Generally, companies forfeit remaining loss carry forwards if more than 50 percent of their share capital changes hands over a five year period. If the change is between 50 percent and 25 percent, the loss is forfeit in proportion to the change. This rule applies to direct and indirect changes in ownership. Its purpose is to curb dealings in tax loss companies.

In 2009 in a reaction to the economic crisis, the German government introduced a temporary exemption for share acquisitions to enable corporate recovery. This exemption applied retroactively to all acquisitions from January 1, 2008 and was later made permanent. Its stated objective is to facilitate the preservation of the business in a substantially unchanged form of a company in difficulties. Companies taking advantage of it must still be in business on the date of the share transfer and not change the nature of their business activity for the next five years. They and their shareholders must also demonstrate commitment in one of three ways – a formal shop agreement with the employees on job preservation, maintaining the average wages bill for the next five years at no less than 80 percent of the average for the previous five, or with a capital injection of not less than 25 percent of existing net assets. The European Commission decided in Spring 2011 that this exemption from the normal loss forfeiture rule is unlawful state aid.

Its main objection is that the inducement is available to all companies in trouble, and not merely to those who actually need it. Its press announcement implies that it might have accepted a system of individual exemptions subject to its individual approval on the bases of minimising competition distortion and medium-term viability of the business. It has ordered Germany to recover any aid already paid out (reduced tax from offset of an otherwise forfeit loss) and has asked for a list of amounts and beneficiaries. The finance ministry warned beneficiaries of a possible repayment obligation and suspended the exemption pending the Commission’s decision. However, the decision has been contested by the German government before the ECJ. It has also to be noted that in a recent tax court decision the judge did not follow the EU decision and the case will now be brought in front of the Supreme Tax Court.

Real estate transfer tax on share acquisitions unconstitutional?
Real estate transfer tax is a stamp duty levied on property sales at the rate of 3.5 percent of the consideration. However, it is also levied on various other ownership transfers with a similar – direct or indirect – effect, including the accumulation of at least 95 percent of the shares in a property-owning company in a single hand. In this case, though, the tax is levied on one of a set of specific formulae – for different types of site, a built up commercial property at 12.5 times its annual rentable value – given that the consideration for the indirect transfer of ownership in the property, is inseparable from that for the rest of the share transfer. The same formulae were also applied when taxing transfers of property by gift or inheritance, but were held in that connection in 2006 by the Constitutional Court to be too arbitrary to meet the constitutional requirement of like treatment of like circumstances. The main argument of the court at that time was that the formulae could lead to values varying between some 20 percent and “over 100 percent” of the present value of the property and thus could not ensure that similar transfers were taxed in an even remotely similar way. However, the judgment allowed continued application of the Inheritance Tax Act up to December 31, 2008 in its then form in order to give the government time to make the appropriate amendments. At the time, it was widely assumed that the changes would also be carried over into the Real Estate Transfer Tax Act; in the event, though that act was left as it stood. The Supreme Tax Court is now faced with a case brought by a taxpayer, claiming on the basis of the Constitutional Court’s 2006 judgment that the present tax on share transfers of property-owning companies is unconstitutional and cannot be levied. Interestingly, the share transfer in was executed on December 2, 2008, that is, in the last month of the period of grace granted to the government. That the government did not avail itself of this opportunity means in the view of many that it cannot now claim that it then still had the right to levy an unconstitutional tax. Because the previous case addressed a different tax, the Supreme Tax Court rule on its present case, but must again refer the issue to the Constitutional Court. The Supreme Tax Court is clearly convinced that the present real estate transfer tax is unconstitutional. On the other hand, the effect of the Constitutional Court ruling now requested is open. The court might disapply the provision retroactively to the date of the case (2001), it might declare it unconstitutional, but grant a further remedial period of grace to the government, or it might even disallow it retroactively whilst giving the government time to make retroactive amends. That this last possibility is not wholly unrealistic is illustrated by a resolution a month later in which the Supreme Tax Court refused another plaintiff a stay of execution of a real estate transfer tax debt on the grounds that an interim relief granted in advance of the main hearing should not exceed the likely ultimate result.

Swiss bank secrecy upheld
Germany and Switzerland have long been at loggerheads over the alleged Swiss practice of providing a safe haven for German tax evaders in the interests of the Swiss banking industry. Switzerland has answered this accusation with a counter-accusation to the effect that Germany has aided Swiss wrongdoers by buying bank data from disgruntled employees, the breach of bank secrecy being an offence under Swiss law.

Representatives of the two finance ministries have now reached a settlement of this dispute with a draft treaty initialled in Bern on August 10. The draft has not been published pending signature; however, according to the German announcement, it covers the following:

In future all interest and similar income, including capital gains, intended for German resident account holders, will be credited under deduction of a 26.375 percent withholding tax. This tax is a final burden and exonerates the account holder from all further disclosure and similar duties. Its proceeds will be paid to the German government without identifying the individual taxpayer. It corresponds to the final burden withholding tax in Germany of  26.375 percent (25 percent plus 5.5 percent solidarity surcharge), so a German tax evader’s interest in a Swiss bank account is now limited to protecting the possibly doubtful past and/or the equally possible doubtful origins of the capital.

The past will be rectified by a one-time only lump sum taxation on an account balance.

The rate will lie between 19 percent and 34 percent depending on the length of time the account was held and on the difference between the opening and closing balances. Further details of the calculation have not been released, but it would seem that the intention is to tax the undeclared interest from the past without burdening the original capital. An account holder can avoid this burden by allowing the bank to disclose his account details to the German authorities. Thus, the honest business with a genuine reason for an account in Switzerland is protected.

The German tax authorities may request information from their Swiss counterparts on named taxpayers. However, they must give a plausible ground for suspicion of tax fraud in each case. These requests are limited by number and should lie within the range of 750-999 within a two-year period. An automatic information exchange is excluded, as are requests at random.

According to the announcement legal problems in Switzerland arising from the German purchase of confidential data stolen from Swiss banks, and from the breach of Swiss bank secrecy rules by the employees who sold it, have been settled. Further details have not been released.

The restrictions on Swiss banks operating in Germany and on German banks in Switzerland resulting from the dispute are to be lifted.

The agreement requires parliamentary ratification and, in Switzerland, probably confirmation by referendum. If all goes well it will come into force on January 1, 2013.

Conclusion
It would not be a surprise that 2012 could be a more active year since the government election will take place in 2013 and tax law changes are typically part of the profiling campaign of the respective government. However, the crisis in Europe may require that Germany reacts due to its contribution into the financial emergency chute even if the current business and economical environment in Germany is still well.

Stefan Ditsch is Partner – International Tax Services PricewaterhouseCoopers, Germany.

For more information: Email: stefan.ditsch@de.pwc.com