the rent for the first 60 m2 of the second flat, claiming that the tax relief
should be governed by the rules on double-households maintained for business reasons.
The Supreme Tax Court has now held that the double-household relief rules are irrelevant
to the present case. The family had moved to a new town because of the husband’s new
job. Additional rental costs necessarily incurred were expenses of earning employment
income and deductible in full. The deduction was to be for the cost of the new flat until
the wife and child moved in and for that of the old one thereafter. The total was, however,
to be limited to the contractual notice period to quit the old flat. The court also made the
point that the statutory provisions on moving costs for civil servants were not directly
relevant to the present case of deduction of a business, as opposed to a personal, expense.
Supreme Tax Court judgment VI R 2/11 of July 13, 2011 published on September 28
Supplementary amount on change to tonnage tax is trading income
Germany operates a tonnage tax system for ships sailing in international waters. The
system is optional, but the option may only be exercised when the ship is commissioned
or at ten-year intervals thereafter. Changeover-abuse is discouraged by establishing the
excess of book value over the market value of the assets at the time of changeover to be
carried forward as a “supplementary amount” until the entitlement to the tonnage tax

Tax & Legal News October 13, 2011 9
regime is lost. This occurs on disposal of the ship or on its withdrawal from international
routes, on the cessation of operations, or – in proportion – on the retirement of a partner
from a shipping partnership. Once one of these events occurs, the supplementary amount
is added to the current trading income of the taxpayer.
A former member of a shipping partnership has just lost a case before the Supreme Tax
Court on his claim that the supplementary amount falling to taxation on his retirement be
seen as a (tax privileged) capital gain. He based his argument on the contention that the
tax liability was triggered by his retirement; therefore it was directly connected with the
disposal of his partnership share. The Supreme Tax Court, however, chose to follow its
previous case law in holding that the income in question was trading income falling to
normal scale rate taxation. It made the point that the supplementary amount had been
established the time of the change in tax status of the partnership. It was thus linked
thereto and retained its status of trading income, not least because the trading losses
leading to the build-up of intangibles had already been deducted by the taxpayer as such.
The amount was based on the historical fact of the hidden reserves at the time of the
changeover; the deferral of the tax charge did not change the nature of the income.
Supreme Tax Court judgment IV R 42/10 of July 9, 2011, published on September 7
Immediately diluted share purchase is purchase of reduced holding
A future director acquired a 12.6% holding in a GmbH. A shareholders' meeting was held
immediately afterwards to resolve a capital increase to be taken up in full by other
shareholders. His relative holding thus fell to 0.02%. Rather more than a year later, he
sold his share, realising a not inconsiderable capital gain. Under the then law, capital
gains on the sale of shares held privately for more than one year were tax-free unless the
recipient had held at least 10% of the issued share capital of the company at any time
during the previous five years. The tax office saw this exception as fulfilled with the
purchase of the 12.6% share and assessed income tax on the gain in the year of sale. The
shareholder argued that he had acquired his investment for the specific and agreed
purpose of voting in favour of the capital increase. Since this increase necessarily led to
the immediate dilution of his shareholding, he had, effectively, never held more than the
diluted proportion of 0.2%. This, though, was well below the !0% limit for taxing the
capital gain.
The Supreme Tax Court has now sided with the taxpayer. The share purchase and capital
increase resolutions were passed in one sitting in the lawyer's offices and were parts of the
same transaction. That the one resolution necessarily preceded the other in law, did not
mean that the two could not be regarded as a single act for tax purposes. Taxation was
based on the substance of transactions rather than on their legal form, and the substance
here was that the taxpayer at no time effectively disposed over a shareholding of more
than 0.2%.
In the meantime, capital gains taxation has been revised and gains on the sale of any
shares acquired in 2009 or later are always taxable, regardless of the circumstances of the
investment. The case therefore has no meaning as a planning guide for the future,
although it is of importance in drawing tax conclusions from interlinked transactions,
establishing, as it does, yet again that interlinked transactions should be taken as a single
event, if such is the substance of the occurrence.
