germany s new gaar — ‘generally accepted...
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Germany’s New GAAR —‘Generally Accepted Antiabuse
Rule’?
by Wolfgang Kessler and Rolf Eicke
Reprinted from Tax Notes Int’l, January 14, 2008, p. 151
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Germany’s New GAAR — ‘Generally AcceptedAntiabuse Rule’?by Wolfgang Kessler and Rolf Eicke
I t is more than just a rule. A statutory general anti-abuse rule is a statement — a statement of tax juris-
dictions, whether the lawmaker or the judges are pri-marily in charge of targeting the cases that lack bothsubstance and business reasons. Most countries in con-tinental Europe incorporated a GAAR in their taxcodes. Among common-law jurisdictions there is a tie.Canada and Australia have a GAAR; the United Statesand the United Kingdom do not. Just recently, JohnCullinane explained in the Financial Times why theUnited Kingdom does not need such a rule.1 Like theUnited States, the United Kingdom takes a ‘‘the judgesshall decide’’ approach.
Previous GAAR
Historically, Germany has taken the middle road.The legislature codified a butter-soft and broad GAAR,and the courts breathed life into it. We described thecase law history (see ‘‘Closer to Haven? New GermanTax Planning Opportunities,’’ Tax Notes Int’l, May 8,2006, p. 501) and showed that the German Federal TaxCourt (Bundesfinanzhof, or BFH) has established anargument on how much substance is needed to accepta structure for tax purposes.
However, the legislature did not want to leave theBFH all by itself when it comes to defining the facts
and circumstances of ‘‘abuse.’’ The former rule in sec-tion 42 AO (Abgabenordnung, or the general tax code)can be translated as: ‘‘The tax code must not be cir-cumvented by way of abuse of legal planning opportu-nities. In case of an abuse, the tax liability is created asif the tax planning followed sound business reasons.’’There’s no word on the nature and content of abuse.
Freudian Slip
Obviously, the legislature was not too fond of howthe courts filled in the gaps. Another reason for themodification of the GAAR is laid down in a very earlydraft of the Annual Tax Act 2008. The legislaturemade a Freudian slip by stating, ‘‘Otherwise, an in-genious taxpayer would be better off than one whouses a normal legal measure, even though both haveachieved the same from a business point of view.’’ Thispassage was deleted in the following drafts; however, itsays much about the lawmakers’ intentions. Betweenthe lines, it targets legal but ‘‘ingenious’’ tax planning.We strongly oppose this reasoning. Targeting per selegal tax planning is like riding on a razor blade, atleast from a legal and constitutional point of view. TheGerman Constitutional Court has continuously upheldthe principle that taxpayers are entitled to structuretheir legal relations in a way to lower their tax liabili-ties. In fact, tax law is a ‘‘consecution law’’ that has tofollow the legal consequences of other legal disciplines(in particular, the civil law). Tax law cannot per se ren-der legal civil law planning meaningless for tax pur-poses. The rule is: Tax planning is legal. Only as an
1John Cullinane, ‘‘Better ways for lawmakers to tackle taxavoidance,’’ Financial Times, Jan. 25, 2007, p. 12.
Wolfgang Kessler is the director of the tax department of the business and economics faculty at the Uni-versity of Freiburg and a partner with Ernst & Young in Freiburg, Germany. The views expressed here areentirely his own. Rolf Eicke is his assistant at the tax department of the University of Freiburg. E-mail:[email protected] and [email protected]
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exception can it be considered tax evasion or tax fraud.However, it is important that any further interpretationof the new rule complies with this ‘‘rule-exception’’principle. Hopefully, the explanation on the early draftwas no more than a Freudian slip and does not materi-alize in future conduct of the tax authorities.
Earlier Draft
As amended, the Freudian slip is from an early draftthat proposed to severely tighten the GAAR. It pro-vided that abuse has occurred if a tax benefit was re-ceived based on an ‘‘uncommon legal structure’’ and ifno relevant nontax reasons were given. The nontaxreasons were supposed to be demonstrated by the tax-payer. Nontax reasons were defined as either businessor political reasons. In case of an abuse, the draft fore-saw the opportunity to ‘‘negotiate’’ with the tax au-thorities on that matter. ‘‘Negotiating’’ tax liabilities isunknown to the German tax system. If this rule wasimplemented, it would have run counter to the prin-ciple of equal taxation. In other words, if the draft hadmaterialized, we would be talking about an entirelynew rule that would have shaped the German tax sys-tem and rendered decades of case law on section 42AO meaningless.
