The Business Tax Reform 2008 introduced a tax on cross-border business restructurings, or the so-called relocation of functions, in section 1 of the Foreign Tax Code (Außensteuergesetz, AStG). This was followed by a binding decree law, issued in August 2008, to further explain section 1 AStG and to ensure consistent application of the law and compliance with international principles concerning income allocation. Given the complexity of the issue, the Federal Ministry of Finance (BMF) considered it necessary to provide further guidance on administrative principles; that guidance was published as a first official draft in an extensive 72-page document in July 2009.
Following the September 2009 election of the new Federal Parliament, however, section 1 AStG will be re-assessed because the new administration has determined that the “negative consequences,” particularly in respect of R&D activities, of the 2008 rules need to be reversed. A first revised draft of section 1 AStG is now under discussion and is expected to be discussed by the German Lower House in March and the Upper House in May.
The issue of most concern is the “transfer package approach.” According to the legislation, a cross-border transfer of business functions is determined as a whole, i.e. taking into account the chances and risks associated with the relocated function as well as all assets and advantages which are transferred to a related party.The basic rationale of the approach is that a third party would only be interested in taking over a function as a whole and the profit potential, as well as any potential goodwill associated with the relocated function, but not in acquiring separate tangible or intangible assets. The new administration has recommended the introduction of an additional exception under which a taxpayer can avoid the transfer package evaluation. If the taxpayer lists at least one significant intangible asset transferred in a business restructuring, the current draft amendment provides that the taxpayer may evaluate the transferred assets on a single asset basis, excluding a residual value such as goodwill associated with the transferred assets, thus avoiding the transfer package approach. Practically speaking, this amendment would mean a reversal of the valuation approach introduced in the Business Tax Reform 2008, since the transfer package approach would no longer constitute the standard, but rather the exception. It should be emphasized, however, that the current wording of the amendment is still under discussion and no final decision is expected before May 2010.
If you have any questions, please contact Dr. Stephan Rasch or your regular Deloitte transfer pricing contact.