Supreme Tax Court judgment IX R 32/10 of May 25, 2011 published on October 5
Reverse charge VAT entitles foreign business to full input tax refund
An Austrian business performed services in Germany subject to VAT by reverse charge.
During the year under review it purchased certain building services in Germany from a
foreign supplier. This made it liable to file a VAT return in order to account for its reverse
charge obligation on the services purchased. It did so after year end and claimed a
deduction for its input tax borne throughout the year. The tax office refused this claim
insofar as it related to periods prior to the reverse charge obligation, saying that the
Austrian business was then without German taxable turnover and could have, and should
have, filed a refund claim as a foreign business.
The Supreme Tax Court has now sided with the taxpayer. A VAT return is an annual
return and thus encompasses all relevant transactions of the year. On the other hand, the
business was unaware of its filing requirement before its purchase of its reverse charge
input. At that time, it could have availed itself of the foreign business refund claim
procedure for EU (and for many foreign) businesses. That procedure sets the refund claim

Tax & Legal News October 13, 2011 10
period as at least one quarter and no more than a calendar year. If the taxpayer chose to
wait until year end and, in the meantime, purchased a supply with a reverse charge
obligation, it lost its right to file a refund claim. It was thus forced to recover its input tax
for the entire year through the one procedure still open to it – the annual VAT return.
Supreme Tax Court judgment V R 14/10 of April 14, 2011 published on August 10
Delivery documentation of intra-community supply must be complete and
accurate
A second-hand car dealer agreed a sale of 13 prime used cars to an Italian business. This
business was represented by the son of the proprietor, who had given him the appropriate
warrant. The son approached the seller with a car transporter and asked that the cars be
loaded for road transport to Italy. He signed a receipt for them, made out on the
letterhead of another business, and paid cash. The receipt gave Italy as the desination of
the vehicles, but left the place of destination and the identity of the consignee open. The
supplier then issued an invoice to the presumed purchaser. This invoice did not show
VAT, but gave no indication of the reason why the sale should be exempt. The supplier
took steps to establish the business identiy of the customer; however, these steps came to
nothing in the face of a letter from the Italian authorities to their German colleagues to
the effect that the purported customer was truly a business, but had never dealt in motor
vehicles and did not have the facilities to display second-hand cars. Accordingly, the tax
office took the line of least resistance and insisted that the transaction was taxable.
The Supreme Tax Court has now followed the tax authorities. The transaction was taxable
as a home-country sale as its documentation as an EU intra-community supply was
incomplete and open to doubt. The invoice did not show VAT, but did not explain why
not; thus the customer was not put on notice of his or her obligation to declare an intracommunity
acquisition of goods. The delivery documentation was also incomplete, or at
least contradictory. in that the receipt for the cars was on the letterhead of another
supplier and did not specify the precise Italian destination of the cars. It also did not
identify the invoicee as the customer of the cars, except, perhaps, by inference.
These documentation deficiencies had to be laid at the door of the supplier. At best he had
been negligent and could not therefore – for lack of proof – claim that the conditions for
intra-community supply exemption had, in fact, been met. He also could not claim to be
the innocent victim of customer deception, since with due care he could have recognised a
potential problem.
Supreme Tax Court judgment V R 46/10 of May 12, 2011 published on September 7
Intra-community supply taxable if intent fraudulent
A partnership delivered luxury motor cars to addresses in Italy. In most cases, the
recipients were dealers interested in obtaining the cars free of VAT. At their suggestion,
the partnership invoiced its deliveries as tax-free intra-community supplies to a series of
Italian import traders. These then failed to declare their intra-community acquisitions,
leaving cars on the Italian market that had not been charged with input tax. The
partnership then destroyed most of its own records of these transactions in an attempt to
prevent complete follow-up by the authorities. However, it soon became apparent that all
was not fully in order, and the two partners found themselves facing criminal charges for
tax evasion. They pleaded guilty, made full confessions of their misdeeds and received
two-year suspended prison sentences. In the view of the criminal court, they had falsely
declared the names of their customers. Their records did not therefore satisfy the intracommunity
supply documentation requirements which rendered the transactions taxable.
