In a recent decision issued by the tax court of Munich (case reference: 13 K 2769/10), the court further clarified the procedural rules when the tax authorities refuse to issue an advance ruling or issue a ruling that does not follow the position taken by the taxpayer.
Under the German General Tax Code, a taxpayer may apply for a binding ruling, asking the tax authorities to confirm the taxpayer’s legal position on a planned structure. The ruling request must include a description of the relevant facts, as well as the taxpayer’s position on the tax consequences of the structure. The tax authorities have discretionary power to decide whether to issue a ruling and whether or not to agree with the taxpayer’s position (positive ruling/negative ruling). The ruling application is subject to a fee, depending on the amount of tax at stake.
The tax court of Munich held that the issuance of a binding ruling is an administrative act that gives the taxpayer (applicant) the same procedural rights as a person would have with respect to other administrative acts which a taxpayer may have reviewed by the courts. However, the court does not have to review the legal position taken by the tax authorities; instead, it is only obliged to review whether or not the tax authorities made proper use of their discretionary powers within the limits set by the General Tax Code. According to the tax court, the position taken by the authorities in a negative ruling will exceed the scope of its discretionary powers only if the tax authorities (i) misinterpret the facts of the case; (ii) fail to provide a statement of reasons as to why they do not accept the taxpayer’s position; or (iii) clearly fail to take the jurisprudence of the highest courts into account.
Because none of these factors were present in the case, the tax court of Munich held that the taxpayer was not entitled to a positive ruling. The court noted, however, that the taxpayer still would have the option to initiate court proceedings against the tax assessment after implementing the structure.
This decision leaves taxpayers in a quandary: if a negative binding ruling is issued, a taxpayer has the right to take the matter to court, but court proceedings will not provide any certainty on the tax treatment of the intended structure.
If the tax court of Munich’s decision is confirmed by the Federal Tax Court, legal recourse against negative rulings from the tax authorities would be feasible only where the tax authorities clearly violate the limits of their discretionary powers (e.g. the authorities fail to provide reasons for their position). The case is pending before the Federal Tax Court (case reference: IX R 11/11).
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