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Germany The courts ruled that there is a hidden capital contribution because of the corporation-shareholder relationship of a third party(nonshareholder). Here, the court applied the prudent business manager standard. The nonshareholder would not have agreed to the conditions of the transaction if the nonshareholder had dealt with the com In the case of a hidden capital contribution, the income of the parties to the trans action must be adjusted accordingly. This adjustment takes place on the recipient side, reducing the income. The adjustment takes place on the side of the parent company, increasing the asset for the investment in the subsidiary and the income It is important to note that only tangible or intangible property can be subject to a contribution. The use of property or the rendering of services to the company is not within the scope of the provision (d) Section 1 of the Foreign Tax Code According to section 1 of the German Foreign Tax Code, the income of a tax payer is increased if such income was diminished in the course of a business rela- tion with a related party abroad. The income of the taxpayer is increased if the terms and conditions of the transaction deviate from those that an unrelated party would have agreed to under the same or similar circumstances. In such a case, the income should be increased to a level that is commensurate with third-party con ditions. This section of the Foreign Tax Code is the only provision in German tax law that explicitly mentions the arms length standard The intention of section 1 of the German Foreign Tax Code was to expand do mestic law to enable the tax administration to increase the income of a domestic taxpayer for all non-arms length transactions. In this context it should be noted that section 1 of the Foreign Tax Code can be used only to increase domestic in come(e.g, German parent gives royalty-free license to a subsidiary). This prov sion cannot be applied to reduce a taxpayer's German income(e. g. foreign parent gives royalty-free license to German subsidiary) In practice, this reduction provision plays a minor role since section l of the ge man Foreign Tax Code states that the rules for hidden profit distribution and rules for hidden capital contribution take precedent. Most cases covered by the provi sion deal with problems that do not apply to the rules for a hidden capital contri bution. Examples of such situations include where the benefit received by a foreign subsidiary does not constitute tangible or intangible property or where the defini- tion of a related party is broader than under the provisions dealing with hidden profit distribution or hidden capital contribution See Corporation Tax Regulations, 8 36a, Federal Tax Court, February 28, 1956, BStB1 III 1956, p. 154: Fed eral Tax Court, October 26, 1987, BStB1. II 1988, p. 348 1See Wassermeyer, in: Flick/Wassermeyer/Baumhoff(eds), Aussensteuevrecht, 6th ed, Cologne:Schmidt 1999,31 AStG, n. 76; Kroppen/Ltibker, ITPJ 1999, P 33
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