Vol. 6 No. 1, January/February ITPJ 3 Recent Developments Germany THE APPLICATION OF GERMAN INCOME CORRECTION RULES TO PARTNERSHIPS HAVING INTERNATIONAL TRANSACTIONS By Dr Heinz-Klaus Kroppen, LL. M and Marc Lubker* The local tax office initially tried to treat the Swiss joint- stock company as letter-box company and attributed all prof- hip is principally deter- its to the German partnership. After negative ruling by the ) However, Tax Court, the tax office supported its income correction by applying Section FTTL. The heirs of the Swiss resident ed suit seeking a suspension, which was granted by the Tax Court. In its ruling, the Tax Court held that Sectio n in this case. The Supreme Tax decision and remanded the case to the IE APPLICATION OF SECTION 1 FTTLTO TERNATIONAL TRANSACTIONS OF A related parties ciple. In the Sectior ax Court c this is the final be discussed folle . THE FACTS Swiss re German partnership (in the sole li of a Sw Swis: the German proposals and tor share of income partnership delivered all all of its costs, and ear on the net value of the good
Vol, 6 No. 1, January/February derived from a partnership, which income for tax purposes is If Section I FTTL is applicable, other problems also arise.It attributed to him is unclear as to how the income adjustment is calculated for other partners(e.g. partners holding a 10 per cent interest) which have no relationship to the Swiss joint-stock company IV RELATIONSHIP OF AN INCOME The issue here is whether Section I FTTL is also applicable ADJUSTMENT UNDER SECTION 1 FTTL TO income of partners not related to the Swiss joint-stock A WITHDRAWAL UNDER SECTION 4, ompany or whether the income correction in this case is lim SUBPARAGRAPH 1 ITL ited to 90 per cent(i. e the interest of partners related to the Swiss joint-stock company). It is also unclear whether Sec tion 1 FTTL will also be applicable for trade tax purposes, as The principal issue in the case is the relationship of the two the partnership itself is the taxpayer for trade tax purposes regardin g an income correction. Supreme Tax Court stated in preliminary proceedings that did not regard the partnership and the Swiss joint-stock com- withdrawal provision precludes the application of Section 1 pany as being related parties. Therefore, there are many ssues which remain to be solved in the primary court pro- FTTL Some views found in literature regard Section 1 FTTL as lex It is also important to note that Section I FTTL would not be the application of Section 1 FTTL are present, the withdrawal applicable if the Swiss joint-stock company were resident specialis to a withdrawal such that where the conditions for regulations cannot be applied. Other opinions see Section I gn country. Therefore, the residence of a related person in a Section I FTTL can only be applied if the conditions for a foreign country leads to higher taxation. In the case of a FTTL as the subordinate regulation to a withdrawal, such that withdrawal are not met. The third perspective posits a so- related person residing in an EU Member State, this unequal tax treatment could violate the eu rules against discrimina called Idealkonkurrenz (ideal competition) between these such that the harsher regulat the conditions for application of both regulations are present The importance of the relationship between Section I FTTL V. TRANSFER PRICING METHODS and a withdrawal under Section 4, Subparagraph 1 ItL is found in the different level of income adjustment resulting It must be emphasized that the Supreme Tax Court has from these regulations. The conditions for a withdrawal under Section 4, Subparagraph 1 ITL are normally met if a expressly denied the application of the profit-split method he allocation of profits between the german partnership and partner or a related party the Swiss joint-stock company. This is in line with the gen ses services or assets of the partnership for a considera- eral opinion of the German tax authorities that the profit-split ion less than cost; withdraws assets of the partnership without payment; or in Germany. However, it is the authors'experience that, in buys or sells assets from or to the partnership for a price practice, tax auditors nonetheless often attempt to apply the below or above the price a third party would pay profit-split method or other profit related methods Where a partner withdraws assets from the partnership with- In addition, the Supreme Tax Court has made statements con- out payment, an income adjustment will result based on the ermine hip beane y The Swiss joint-stock company is e determination of the arms length price for the the Teilwert is normally limited to the replacement costs and relation does not contain any profit element. In the case at hand, the working in the Arab market. However, for purposes of deter- Teilwert is the manufacturing costs of the buildings mining the third party price of the German subcontractor, the The conditions for the application of Section 1 FTTL are gen- Arab market(which is the market of the prime contractor)is erally met if an international business transaction between not decisive. Rather, the decisive market is that market in related parties does not correspond with the arm's length which the German subcontractor offers its services and is in principle. The income adjustment under Section 1 FTTL competition with other German subcontractor companies therefore based on the third party price, which normally Therefore, the third party price must be determined on the includes an appropriate profit mark-up. Therefore, an income erman-Swiss market, taking into account that the Swiss adjustment based on Section 1 FTTL is a much more harsh company was the main contractor for the Arab customers result for a taxpayer than the assumption of a withdrawal 1999 International Bureau of Fiscal Documentatio