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Federal Cabinet adopts changed proposal for major corporate tax reform 2008 — Orbitax Tax News & Alerts

On 25 May 2007, the Federal Cabinet adopted the Tax Reform 2008 Draft Bill proposed by the Federal Cabinet with a few changes:

-   the base for the calculation of the interest barrier will now be earnings before interest, taxes, depreciation and amortization (EBITDA), however, with the exclusion of R&D expenses;
-   the "escape clause" has been reformulated to accommodate for partnerships and partnership interests;
-   the interest barrier now also explicitly applies to non-resident companies deriving only non-business income from German sources;
-   capital losses from the sale of shares will no longer be deductible from all investment income, but only from income of the same source;
-   the rules on the purchase of shell companies are tightened further to encompass cases of groups of investors, who have the same objectives concerning the loss corporation;
-   the threshold for immediate depreciation of low-value business assets will be decreased from EUR 410 to EUR 150;
-   the depreciation reserve will be available for enterprises with business assets up to EUR 235,000 instead of EUR 210,000; and
-   expenses from trade discounts will no longer fall under the general 25% add back of interest expenses to the trade tax base.

Deloitte Tax Forum – Tax Risks and Opportunities for Internationally Operating Corporations

The 5th Annual Deloitte Tax Forum took place on 23 and 24 May 2007. The Forum involved a series of seminars and workshops discussing German outbound investment, the 2008 tax reform and its impact on German corporate tax law.

After the opening of the conference by Manfred Guenkel (Managing Partner of Deloitte&Touche GmbH, Duesseldorf), Mr. Christian Ehlermann (Partner of Deloitte&Touche GmbH, Munich) addressed current trends in German international tax law and relevant target countries for outbound investments. He gave special emphasis to the Cadbury Schweppes decision and the Federal Ministry of Finance's reaction to it by issuing a circularclarifying the application of German CFC rules to pending cases. Further, he discussed the new principle of correspondence in view of hidden profit distributions and hidden contributions introduced by sec. 8b(1), (3) KStG as well as the amended anti-treaty shopping rules of sec. 50d(3) EStG.

The final presentation of day one was delivered by Prof. Dr. Heinz-Klaus Kroppen (Managing Partner of Deloitte&Touche GmbH, Duesseldorf). He commented on changes to general transfer pricing rules, analysing in detail the new rules on business restructurings by using various case studies. The rules on business restructurings will form part of the general transfer pricing rules under sec. 1 AStG (Foreign Tax Act). He raised the issue of the definition of transfer of functions embodied in sec. 1(3) AStG being too broad, as it comprises any transfer of functions. In the light of the explanatory statement to the draft bill, the definition could be limited to transfers of functions including intangibles.

The second day was opened by John Cullinane (President of the UK Chartered Institute of Taxation, 2006-2007, and UK Tax Partner, Deloitte). He discussed how the UK corporation tax system is affected by global competition and the European Union. Before he explained the role of corporate tax in UK tax policy, he gave an overview of the UK's attitudes to global competition and the European Union. He concluded his speech focusing on future prospects and solutions to address the pressure from both the European Union and the UK's economy on UK businesses.

Dipl.-Kfm. Heinrich Montag (Head of Tax, E.ON AG) addressed key features of the German tax reform. In particular he commented on the general tax rate deduction, the interest barrier, the new rules regarding the utilization of loss carried forward in the case of a change of control and changes to the business tax. He concluded that the main objective of the Business Tax Reform, to create more incentives to attract and do business in Germany, might be endangered by measures to broaden the tax base. The presentation was followed by an analysis of the 2008 tax reform measures on the basis of various case studies, presented by Heinrich Montag and Manfred Guenkel.

The final presentation was delivered by Dr. Axel Nawrath (State Secretary of the German Ministry of Finance), who, in particular emphasized the importance of the 2008 tax reform in view of the global competition among different tax systems.
The Forum concluded with a series of workshops on best practices in tax reporting, M&A, transfer pricing and real estate taxation.

Draft bill to amend Investment Law published

On 12 June 2007, the German government published a draft bill on amendments to the German Investment Act. The draft bill aims to enhance the international competitiveness of the German funds industry and improve the protection of investors. Consequently, the draft bill will implement the UCITS Directive (Undertakings for Collective Investments in Transferable Securities). German investment companies will benefit from the UCITS Directive and they will be allowed to market their shares cross-border more favourably.

Key elements of the draft bill are:

-   the improvement of corporate governance;
-   the reduction of reporting requirements (e.g. notification requirement of Sec. 10 of the Investment Act);
-   liberalization of the regulatory framework to ease investments by funds; and
-   the introduction of the "Société d'investissement à capital variable" (SICAV) to the German market.