1. 1 MÜNCHENER STEUERREVISIONS- UND TREUHAND GMBH Steuerberatungsgesellschaft (Tax Consultants)  MÜNCHENER WIRTSCHAFTSPRÜFUNGSGESELLSCHAFT (Auditing Company) (Auditing Company)  SENFT & COLLEGEN RECHTSANWALTSGESELLSCHAFT MBH (Lawfirm)

2. 2 Directive of German Federal Ministry of Finance 16-04-2010: The Application of DTA to Partnerships Petra Kanz, Lawyer / Tax Advisor Gothenborg 24-09-2010

3. 3 Legal forms in Germany Legal formnumber one-man business2 039 100 partnerships 373 440 corporations 519 382 other legal forms 240 849 In total 3 172 771 Source: Statistisches Bundesamt 2006

4. 4 Legal form of Partnership (tax respect) In part. business „co-entrepreneurship“(§ 15 EStG): oHG, KG, hybrid form: GmbH & Co. KG In part. business „co-entrepreneurship“(§ 15 EStG): oHG, KG, hybrid form: GmbH & Co. KG Tax transparent Tax transparent Exemption: Trade Tax + VAT on level of partnership! Exemption: Trade Tax + VAT on level of partnership! Profits / Losses separately assessed / p.r. allocated to partners; Profits / Losses separately assessed / p.r. allocated to partners; Losses: unlimited carry forward but limited offset on level of partners Losses: unlimited carry forward but limited offset on level of partners „Sonderbetriebsvermögen“ „Sonderbetriebsvermögen“

5. 5 German Specifics (1) „SONDERBETRIEBSVERMOEGEN“ Operational use giving distinction to private property  no expense with tax effect but addition as operating revenue: Operational use giving distinction to private property  no expense with tax effect but addition as operating revenue: Management fees & partners‘ remuneration (loan interest, service fees, lease, royalties etc.) Management fees & partners‘ remuneration (loan interest, service fees, lease, royalties etc.) Partner owned private property which is used for the operating business of p‘ship is deemed specific business asset in tax respects. Partner owned private property which is used for the operating business of p‘ship is deemed specific business asset in tax respects.

6. 6 German Specifics (2) „FICTION OF BUSINESS PARTNERSHIP“ Actually asset managing partnership;Actually asset managing partnership; Corporate entity (GmbH) is exclusive general partner + manager (§ 15 para.3 No. 2 EStG)Corporate entity (GmbH) is exclusive general partner + manager (§ 15 para.3 No. 2 EStG) Typically: Real Estate GmbH & Co. KGTypically: Real Estate GmbH & Co. KG  Trade or business co-entrepreneurship by legal definition („gewerblich geprägte Personengesellschaft“)  Trade or business co-entrepreneurship by legal definition („gewerblich geprägte Personengesellschaft“)  2nd legal definition: „gewerblich infizierte“ partnership   2nd legal definition: „gewerblich infizierte“ partnership 

7. 7 German view: Treaty Entitlement as to Partnerships Transparent Partnership  PE (Art 5 OECD-MC) triggering trade or business income (Art. 7) on account of its partners; Transparent Partnership  PE (Art 5 OECD-MC) triggering trade or business income (Art. 7) on account of its partners; Treaty entitled persons are the partners only. If resident in a third country  respective DTA Principle: Treaty entitled persons are the partners only. If resident in a third country  respective DTA Intransparent Partnership - Fiction of treaty entitlement if Intransparent Partnership - Fiction of treaty entitlement if -defined as corporate entity under DTA or foreign law -  treaty benefits in favour of p‘ship: e.g. WHT cap applying

8. 8 Treaty Entitlement as to Partnerships Germany state of source - Transparent partnership abroad Licensee Business Partnership = licensor Socio A Socio B Royalties 50%  Germany: WHT on royalties 15 %  DTA GER-AU: P‘ship = transparent, no treaty entitled person;   DTA GER-SP not applicable: SP allocates royalties to p‘ship  subject to (Spanish) tax not before „dividend“ distribution;  No reduction of WHT in Germany

9. 9 (European) DTA : profits allocated to a partner of a partnership deemed trade or business income, Art. 7 OECD-MA France France UK UK Ireland Ireland Luxembourg Luxembourg The Netherlands The Netherlands Austria Austria Switzerland Switzerland Source: BMF 16-04-2010, sec. 2.2.1.

