ITPJ Vol. 4 No. 1, Jar /February 1997 lll. CHARGES FOR SHAREHOLDER/ 3. Issuance of shares in the parent company STEWARDSHIP ACTIVITIES The financing of the parent company is not the concern of the As mentioned in the introduction, shareholder costs have to former and therefore these costs have to be bome by the be viewed as separate from business costs(the latter being defined as the costs incurred in connection with the busI- 4. Costs of listing on a stock exchange ness). By contrast, shareholder costs may be defined as those incurred in connection with the company-shareholder rela- (including advertising costs) tionship. The German Supreme Tax Court has handed down If the listing involves shares of the subsidiary, the costs several decisions which distinguish between these two types should be allocated to the subsidiary because the financing is of costs. In addition, the German tax administration issued in necessary for the business operations of a company. If, hoy 1983 a circular entitled"Principles for the examination of ever, it is the stock of the parent company which is listed. the income allocation in the case of internationally affiliated costs have to be bome by the parent company enterprises"(hereinafter"Administrative Principles"). The circular expresses the views of the tax authorities on income. 5. Banking costs of dividend payments allocation between internationally affiliated companies. In our opinion, some of these principles are not consistent with At the subsidiary level, the banking costs of dividend pay. the legal definition of business costs This definition does not ments are, in our opinion, related to the distribution of aguish between intemal relationships and cross-bor ncome rather than the generation of income. Strictly speak relationships ing, they should be classified as shareholder expenses(see however, B. ). A. Classification of shareholder/stewardship activities 6. Costs of annual financial reports In current German tax practice, the terms"shareholder costs" German commercial law imposes on companies the obliga- and"stewardship costs"are used interchangeably, unlike in tion to draw up year-end financial statenwver, a company may paragraph 79 of the 1995 OECD Transfer Pricing Guidelines, of a certain size, to publish them. Howe nents and, if they are where a distinction is made between the two. German tax voluntarily publish its financial statements for public rela- practice, however, does distinguish between stewardship tions purposes. In both cases, the costs are directly connected costs and those costs which benefit the subsidiary. Therefore, with the business operations of the company. The costs of the costs listed below are classified. as either those resulting generating financial reports of the parent company may not from business operations (business expenses)or those be allocated to the subsidiary incurred in connection with the company-shareholder rela- tionship. The classification of an expense as a business 7. Yearly contributions to the Chamber of Commerce expense by itself does not necessarily mean that the amount as a payment resulting from the company-shareholder rela- join the local Chamber of Commerce. The costs incurred in tionship usually means that it is not deductible by the sub- connection with such membership are a requirement for sidiary. The tax treatment of these costs is discussed in B. doing business and therefore, both the company and the par- below ent have to bear their respective shares 1. Activities relating to the juridical structure of the 8. Costs of the supervisory board The supervisory board serves the interests of both the compa- In our opinion, the juridical structure is a matter for the ny(e.g. the staff)and the shareholders. Under certain condi ent company. Thus, any costs incurred in connection tions, German company law requires a company to hav ve a activities relating to this structure should be classified as, supervisory board. The costs of complying with this legal shareholder costs (paragraph 6.3.2. of the Administrative obligation should therefore be considered necessary to the Principles). Conversely, these costs are not caused by the business operations of the company. business operations of a subsidiary and therefore do not qual- On the other hand, companies that are not required to estab- ify as business expenses of the subsidiary. lish a board sometimes do so voluntarily. In this case, the 2. Meetings of the parent's shareholders (including expenses may not entirely qualify as business expenses since the board may perform certain functions in the interest of the shareholders. In practice, however, the costs of the supervi- These costs do not arise out of the business operations of a sory board are treated as business expenses. Paragraph 6.3.2 subsidiary either. They have to be borne by the shareholder (paragraph 6.3. 2 of the Administrative Principles) Minister of Finance of 23 February 1983(V C5-S 13414/83). For the unofficial English translation of this circular. see the chapter on Germany in The Tax Treatment of Transfer Pri- c 1997 International Bureau of Fiscal Documentation