They were convicted for their failure to declare and pay this tax. The tax office took note
of this trial and promptly issued assessment notices on the partnership for the tax. The
partnership appealed on the grounds that the persons involved could adequately
demonstrate the fact of delivery to registered businesses in Italy and thus the entitlement
to tax exemption of the deliveries as intra-community supplies. Incorrectly naming
business partners was a minor detail when the fact of delivery was not in doubt.
The Supreme Tax Court has now rejected the appeal. The VAT Directive (at the time, the
Sixth Directive) specifically excludes exemption for a supplier who deliberately distorts
evidence in order to conceal the true identity of the recipient of the goods and so enable
him to evade VAT in his own member state. In the face of this specific disqualification,
proof of delivery to another member state was irrelevant.
Supreme Tax Court judgment V R 50/09 of August 11, 2011 published on October 5

Tax & Legal News October 13, 2011 11
Sausage and chip stand sells food if no seating provided
Restaurant services are subject to 19% standard rate VAT, whilst sales of food are taxed at
the reduced rate of 7%. Tax offices tend to see anything offered for immediate
consumption on or beside the premises as a service, whilst many fast food providers like
to see their supplies as sales of goods, the service element of the supply being
insignificant. A number of appeals are still before the courts and in March of this year the
ECJ ruled on four of them in a single, joint judgment. Sales from mobile sausage and chip
wagons or from fixed sausage stands for stand-up consumption were reduced-rate sales of
food, as were warmed-up cinema snacks, whilst a butcher offering a party service did so
as a standard-rate supply.
The Supreme Tax Court has now decided two cases involving the sale of sausages and
chips (“French fries” in US parlance) to passing customers. The first was one of those
tried by the ECJ and involved sales from a wagon to visitors and passers-by at weekly
markets. Customers were expected to eat their food standing, but were able to lean on a
shelf running around the wagon. A bin was available for discarded wrappings, uneaten
sausage remainders and other litter, and an awning provided some protection from the
rain. The Supreme Tax Court followed the ECJ in holding the service element of the
supply to be insignificant and ruled that the transaction be taxed as the sale of food.
The second case was brought by the proprietor of a fixed stand set up immediately beside
a public bench where customers could (if there was room) sit to eat their sausages and
chips. Later, the proprietor added a table and two benches for the use of customers. This
furniture was described as “beer tent furnishings”, meaning that it was of cheap wood,
collapsible and slightly unsteady. Otherwise, the conditions of sale from the stand appear
to have been similar to those of the market day wagon. The Supreme Tax Court held that
its wagon decision also applied to the stand for as long as any seating available was not
provided by the seller. The mere fact that a bench was there, did not change the nature of
the supply by the sausage and chip seller. The bench was provided by the council (local
authority) and could be used by anyone. It was not a service in connection with the sale of
goods. However, the situation changed with the set-up of, even primitive and inadequate,
seating. Seating was reserved for customers of the stand and some customers were able to
take their places there. That not all did so was irrelevant. The proprietor was also obliged
to keep the seating and table clean with an occasional wipe. This enhanced the nature of
the supply and increased the work necessary to provide it. It was now a restaurant service,
taxable at 19%.
Supreme Tax Court judgments V R 35/08 (wagon) and V R 18/10 (stand with seating) of
June 6, 2011 published on August 24 and following ECJ case C-497/09 Bog and others of
March 10
Registered proprietor liable for VAT on scam
Three local businessmen of tarnished reputation registered a publishing business in the
name of one of their mothers. The lady signed the registration in her own hand and
consented to the appearance of her name on the letterhead, even though she was longsince
fully retired and had - she claimed - no knowledge of the business operation. In
point of fact the business was a publishing scam: it bulk-mailed 464,000 invoices to
named businesses for registration in a forthcoming telefax directory. Each invoice was for
a fixed amount and showed VAT. The addressees were culled from public directories;
clearly, the actual invoice issuers hoped that at least some of the recipients would assume
a valid agreement and pay the amount requested. There was, however, never any
intention of actually producing the purported directory. Following a back duty
investigation by the tax criminal investigation service (attached to the public prosecution
service), the tax office assumed that 10% of the invoice recipients had paid the amount
demanded and raised a VAT assessment accordingly on the mother holding the business
registration. She protested that she had no knowledge of, and certainly nothing to do
with, the events in question, though to no avail, as the Supreme Tax Court has now held.