10. 10 German view of DTA (1): Partnership-PE / Business Profits (Art. 7 OECD) FEDERAL MINISTRY OF FINANCE 16-04-2010 : 1) Originally trade or business income plus 2) income deemed trade or business by definition („gewerblich geprägt“) i.e. asset managing GmbH & Co. KG FEDERAL MINISTRY OF FINANCE 16-04-2010 : 1) Originally trade or business income plus 2) income deemed trade or business by definition („gewerblich geprägt“) i.e. asset managing GmbH & Co. KG  FEDERAL COURT OF FINANCE 28-04-2010 : Fiction not applying under DTA-Law, neither inbound nor outbound!  FEDERAL COURT OF FINANCE 28-04-2010 : Fiction not applying under DTA-Law, neither inbound nor outbound!

11. 11 GERMAN FEDERAL COURT OF FINANCE - 28 April 2010 -. U.S. partnership Real estate fund German partner Interest from capital investment of M&R reserves  USA: fund‘s option for business income  potential US taxation of interest as „effectively connected income“;  Germany: Question whether tax exemption due to PE Prerogative or interest taxation in state of residence ?  Court Judgment (  BMF): Fiction of „business“ acc. German tax law not applying under DTA  interest taxable in Germany  As the case may be, material issue of double taxation !

12. 12 German view of DTA (2): Partnership-PE / Business Profits (Art. 5, 7 OECD) Exercise of business operations in the state of seat of PE: Exercise of business operations in the state of seat of PE: Fixed place of business;Fixed place of business; Managing (holding) activityManaging (holding) activity Constitutional seat of general partner (GmbH), not sufficient if: managing director resident abroad and no permanent office in PE state.Constitutional seat of general partner (GmbH), not sufficient if: managing director resident abroad and no permanent office in PE state.

13. 13 BASIC OUTBOUND STRUCTURING Trade or business partnership with its seat / management abroad deemed a foreign PE of (German) partner in terms of DTA; Trade or business partnership with its seat / management abroad deemed a foreign PE of (German) partner in terms of DTA; Exclusive (lower) taxation in the state of PE ; Exclusive (lower) taxation in the state of PE ; Repatriation of profits to Germany exempt from WHT or national minimum taxation (# dividends) Repatriation of profits to Germany exempt from WHT or national minimum taxation (# dividends)

14. 14 Challenge: INBOUND PE STRUCTURING Case: Emigration of a German shareholder of a German GmbH to a low-tax country (issue of § 6 Foreign Transaction Tax Act) Emigration of a German shareholder of a German GmbH to a low-tax country (issue of § 6 Foreign Transaction Tax Act) Prior transfer of shares to a German GmbH & Co. KG as managing holding PE  intended PE taxation Prior transfer of shares to a German GmbH & Co. KG as managing holding PE  intended PE taxation  Avoidance of expatriation taxation ?? Federal Ministry of Finance: YES – on certain conditions: Issue „partnership holding“ subject to constant discussion

15. 15 German view of DTA (3): Partnership-PE / Business Profits (Art. 5, 7 OECD) German view of DTA (3): Partnership-PE / Business Profits (Art. 5, 7 OECD) Condition: Functional attribution of the asset the profits are resulting from to the PE Condition: Functional attribution of the asset the profits are resulting from to the PE Additional requirements in case of (managing) partnership holdings: Not only participation administration but: Functional, strategic or economic impact of participating interest / shareholding in favour of partnership or substantial service relations Additional requirements in case of (managing) partnership holdings: Not only participation administration but: Functional, strategic or economic impact of participating interest / shareholding in favour of partnership or substantial service relations  Federal Court of Finance (07-12-2003 / 19-12-2007)  International Standards

16. 16 OUTBOUND SITUATION Limitation of PE Prerogative Principle : Exemption of foreign PE profits from taxation in Germany as state of partners‘ residence (but progression) Principle : Exemption of foreign PE profits from taxation in Germany as state of partners‘ residence (but progression) Unless case of: Unless case of: Activity test in DTA: if passive  profit taxable in state of residence (recently signed DTA UK);Activity test in DTA: if passive  profit taxable in state of residence (recently signed DTA UK); Switch-over / subject-to-tax clause in DTA:Switch-over / subject-to-tax clause in DTA: Unilateral Switch-over ruling (§ 50d para. 9 EStG), in particular case of qualification conflict ► change to crediting method !Unilateral Switch-over ruling (§ 50d para. 9 EStG), in particular case of qualification conflict ► change to crediting method !