For the first time, abuse oflaw is outlined in thestatute. Yet the statutedoes not define whatinappropriate means.
However, the legislature passed a new version of theGAAR in the Annual Tax Act 2008 that does not havesuch a massive impact on the German tax system.
Final Legal Framework
The new version provides that an abuse occurs onlyif the taxpayer chooses an ‘‘inappropriate legal struc-ture’’ not complying with the law. Therefore, for thefirst time, abuse of law is outlined in the statute. Yetthe statute does not define what inappropriate means.Therefore, resorting to case law is helpful. The BFHhas established that the word ‘‘inappropriate’’ describesany legal structure that two unrelated and reasonableparties would not have chosen to achieve a specificbusiness goal. In essence, inappropriate structures are,in the view of the BFH, ‘‘complex, complicated, andartificial.’’
The burden of proof of whether or not a structureis inappropriate rests with the tax authorities:
• The tax authorities must compare the tax conse-quences of an appropriate structure with the taxconsequences of an inappropriate structure.
• If the latter results in a tax advantage for the tax-payer or a third party, the tax authorities mustfurther examine whether or not this tax advantageis stipulated for in the particular applicable provi-sion. Legislative history reveals that examples forsuch a stipulation within the provision are statu-tory election rights for tax purposes as well as taxincentives.
The new regime is applicable beginning January 1,2008, for calendar years that begin after December 31,2007.
Tax Advantages: Now and ThenFor tax advantages that were formerly promoted by
the legislature and later withdrawn, the German taxsystem features a very interesting turnaround.
The tax regime used to endorse and spark interest inthe wide range of tax shelter schemes regarding lossallocation, movie, solar and wind energy, and shippingfunds. To generate losses, millions of taxpayers in-vested in these funds to reduce their taxes payable. Be-cause in Germany, and elsewhere, the drive to savetaxes is stronger than most other forces, German tax-payers financed many Hollywood movies (for example,the Lord of the Rings trilogy) and South Korean shippingyards. Suddenly those effects were no longer desired bylegislators, so they restricted those schemes in a waythat drove many of those funds out of business. Thelesson here is that a tax advantage stipulated for in therelevant statute might wither when policies change.
Room for RebuttalHowever, even in case of a presumption of abuse,
the taxpayer has a right to rebut and demonstrate thatthe overall structure is based on relevant nontax rea-sons. ‘‘Relevant’’ describes reasons and facts that mustbe considered in light of all circumstances.
In case the rebuttal has not been attempted or fails,the tax payable is computed as if the particular struc-ture was based on sound business reasons.
Priority IssueThe legislature ends a dispute that has been hover-
ing over the German tax law for decades: the questionof which antiabuse rule takes priority over the other.The position of the tax authorities has always beenthat even if a special antiabuse rule (for example, theanti-treaty-shopping rule) applies, the statutory GAARcan still apply as well. There has never been a soundargument why the general rule will not be supersededby a special rule as provided by the lex specialis prin-ciple.
FEATURED PERSPECTIVES
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After all, the legislature now follows the lex specialisprinciple and has declared that the application and le-gal consequences of the GAAR are superseded if aspecial antiabuse rule applies. Accordingly, the legisla-ture takes the position of the latest BFH case law.Thus, before presuming an abuse has occurred, the taxauthorities must analyze whether or not the applicablelegal statute contains a provision that prevents taxavoidance.
In a nutshell, the new rule has three features to re-member:
• inappropriate tax planning constitutes an abuse;• the presumption of abuse can be rebutted by the
taxpayer demonstrating sound business reasons forthe particular structure; and
• the GAAR is superseded if a special antiabuserule applies.
ConclusionThe German legislature has tightened the GAAR
effective beginning January 1, 2008, thereby implicitlyexpressing its discontent with the rather taxpayer-friendly interpretation by the courts. The provision isstill very broad, but for the first time, it attempts todefine abuse. From now on, all inappropriate tax plan-ning measures are under special scrutiny. Yet it couldhave been worse, as the first legislative draft suggested.Luckily, much of the case law on the old regime willcontinue to apply.
That is why the new GAAR can be considered asgenerally accepted — assuming the broad definition ofabuse is not ‘‘abused’’ by the tax authorities and thatthe German Federal Tax Court continues to fill thegaps in the legal wording in a way that balances theinterests of the tax authorities and the taxpayers. ◆
New German Statutory GAAR
Abuse
Tax Payable as if
Tax Planning
Was Appropriate
FEATURED PERSPECTIVES
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