The Supreme Tax Court based its finding on the provisions rendering the issuer of a
fraudulent invoice liable for the VAT shown. The issuer was the person shown as such on
the invoice, provided that that person "had in some way contributed" to it. The
contribution could be active or passive; a passive contribution could be seen in the failure
of a registered business proprietor to take steps to prevent or detect any misuse of his
name. The mother had met this criterion, either through her acceptance that other
persons were acting in her name, or through her lack of interest in the possible use of her
business registration by others.

From Europe
Tax & Legal News October 13, 2011 12
Supreme Tax Court judgment V R 44/09 of April 7, 2011 published on August 31
No requirement to exempt foreign service allowances for work in country of
residence on same terms as those paid abroad
A German resident French national taught in a local Franco-German school. She had civil
service status and was paid from the French public purse. Her emoluments were taxable
in France under the double tax treaty, but were taken into account when setting the rate
to be applied to her other, taxable income in Germany. They consisted of scale rate pay
and two foreign service allowances. The pay was taxable under French law, but the
allowances were exempt. She claimed that they should also be fully exempt in Germany,
that is they should left out of account when setting her other income rate. She based her
claim on the free movement of workers requirement for equal treatment in the light of the
full exemption in German law of corresponding payments to government servants abroad,
but taxable in Germany under the relevant double tax treaty.
The ECJ has now held that there has been no discrimination, despite initial appearances.
As a German resident French citizen, she has not been treated any worse than a German
resident German citizen. That a German civil servant resident in another EU member
state enjoyed complete German exemption on his foreign service allowances was not a
relevant comparison as it ignored the secondary effects in the foreign state, in this case,
the effect on the tax charge on the other, locally taxable income.
The ECJ case reference is C-240/10 Schulz-Delzers judgment of September 15, 2011.
SWIFT services subject to VAT
A Finnish bank claimed a refund of the VAT it had paid by reverse charge on its SWIFT
costs in connection with processing national and international transfers of cash and
securities. Its basis was that SWIFT effected a transfer service; thus its charges were
exempt under the Sixth Directive as remittance business or securities dealing as the case
might be. As against this, the tax authorities maintained the services were taxable as
technical support, as they did not effect the actual transfer of funds or instruments.
The ECJ has now held the SWIFT charges for its services to banks to be taxable. SWIFT
bears responsibility to its banking members for the correct transmission of messages, but
has no access to their content. It bears no responsibility for the correct execution of the
instructions it transmits. It does not therefore effect the actual transfer, but merely passes
the necessary information for the transfer to be effected by the receiving bank. This
applies to dealings in both cash and securities. The service is thus a support service for
banks, rather than an outsourcing of banking business.
The ECJ case reference is C-350/10 Nordea judgment of July 28, 2011.
Personal residence not immediately relevant to VAT place of business
A German trader hiring drivers to haulage companies moved his business to Austria, but
continued to service his German customer base. He also moved his main personal
residence to Austria, but retained accommodation in Germany. On re-registering his
business in Austria, he started billing his German customers free of VAT but with a note
on the invoice to the effect that the customer should account for the VAT as a reverse
charge. The German tax office challenged this position, saying that the trader continued
to live in Germany. His business therefore continued to be established in Germany. As a
domestic business providing a service to a domestic customer, his invoices were not open
to reverse charge. Rather he should have charged the VAT and accounted for the amount
to the tax office.