17. 17 Qualification Conflicts: Trouble shooting from German view Case of double taxation:  BMF: State of residence is bound to qualification of state of source, i.e. responsible to provide for release; Case of double taxation:  BMF: State of residence is bound to qualification of state of source, i.e. responsible to provide for release; Case of zero-taxation:  Germany as state of residence: § 50d para.9 EStG (unilateral switch-over)  change of method from exemption to crediting Case of zero-taxation:  Germany as state of residence: § 50d para.9 EStG (unilateral switch-over)  change of method from exemption to crediting

18. 18 UNILATERAL SWITCH-OVER CLAUSE § 50d para. 9 EStG (possibly subj. to constitutional ban on retroactive effect) § 50d para. 9 EStG (possibly subj. to constitutional ban on retroactive effect) „Partner“ Deutschmann State B = PE royalties paid by licensees State of Source= C Licensee ► Non-resident tax liability rules in B: Royalties from State of Source C tax exempted ►Subject to German tax: § 50 d para. 9 No. 2 EStG Business Patent Partnership

19. 19 Negative Qualification Conflict (1) OUTBOUND Trade/Business Partnership (no tax subject) - car dealing - German perception: - PE prerogative  business income (no interest Art. 11 OECD); - Taxation in PE state; - If actually no taxation in PE state  switch-over acc. 50d IX Bridge financing; customers paying interest Source State view: INTEREST (Art 11 OECD)  German view: BUSINESS PROFITS ? Germany = State of Residence

20. 20 Constant dispute: „Sondervergütungen“ Specific Feature under German Tax Law (see chart 5 - similar in Europe: Austria, Switzerland) Specific Feature under German Tax Law (see chart 5 - similar in Europe: Austria, Switzerland) § 50d para. 10 EStG affecting DTA Law ?  Business Income by definition § 50d para. 10 EStG affecting DTA Law ?  Business Income by definition Application challenged by German Jurisdiction !! Treaty Override; inbound: rule coming to nothing Application challenged by German Jurisdiction !! Treaty Override; inbound: rule coming to nothing

21. 21 „Sondervergütungen“ Negative Qualification Conflict OUTBOUND Partner Trade or Business Partnership Loan German perception: - Interest = business profit acc. national tax law, impact on DTA: § 50d para.10 EStG - Principle: Taxation in PE state; - If actually no taxation in PE state  no obligation of state of residence to stick to exemption method  switch-over acc. DTA or § 50 d para. 9 EStG PE State view: INTEREST Art. 11 OECD  German view: BUSINESS PROFIT Foreign State Interest

22. 22 „Sondervergütungen“ Positive Qualification Conflict INBOUND Foreign Partner German Business Partnership Loan  Foreign state of residence: Taxation of worldwide income = interest, 11 OECD  Germany: § 50d para 10 EStG: DTA impact of German legal fiction „business profit“  allocation to German PE = taxing power;  Foreign state of residence is responsible to clear double-taxation  BUT: Appeals pending at Federal Court of Finance (Treaty Override?) Interest

23. 23 FOREIGN P.E. LOSSES German Federal Court of Finance 09-06-2010 Principle: Germany has no taxing right with respect to losses which have been generated in a foreign ‹French› Permanent Establishment operated by an enterprise resident in Germany (= permanent jurisdiction in line with general PE principles). Principle: Germany has no taxing right with respect to losses which have been generated in a foreign ‹French› Permanent Establishment operated by an enterprise resident in Germany (= permanent jurisdiction in line with general PE principles). Exception: Possible consideration of losses in Germany due to EC Law as far as the German taxpayer furnishs proof that the losses definitely can not be used in the state of source  time limit of loss carryforward pursuant to foreign law. Exception: Possible consideration of losses in Germany due to EC Law as far as the German taxpayer furnishs proof that the losses definitely can not be used in the state of source  time limit of loss carryforward pursuant to foreign law. (Principle of „Final Losses“, EU-CoJ 15-05-2008 – Lidl/Belgium)

24. 24 Participation interest of German partners in foreign trade or business partnership: Assessment process in Germany Basically: Exemption method with progression Uniform and separate assessment of the shares in profits allocated to German partners; Uniform and separate assessment of the shares in profits allocated to German partners; Great administrative effort, crossborder cooperation with tax advisors; Great administrative effort, crossborder cooperation with tax advisors; Federal Central Tax Office (Bundeszentralamt/Steuern) collecting and providing information through offical channels („IZA“= information center for tax relevant foreign relations). Federal Central Tax Office (Bundeszentralamt/Steuern) collecting and providing information through offical channels („IZA“= information center for tax relevant foreign relations). Müller Huber Maier Foreign PE / Fund