1. German Company Tax Reform 2008 31 May 2007 Nexia Tax Conference Sydney

2. Slide 2 © DHPG 2007 I.General information II.Rate cuts for corporations and partnerships III.Measures of counter-financing IV.Who benefits?

3. Slide 3 © DHPG 2007 I. General Information A.Background of the reform project B.Cornerstones of the company tax reform C.Actual status and outlook

4. Slide 4 © DHPG 2007 A.Background Worldwide company tax rates

5. Slide 5 © DHPG 2007 B. Cornerstones of the company tax reform Rate cuts to approx. 30 % Preferential treatment of retained earnings in partnerships (for individuals only) Flat-rate tax of 25 % on certain capital income (incl. capital gains) Incentives for future investments in small companies

6. Slide 6 © DHPG 2007 B. Cornerstones of the company tax reform Introduction of earnings stripping rules Tightened change-of-control rules New rules for transfer pricing and base shifting New calculation rules for trade tax on income Abolishment of declining balance depreciation and allowance for low value items

7. Slide 7 © DHPG 2007 D. Acutal status and outlook First draft of 5. February 2007 Official draft for discussion purposes in Parliament of 14. March 2007 Discussion in Sub-discussion group of the Parliament in May 2007 Final discussion and decision before summer break 2007 Generally valid as of 1. January 2008 Flat rate tax 1. January 2009

8. Slide 8 © DHPG 2007 II. Rate cuts for corporations and partnerships A.New tax rates B.New calculation scheme for trade tax C.Calculation for corporations D.Calculation for partnerships

9. Slide 9 © DHPG 2007 A. New tax rates Company TaxNew RatePresent Rate Corp. income tax (CIT)15 %25 % Solidarity levy (of CIT)5,5 % Combined rate15,83 %26,38 % Base rate trade tax3,5 %5 % Trade Tax12,25 – 17,5 %14,9 – 20 %

10. Slide 10 © DHPG 2007 B. New calculation scheme for trade tax Current scheme –Basis of taxation = taxable profit + addbacks – deductions –Tax base * base rate (5 %) * levy rate –Trade tax is deductible –Result / 1+(0,05 * levy rate) –Trade tax –Special tariff for partnerships –Credit factor for income tax = 1,8 * tax base * base rate New scheme –Basis of taxation = taxable profit + addbacks – deductions –Tax base * base rate (3,5 %) * levy rate –Trade tax is non-deductible –Trade tax –Abolishment of special tariff for partnerships (except de minimis treshold of 24,500) –Credit factor for income tax = 3,8 * tax base * base rate

11. Slide 11 © DHPG 2007 C. Calculation for corporations 200720082009 PrivateBusiness Company level Earnings before taxes (EBT)100,00./. Trade tax (400 %)-16,67-14,00./. Corporation tax-20,83-15,00./. Solidarity levy- 1,15- 0,83 Taxes on Income-38,65-29,83 EAT company level61,3570,17 Taxable income shareholder30,6835,0970,1742,10 Income tax (incl. 5,5 %)-14,57-16,66-18,51-19,99 Net income shareholder46,7853,5151,6650,18 Total tax53,2246,4948,3449,82

12. Slide 12 © DHPG 2007 C. Calculation for corporations TownAverageBerlinHamburgCologneFrankfurtMunichStuttgart Trade tax levy400%410%470%450%460%490%420% Earnings before Taxes100,00./. Trade tax-16,67-17,01-19,03-18,37-18,70-19,68-17,36./. Corporation Tax-20,83-20,75-20,24-20,41-20,33-20,08-20,66./. Solidarity levy-1,15-1,14-1,11-1,12 -1,10-1,14 Taxes on Income 2007-38,65 -38,90 -40,38-39,90-40,15 -40,86 -39,16 Earnings before Taxes100,00./. Trade tax (400 %)-14,00-14,35-16,45-15,75-16,10-17,15-14,70./. Corporation Tax-15,00./. Solidarity levy-0,83 Taxes on Income 2008-29,83 -30,18 -32,28-31,58-31,93 -32,98 -30,53 Tax reduction8,828,728,108,328,227,888,63 Tax reduction in %22,82 22,42 20,0620,8520,47 19,29 22,04

13. Slide 13 © DHPG 2007 D. Calculation for Partnerships 20072008 42 % Foreign Partner 45 %28,25 % Foreign Partner Earnings before taxes100,00./. Trade tax (400 %)-16,67 -14,00 Earnings after taxes83,33 86,00./. Individual IT/CIT-35,00-20,83-45,00-30,60-15,00 + Trade tax credit7,5013,30./. Solidarity levy-1,51-1,15-1,74-0,95-0,83 Total tax partner-45,68-38,65-47,44-32,25-29,83 Net income partner54,3261,3552,5667,7570,17

14. Slide 14 © DHPG 2007 III. Measures of Counter-Financing A.Earnings stripping rules B.Modifications to trade tax addbacks C.Tightened change-of-control rules D.New rules for transfer pricing and base shifting E.Changes in rules for depreciation

15. Slide 15 © DHPG 2007 General rule and definitions: –Net interest expense is deductible only up to 30 % of Tax-EBIT –Net interest expense = difference between interest income and interest paid. –Interest = All interest payments, receipts and/or accruals whether to or from related party or third parties. –Tax-EBIT = Pre-interest taxable income of the entity –In the case of group taxation the whole group would be treated as a single entity –Disallowed net interest expense can be carried forward indefinitely A. Earnings stripping rules

