1. Interest deduction and loss deduction – new rules in Germany Tanja Neef and Ralf Krüger CFH Cordes + Partner Hamburg Nexia ETG Meeting Malta February 5, 2010

2. 1 © NEXIA 2010 1. Growth Acceleration Act („Wachstumsbeschleunigungsgesetz“) Reason:  Slump of economic growth caused by financial crisis Objective :  Encouraging economic growth through tax reliefs

3. General rule: (unchanged) interest expenses -interest income =net interest expenses -30% of EBITDA =nondeductible interest expense to be added back to income 2 © NEXIA 2010 2. Changes interest deduction (Sec. 4h Income Tax Act) deductible interest expense

4.  capital ratio until 1% below capital ratio of group not harmful Exceptions to limitation: 1) tax-exempt threshold EUR 1 million 3 © NEXIA 2010 2. Changes Interest deduction (Sec. 4h Income Tax Act ) Capital ratio of company Capital ratio of group ≥ New: 2% New: EUR 3 million 2) not part of an affiliated group and no harmful sharholder debt financing (acc. Sec. 8a Corporation Income Tax Act) 3)Part of an affiliated group and

5. 4 © NEXIA 2010 Further changes: EBITDA carryforward -Carryforward of not fully deducted or utilized EBITDA over the next 5 financial years (Fifo-method) -Not applicable for cases of exceptions Tax-exempt threshold of EUR 3 million Not part of an affiliated group Part of affiliated group and equity ratio ≥ equity ratio of group 2. Changes Interest deduction (Sec. 4h Income Tax Act)

6. 5 © NEXIA 2010 -Fictitious EBITDA carryforward 2007, 2008 and 2009 -Total or partial loss of EBITDA carryforward in case of Sale or termination of business Departure of a partner 2. Changes Interest deduction (Sec. 4h Income Tax Act)

7. 6 © NEXIA 2010 Conclusion: Advantages: -Relief of interest deduction (esp. small and medium-sized companies) -EBITDA carry forward Disadvantages: -Increase of complexity -Insecurity 2. Changes Interest deduction (Sec. 4h Income Tax Act)

8. Total or partial limitation of loss deduction (for corporate income tax and trade tax purposes) 7 © NEXIA 2010 Limitation of loss deduction if: -Transfer of shares, voting rights or comparable issues -more than 25% -within 5 years -to be directly or indirectly held by one single shareholder Related parties Several shareholders with parallel interests 3. Changes loss deduction (Sec. 8c Corporate Income Tax Act)

9. 8 © NEXIA 2010 Transfer of more than 25% up to 50% of shares: =>partial loss of accumulated loss carryforward in proportion to transferred shares Transfer of more than 50% of shares: =>complete loss of accumulated loss carryforward 3. Changes loss deduction (Sec. 8c Corporate Income Tax Act) Example: Loss carryforward EUR 100.000 Year 01: harmful transfer of 30% of shares => 30% of loss (-) Year 04: transfer of additional 40% of shares => 100% of loss (-)

10. 9 © NEXIA 2010 1.Exception for affiliated groups Harmful transfers within a group Same shareholder participating 100% in both legal entities (transferring and aquiring company/legal successor) Not supported: -transfers of legal entities with several shareholders -Prolongation or abbreviation of participation chain -Partnerships as legal entities 3. Changes loss deduction (Sec. 8c Corporate Income Tax Act)

11. 10 © NEXIA 2010 2.Hidden reserves Loss deductible as far as amount of taxable hidden reserves included in the shares which are subject to a harmful transfer Example: transfer 40% of shares, loss carryforward EUR 500.000 hidden reserves (taxable in Germany) EUR 300.000 Loss EUR 500.000 x 40% = EUR 200.000 Hidden reservesEUR 300.000 x 40% = EUR 120.000 deductible 3. Changes loss deduction (Sec. 8c Corporate Income Tax Act)

12. 11 © NEXIA 2010 3.Recapitalization -no limitation of loss deduction if transfer of shares due to recapitalization of a business -Precondition: maintenance of essential business property Previously: limited until December 31, 2009 3. Changes loss deduction (Sec. 8c Corporate Income Tax Act) New: without any time restrictions

13. 12 © NEXIA 2010 Conclusion Tax relief for companies regarding limitation of loss deduction Reasonable operational reorganizations within groups are not prevented due to tax reasons 3. Changes loss deduction (Sec. 8c Corporate Income Tax Act)

14. © NEXIA 2010 Thank you for your attention Tanja Neef and Ralf Krüger CFH Cordes + Partner Hamburg