1 Trilateral Meeting of the German, Netherlands and British Branches of the International Fiscal Association International Taxation on the road to economic recovery Roland Hummel 3 Nov 2010

2 Treatment of Tax Losses: German domestic dimension NOL carryback NOL carryforward CoO Sole Trader (single) IT preceding year; deduction max € 511.5kno time limit deduction p.a. max € 1mn + 60% of income exceeding €1mn no transfer NOL remains with Sole Trader TT (-)no transfer to new owner Partnership IT / CIT NOL attributed to partner; preceding year deduction max € 511.5k NOL attributed to partner; no time limit deduction p.a. max € 1mn + 60% of income exceeding €1mn no transfer to new owner NOL remains with partner TT (-) no time limit deduction p.a. max €1mn + 60% of income exceeding €1mn no transfer to new partner; limitations in case of CoO in corporate partner Corporation CIT preceding year deduction max € 511.5klimitations in case of CoO > 25% of share capital, forfeiture in case of CoO > 50% TT (-) IT = Income Tax CIT = Corporate Income Tax TT = Trade Tax CoO = Change of Ownership Multiple changes since 2007 !

3 Treatment of Tax Losses: German domestic dimension Basic Principle In-/direct acquisition of stock in a German corporation within 5 years by qualifying acquiror in the following ratios * 25% < x ≤ 50%: proportional forfeiture of NOL * > 50%: forfeiture of entire NOL Introduced wef 2008 (BGBl. I 07, 1912) BMF – Decree (BStBl. I 08, 736) widely criticised Federal Tax Court, I B 49/10 of 26.Aug.10: Compatibility of minimum tax and loss forfeiture with constitution seriously questionable Exemptionacquisition for financial restructuring purposes in 2009 wef 2008 initially limited to FYs 2008 and 09; limitation waived in Dec. 09 EC commenced procedure under Art. 108 (2) TFEU (state aid) – C 7/2010 Application now stalled (BStBl. I, 488) NOLs in certain Venture Capital owned companies announced in 2008 wef 2008; never became effective as European Commission denied consent (Decision of 30.Sep 09) Intra – group transfers wef 2010 unresolved questions NOLs supported by hidden reserves wef 2010

4 Treatment of Tax Losses: German / European dimension PE PE income generally tax exempt in German HQ What does this mean for PE losses? ECJ * , C- 293/06, Deutsche Shell, Itl. PE of German HQ; BMF * , C- 414/06, Lidl Belgium GmbH Co & KG (Lux. PE of German HQ) ** subsequent decision by Federal Tax Court ( , I R 84/04), ignored by Federal Ministry of Finance, BStBl. I 09, 835 ** Position Paper, Bavarian upper Tax Authority LfSt BY, , S /10 St32, DStR 10,444 * , C-157/07, Krankenheim Ruhesitz am Wannsee-Seniorenheimstatt GmbH (Austrian PE of German HQ) Federal Tax Court * , I R 23/09 (Lux. PE of German HQ): No „finality“ of foreign PE losses in case of time limits imposed by foreign country * , I R 107/09 u. I R 100/09 (French PE of German HQ): deduction of factually „final“ foreign PE losses for both Income Tax and Trade Tax Sub Write down of shares in / shareholder loans to (foreign) subsidiaries not tax effective for German shareholder / lender / guarantor Under current law, foreign subsidiary does not qualify for an Organschaft ECJ * , C-446/03, Marks&Spencer , C-337/08, X-Holding BV Lower Tax Courts *Lower Saxony, , 6 K 406/08, appeal at Federal Tax Court, I R 16/10; taxpayer turned down re lack of loss compensation agreement *Rhineland-Palatinate, , 1 K 2406/07, appeal at Federal Tax Court, I R 34/10, taxpayer turned down re lack of loss compensation agreement European Commission *Sept. 2010: Commission requests amendment to double-residence criterion in the German Organschafts-regime

5 Interest Barrier Rule, § 4h EStG, § 8a KStG Introduced in 2008 (German Business Tax Reform Act), replaced the former thin-cap rule for corporations Decree of Federal Ministry of Finance of 21 Feb Effect: limitation of interest deduction for businesses (re Income and Trade Tax), 5y carry forward of excess EBITDA in limited cases; carry-forward of non- deductible interest expenses. Limited deductions for Trade Tax, § 8 Nr. 1 GewStG Widened the regime to disallow interest expenses Bank privilege § 19 GewStDV relaxes these rules for banks and certain finance institutions Current German aspects of interest deduction

6 Details on Interest Barrier Rule Negative Interest Balance (NIB) = excess amount of interest expense over interest income (Definitions) of a business (Definition, Group) Barrier: 30% of tax EBITDA = determined based on tax rules, only 5% of dividends Exemptions: NIB 25%) shareholder, related party or recourse loan Business‘ equity ratio ≥ (group‘s equity ratio./. 2 p.ct. points) corporation: only if no more than 10% of interest expense relates to substantial (>25%) shareholder, related party or recourse loan Current aspects of interest deduction