Special Reports arms-length remuneration, operational expenses related to the German assigning company to including a markup. It must also employee secondment are not take over a part of the operational be determined whether the admissible for tax purposes employee s activities result in the because expenses related to the creation of a permanent establish- employee assignment constitute According to section 3. 1.1 of the primary expenses of the commer- administrative principles, it is assumed as a rule that an For purposes of the administra- cial employer, based on the mployee works in the interest of tive principles, the term and for the account of the receiving “ employer” is related to its The administrative principles terprise. However, if the economic definition. Also, the term also state explicitly that a transfer employee receives remuneration is defined differently under of know-how, which might occur as exceeding wage levels in the Germany's income tax treaties a result of the employee's activities receiving companys country of wage tax law, civil law, or social behalf of the receiving company, residence, the assigning company security law. As a rule, under the and given his experience, need not might also be deemed to have an new principles, integration into the be remunerated additionally interest in the employee. The receiving company should be because a transfer of an intangible assigning company carries the assumed if the assignment exceeds is not deemed to occur. burden of proof regarding any three months 2 operational expenses it incurs, All direct and indirect expenses, even if the employee's remunera insofar as they affect the results of tion exceeds the wage level in the the receiving and/or assigning receiving company's country of enterprises, are to be allocated to the employee assignment, regard In case of a tax audit of a less of whether they are part of the The issue of domestic receiving company, the employees taxable wage. The secondment is tax auditors should take into account that a prudent and becoming more and diligent business manager would e the employee' s basic salary; more a discussion point e willing to accept only those current and nonrecurring in tax audits and the expenses he would have to bear if remuneration(such as sever- he engaged an employee from the ance pay and gratuities); trend can only get worse local labor market. The domestic receiving company must demon bonuses, vacation pay, and under the current administrative strate that any amount paid above normal wage levels is paid in its taxes assumed: principles own interest; if the company is not able to prove that, the foreign additions to pension accru assigning company would have to social security contributions in do so 6 the country of work and in the In contrast to the first draft the country of origin; final regulations stress that the foreign service allowances; comparable uncontrolled price method is to be used preferentially remuneration in kind and The evaluation criteria for for arms-length purposes. The first other incentives (including ncome allocation have not draft of the regulations distin company cars and stock changed significantly compared to those in the first draft. The new reimbursement of increase principles distinguish more maintenance costs and precisely whether the employee's increased taxes: activities are performed solely for the receiving company or whether ples Section 2 of the administrative princi- moving and travel allowances the assigning company might have (including expenses for a partial interest in the employee 3Section 2.3 of the administrative prin- relatives ): and work for the receiving company ciples expenses incurred for double This distinction might reduce the housekeeping, school, and possibility that tax authorities will cp section 4. 2 of the administrative prin- boarding school fees accept operational expe sEction 3.1 of the administrative prin those of a german assigning ciples. The administrative principle company. Otherwise, the new rules sEction 3.1.2 of the administrative emphasize that profit markups could provide an opportunity for a 512 4 February 2002 Tax Notes Internationalarm’s-length remuneration, including a markup. It must also be determined whether the employee’s activities result in the creation of a permanent establish￾ment. For purposes of the administra￾tive principles, the term “employer” is related to its economic definition. Also, the term is defined differently under Germany’s income tax treaties, wage tax law, civil law, or social security law. As a rule, under the new principles, integration into the receiving company should be assumed if the assignment exceeds three months.2 All direct and indirect expenses, insofar as they affect the results of the receiving and/or assigning enterprises, are to be allocated to the employee assignment, regard￾less of whether they are part of the employee’s taxable wage. The expenses include: • the employee’s basic salary; • current and nonrecurring remuneration (such as sever￾ance pay and gratuities); • bonuses, vacation pay, and Christmas bonuses; • taxes assumed; • additions to pension accruals; • social security contributions in the country of work and in the country of origin; • foreign service allowances; • remuneration in kind and other incentives (including company cars and stock options); • reimbursement of increased maintenance costs and increased taxes; • moving and travel allowances (including expenses for relatives); and • expenses incurred for double housekeeping, school, and boarding school fees. The administrative principles emphasize that profit markups on operational expenses related to the employee secondment are not admissible for tax purposes because expenses related to the employee assignment constitute primary expenses of the commer￾cial employer, based on the principle of causation.3 The administrative principles also state explicitly that a transfer of know-how, which might occur as a result of the employee’s activities on behalf of the receiving company, and given his experience, need not be remunerated additionally4 because a transfer of an intangible is not deemed to occur. The evaluation criteria for income allocation have not changed significantly compared to those in the first draft. The new principles distinguish more precisely whether the employee’s activities are performed solely for the receiving company or whether the assigning company might have a partial interest in the employee’s work for the receiving company. This distinction might reduce the possibility that tax authorities will accept operational expenses as those of a German assigning company. Otherwise, the new rules could provide an opportunity for a German assigning company to take over a part of the operational expenses.5 According to section 3.1.1 of the administrative principles, it is assumed as a rule that an employee works in the interest of and for the account of the receiving enterprise. However, if the employee receives remuneration exceeding wage levels in the receiving company’s country of residence, the assigning company might also be deemed to have an interest in the employee. The assigning company carries the burden of proof regarding any operational expenses it incurs, even if the employee’s remunera￾tion exceeds the wage level in the receiving company’s country of residence. In case of a tax audit of a domestic receiving company, the tax auditors should take into account that a prudent and diligent business manager would be willing to accept only those expenses he would have to bear if he engaged an employee from the local labor market. The domestic receiving company must demon￾strate that any amount paid above normal wage levels is paid in its own interest; if the company is not able to prove that, the foreign assigning company would have to do so.6 In contrast to the first draft, the final regulations stress that the comparable uncontrolled price method is to be used preferentially for arm’s-length purposes. The first draft of the regulations distin- 512 • 4 February 2002 Tax Notes International Special Reports 2 Section 2 of the administrative princi￾ples. 3 Section 2.3 of the administrative prin￾ciples. 4 Section 4.2 of the administrative prin￾ciples. 5 Section 3.1 of the administrative prin￾ciples. 6 Section 3.1.2 of the administrative principles. The issue of ‘secondment’ is becoming more and more a discussion point in tax audits, and the trend can only get worse under the current administrative principles