The ECJ has now held that the business establishment is the relevant criterion for
determining a VAT filing obligation. A personal residence of the proprietor is of no
moment, unless there is doubt as to where the business was located. Even then, its
significance was that of an indicator as to where the business might be, rather than as part
of the definition of a domestic/foreign business. Since there was no doubt in this
particular case that the business had genuinely been established in Austria, there was no

Tax & Legal News October 13, 2011 13
need to examine the proprietor's personal residence. The customer invoices issued by the
business were reverse-chargeable in Germany, regardless of where the proprietor lived.
The ECJ case reference is C-421/10 Stoppelkamp judgment of October 6, 2011.
Dutch exit tax excessively burdensome?
A Dutch captive finance subsidiary of a UK group replaced its Dutch management
personnel with UK employees. At the same time, it closed it offices in Holland. However,
it remained in existence as a BV, albeit managed from the UK. It thus became resident in
the UK within the meaning of the double tax treaty by reference to its place of
management. Dutch law allows companies to move abroad, but imposes a “final
settlement tax” on the hidden reserves in undervalued assets and off-balance sheet
intangibles. This final settlement tax is justified on the grounds that the hidden reserves
had accumulated in Holland, but could not be taxed there once the company had
relocated its tax residence. However, the company protested that the tax was a hindrance
of its freedom of establishment, given that a company moving within Holland would not
be subject to it. It also made the point that the only significant item subject to the tax (in
this case) was the unrealised exchange gain on a loan in sterling to a UK associated
company. Once the company took up UK tax residence, the pound became its functional
currency and euro/sterling exchange rate movements ceased to be relevant to its taxation.
The company’s reference to the freedom of establishment brought the case before the
ECJ. The advocate general has just published her opinion supporting, in principle, the
Dutch concept of exit taxation manifested in the final settlement tax, whilst objecting to
the immediate levy as being unnecessarily harsh. As such, the tax is discriminatory,
because a company moving its place of management within Holland would not be subject
to it. However, the discrimination is justified by the need to preserve the international
allocation of taxing rights as agreed in the double tax treaties. On the other hand, actually
collecting the tax at the moment of departure goes beyond what is necessary to achieve a
legitimate object. The company remains registered in Holland and thus continues to be
subject to Dutch accounting and reporting formalities. It is therefore not exceptionally
difficult for the Dutch authorities to follow its affairs to the extent necessary to be sure of
collecting the tax on disposal of the asset or other form of release of the hidden reserves.
The advocate general also suggests the court rule that the taxation, when finally levied,
should take losses between the dates of exit and asset realisation into account. The tax
burden is thus reduced to the level that a domestic taxpayer would bear on realisation of a
hidden reserve. However, she rejects the company’s argument that the hidden reserve
disappears once the company’s functional currency changes to the currency of the debt as
not being a matter for Dutch taxation. The tax should therefore be payable when the asset
is realised (repayment of the loan) and the taxable gain should be the lower of the
unrealised gain on change of residence and the gain that the company would have realised
on loan repayment had its functional currency remained the euro.
This case has a number of parallels in German law - the taxation levied on the transfer of
a function as a prime example. It is therefore of possibly wider interest than might at first
sight appear.
The ECJ case reference is C-371/10 National Grid Indus, opinion of September 8, 2011.

From PwC
Tax & Legal News October 13, 2011 14
Guide to Doing Business and Investing in Germany - in Chinese
The Chinese edition of our February 2011 Guide to Doing Business and Investing in
Germany has now been published. The pdf version can be downloaded from
http://www.pwc.de/de/standorte/german-business-groups/assets/doing-business-ingermany.pdf;
the printed version may be ordered from Norbert Oefner by email to
norbert.oefner@de.pwc.com with your name and postal address.
Breaking news
If you would like to follow the latest news on German tax as it breaks, please visit our Tax
& Legal News site at http://tax-news.pwc.de/german-tax-and-legal-news
Editor’s Office Andrew Miles
PricewaterhouseCoopers AG WPG
Friedrich-Ebert-Anlage 35-37
60327 Frankfurt am Main
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