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