16. Slide 16 © DHPG 2007 Exemptions If one exemption is met the complete net interest expense can be deducted: 1.Net interest expense < 1 Mio. EUR (de minimis threshold) 2.Business is not part of a group or only a proportional member 3.Escape clause: Business is part of a group, but it could be proved that the borrower’s gearing is not higher than the group’s leverage ratio (1 % difference is accepted) A. Earnings stripping rules

17. Slide 17 © DHPG 2007 Exemption from exemption 2 (shareholders’ loans in non-controlled corporations): –Shareholders are only considered if they own more than 25 % of the non-controlled corporation directly or indirectly (substantial shareholding). –Remuneration of shareholder debt accounts is =< 10 % of net interest expense –The same applies for payments to related parties or third parties with recourse against a substantial shareholder A. Earnings stripping rules

18. Slide 18 © DHPG 2007 Exemption from exemption 3 (Shareholders’ loans in corporations forming part of a controlled group): –Remuneration of shareholder debt accounts stated in the consolidated financial statements is =< 10 % of net interest expense –Escape clause is denied to the entire group if the 10 % threshold is exceeded even by one group company –Shareholders are only considered if they own more than 25 % of the corporation or of any other group company (substantial shareholding) –The same applies for payments to related parties or third parties with recourse against a substantial shareholder A. Earnings stripping rules

19. Slide 19 © DHPG 2007 A. Earnings stripping rules 20072009 DividendInterestDividendInterest Tax-EBIT100,00./. Net interest expense-100,00 Income after interest100,000,00100,000,00 Taxable corp. tax100,000,00100,0070,00 Taxable trade tax100,000,00100,0070,00 Trade tax addback0,0050,000,007,50 Corp. tax + sol. levy21,980,0015,8310,50 Trade tax (400 %)16,678,3314,0010,85 Taxes on income38,658,3329,8321,35 Spread30,327,90

20. Slide 20 © DHPG 2007 Carry forward of disallowed interest expense –Use is only possible after radical change of profit situation –3,33 EUR EBIT necessary to deduct 1 EUR of carry forward –Change-of-control-rules apply also for net interest expense –No carry forward after restructuring A. Earnings stripping rules

21. Slide 21 © DHPG 2007 B. Modifications to trade tax addbacks Present regulation –50 % of long-term interest –Annuities and recurring payments connected to establishment or purchase of the business –Profit share of silent partners –50 % of rental and leasing payments for movable fixed assets (if not taxed by the recipient) –No de minimis threshold New regulation 25 % of following payments –Any deducted interest expense (independent of term) –Annuities and recurring payments –Profit share of silent partners –20 % of rental and leasing expense for movable property –75 % of rental and leasing expense for immovable property –25 % of certain royalties De minimis treshold = 100 kEUR

22. Slide 22 © DHPG 2007 Premises: Levy Rate 400%, Calculation factor 3,5%, Taxfree allowance disregarded ExpensesDeemed interest ratio Deemed interest Addback (25%) Trade tax on expense Interest expense100,00 €100%100,00 €25,00 €3,50 € Recurring payments100,00 €100%100,00 €25,00 €3,50 € Profit share silent partner100,00 €100%100,00 €25,00 €3,50 € Rental & leasing expense movable property 100,00 €20%20,00 €5,00 €0,70 € Rental & leasing expense immovable property 100,00 €75%75,00 €18,75 €2,63 € Royalties100,00 €25%25,00 €6,25 €0,88 € B. Modifications to trade tax addback

23. Slide 23 © DHPG 2007 C. Change-of-control rules Present regulation –§ 8 Para. 4 CIT Act –Economical identity is necessary for use of loss carryforwards –Economical identity proved by share transfer test –Harmful transfer = > 50 % –within 5 years (practice of tax authorities) and business asset test –Harmful if predominantly new assets are injected New regulation –§ 8c CIT Act –Substantial share transfers (or voting rights) trigger forfeiture of loss carryforwards –Harmful transfers are: Transfers within 5 years > 25 % proport. forfeiture > 50 % compl. forfeiture Share capital increase = transfer

24. Slide 24 © DHPG 2007 D. Change-of-control rules Present regulation –Applies also for trade tax purposes –Not valid for indirect changes in ownership –Special rules for corp. under restoration –No exemptions for publicly traded companies –Applicable for transfers before January 1 st, 2008 New regulation –Applies also for trade tax purposes –Valid for direct and indirect changes in ownership –No special rules for corp. under restoration –No exemptions for group reorganizations –No exemptions for publicly traded companies –Applicable for transfers after December 31 st, 2007

25. Slide 25 © DHPG 2007 D. New rules for transfer pricing Priority methods for transfer pricing –Comparable uncontrolled price method –Resale minus method –Cost plus method Regulation for narrowing identified ranges –If transfer price outside the range = > median is used If no standard price method is possible hypothetical arm’s length test

26. Slide 26 © DHPG 2007 D. New rules for base shifting Transfer of business functions –Transfer includes all risks and opportunities relating to the function –Individual components have to be evaluated as one package (transfer package) –Transfer of functions = > transfer of profit potential –Determined by discounted cash flows –Provision for retrospective adjustment

27. Slide 27 © DHPG 2007 D. Changes to documentation requirements Exceeded documentation requirements for base shifting, R & D activities and cost sharing agreements Time limit for submission of documentation is reduced from 60 to 30 days for extraordinary transactions Correction of transfer price possible if foreign related party does not submit supplementing information

28. Slide 28 © DHPG 2007 IV. Who benefits? Advantageous for –Foreign investor Reduced rates on the company level (from 40 % to 30 %) –Mid-sized corporation Earnings stripping rules threshold of 1 mio. euros