H AARMANN, H EMMELRATH & P ARTNER Recent Bilateral Tax Developments - Effects on Doing Business in Singapore - Thomas Busching Attorney-at-Law, Certified Tax Consultant (Germany)

H AARMANN, H EMMELRATH & P ARTNER page 2 RECENT DEVELOPMENTS German tax reform Singapore Budget 2001 DTA negotiations

H AARMANN, H EMMELRATH & P ARTNER page 3 GERMAN TAX REFORM Most significant tax reform ever -Income tax rate 42 % -Corporate tax rate 25 % -Exemption of capital gains on share disposals of companies -Exemption of foreign dividend income for companies

H AARMANN, H EMMELRATH & P ARTNER page 4 HISTORICAL TAX RATES

H AARMANN, H EMMELRATH & P ARTNER page 5 TOP INCOME TAX RATE

H AARMANN, H EMMELRATH & P ARTNER page 6 CORPORATE TAX RATES

H AARMANN, H EMMELRATH & P ARTNER page 7 TOTAL TAX BURDEN

H AARMANN, H EMMELRATH & P ARTNER page 8 CAPITAL GAINS FROM SHARE DISPOSALS Formerly: -Gains from the disposal of shares in a German corporation are subject to tax for a German corporation Now: -Tax exempt Effects: -Encourages and facilitates group restructuring -Strengthen Germany’s position as European holding location

H AARMANN, H EMMELRATH & P ARTNER page 9 CORPORATE TAX RATE Formerly: -40 % for retained domestic earnings -30 % for distributed earnings Now: -25 % for all domestic earnings Trade tax ( %) is territorial Total domestic tax burden roughly 40 % Foreign source income principally exempt Effect: Foreign source income taxed substantially lower than domestic source income

H AARMANN, H EMMELRATH & P ARTNER page 10 EXEMPTION OF FOREIGN DIVIDEND INCOME FOR CORPORATIONS Formerly: -Exemption only granted in tax treaties: No exemption for non-treaty companies Subject to min. 10 % shareholding Subject to activity test in tax treaty Now: -Exemption granted under domestic legislation For domestic and foreign dividend income Exception: Passive source income in a low tax jurisdiction Low tax: Less than 25 % tax burden

H AARMANN, H EMMELRATH & P ARTNER page 11 EXEMPTION OF FOREIGN DIVIDEND INCOME FOR CORPORATIONS - 2 Effects: -Passive source income from “high” tax jurisdictions becomes exempt -Active source income from non-treaty countries becomes exempt Hong Kong may become attractive for active source income -Dividends from portfolio investments, i.e. under 10 %, become exempt High net worth individuals, venture capitalists

H AARMANN, H EMMELRATH & P ARTNER page 12 EXEMPTION OF FOREIGN DIVIDEND INCOME FOR CORPORATIONS - 3 Dividends are not passive, provided that -Subsidiary of holding generates active source income Effects: -Two tier offshore structures become tax neutral -Setting up of a regional holding is not discouraged anymore -Singapore becomes premiere Asia-Pacific holding location

H AARMANN, H EMMELRATH & P ARTNER page 13 SINGAPORE BUDGET 2001 Reduction of corporate tax rate from 25.5% to 24.5% Effects: -Low tax jurisdiction from a German perspective -Passive income generated in Singapore to be taxed in Germany -Passive, e.g. interest, royalties, intragroup transactions etc.

H AARMANN, H EMMELRATH & P ARTNER page 14 DTA NEGOTIATIONS Germany wishes to eliminate exemption method Effects: -Competitive disadvantage in comparison to all other DTA countries of the region -Financial service industry mainly effected

H AARMANN, H EMMELRATH & P ARTNER page 15 HAARMANN, HEMMELRATH & PARTNER THANK YOU __________________________________ QUESTIONS & ANSWERS