German Tax Reform Vienna, 30 May 2008

Ebner, Stolz & Partner locations in Germany, over 540 employees Kiel Hamburg Hanover Berlin Munich Leipzig Stuttgart Reutlingen Frankfurt

Agenda I.Reduction of tax rate II.Counter financing III.Anti-Treaty Shopping rules IV.Outlook

I. Reduction of tax rate 15% corporate tax rate (ex 25%) Applicable for FY starting 2008 Solidarity surcharge of 5,5% on top of the tax rate remains Trade tax remains, but changes Total burden app. 29.5%

Trade tax Not deductible as tax expense any more Basic factor reduced from 5 to 3,5% Factor multiplied by regional rate Base expanded by stricter rules in respect of financing costs

Expansion of trade tax base for financing costs Calculation scheme 100 %For interests, pension, silent partners 20 %For rent and leasing of moveable goods 25 %For license fees 75 %For rent and leasing of immovable goods =Total of financing costs./.Allowance € =Increase of profit for trade tax purposes by 25 % Effective tax cost 100 EUR financing 3,50 EUR 0,70 EUR 0,88 EUR 2,63 EUR

Example for a German corporation Comperisation of total tax burden Trade tax rate300 %400 %420 %490 % Profit 100,00 Trade Tax - 10,50- 14,00- 14,70- 17,15 Corporate Tax - 15,00 Solidarity surcharge - 0,83 Tax from FY ,33- 29,83- 30,53- 32,98 Tax in the past - 35,98- 38,65- 39,15- 40,86 Tax reduction 9,658,828,627,88 Reduction in % 26,83 %22,82 %22,04 %19,30 %

II. Counter financing Overview Interest ceiling Loss limitation Exit taxation Base shifting

Overview Budget impact of the tax reform should be limited to EUR 5 billion Therefore, a couple of rules have been changed and implement for counter financing The following tools seem to be the most relevant, but do not provide a complete picture

Interest ceiling Old safe-haven rule dismissed (Art. 8a CTA) Introduction of complete new scheme of imposing a limit on deductibility of interest Covers all kind of financing Applicable for FY starting 1 June 2007

Interest ceiling - New concept Interest on borrowed capital will be tax deductible without restriction only up to an amount of EUR 1 mio If the limit is exceeded, interest is permitted to offset only by a percentage of EBITDA Percentage rate is 30% Any not tax deductible interest to be carried forward

Interest ceiling - Exceptions The interest ceiling rule does not apply if (1)The business has net interest expenses of less than EUR 1 mio in a given FY or (2)The business neither belongs to a consolidated group for accounting purposes nor is under common control with other businesses or (3)The business can demonstrate that its indebtedness does not exceed the group indebtedness (by more than 1%)

Interest ceiling - Check list Interest expense./. income ≤ 0 Difference < EUR 1 mio Difference ≤ 30 % EBITDA INTEREST CEILING Only 30 % of EBITDA Remaining interests to be carried forward Interest expenses fully tax deductible No Group-clause Escape-clause: No No debt financing by shareholder +

A T1-Corp T2-Corp T3-Corp B 100 % loan 1 loan % 70 % 30 % M-Corp loan 2  loan 1 and loan 3 are under tax risk  loan 2 is not under risk as it is consolidated GROUP Example

Loss limitation rules Tax losses of a merged company are not transferable any longer to the acquiring company Transfer of shares within a 5-year period: –If > 50% the carry-forward will cease to exist –If > 25% the carry-forward will expire on a pro rata basis –Injection of new assets isn’t risky any longer

Exit taxation If an asset is moved cross-border into a PE and the German taxation right is excluded or limited, a capital gain has to be taxed If a person owning at least 1% of any share holding moves and the German taxation right is excluded or limited, a capital gain has to be taxed The payment can be deferred until the realization of a sale if it happens within the European Community

Base shifting Background Definition Evaluation Price correction Base shifting

Base shifting - Background R&D Patent registration and invoicing Transfer of the project

Base shifting - Definition Shifting of business tasks inclindung functions and risks Examples –Transfer of whole business –Involvement of a contract manufacturer –Conversion of a sales person to a commissioner –Conversion of a contract manufacturer to a production entity –Secondment of staff in case of transfer of functions Copying of a successful business model was under heavy discussion and has been excluded unless it is a hidden base shifting

Entity, which transfers the functions TRANSFER Goods, Machinery, Know-How, Good-Will, Future Profit EVALUATION STANDARD To sum up all assets and evaluate it by taking the profit expectations into account EXCEPTION To evaluate single assets Entity, which takes over the function BASE SHIFTING Transfer package versus single goods

Evaluation of future profit (1) Entity, which transfers the function Entity, which takes over the function Profit potential Expected profit before base shifting./. Expected profit after base shifting = Difference x Factor for capitalization = Minimum selling price Expected profit after base shifting./. Expected profit before base shifting = Difference x Factor for capitalization = Maximum purchase price

Evaluation of future profit (2) Most likely price PRICE Agree upon area Entity, which transfer the function 4 mio 5 mio Entity, which takes over the function

Price shifting clause Tax legislator works with an assumption that –There are uncertainties at the time of making the arrangement and –Third parties would have agreed on a price shifting clause. Important in case the profit develops different from the planning Shall allow price corrections within 10 years period by the tax authority

Three-row-model VALUE OF TRANSFER PACKAGE RETRO- ACTIVE PRICE CORRECTIO N INFO- SUPPORT BY THE TAX PAYER BASE SHIFTING TAX TREATMENT

III. Anti-Treaty-Shopping rules Tax Bill 2007 has introduced tightened domestic Anti-Treaty shopping rules First practical experience available Domestic subject to tax clause introduced

Stricter conditions (Art. 50d 3 ITA) Foreign holding exempt from WHT only if shareholders are entitled to the same benefit or the 3-Factor-Test is met: + Sufficient resources to conduct business + Proof of non-tax reason for the structure + 10% of gross revenues from own business activities

Application of the rules German entity or the applicant has to complete a long and detailed questionnaire providing evidence about the shareholder and its background Old applications still valid, but extension requires the same questionnaire

Domestic subject to tax clause No “white” income any more? If foreign source income is not subject to taxation abroad, it shall be subject to taxation in Germany (Art. 50d 9 ITA) The reason for the non-taxation abroad needs to be analyzed, e. g. –different treatment of non-residents –DTT qualification conflict (hybrid structures)

IV. Outlook Flat tax of 25% to certain capital income and capital gains Reform of inheritance and gift tax

Flat tax of 25% from 2009 Applicable to –Private income from capital, such as dividends and interests –Private income from capital gains Restructuring of investments underway, which needs to be completed by

Example for German corporation and shareholder PrivateBusinessold Profit before tax100,00 Tax at corporation level -29,83 -38,65 Dividend distribution70,18 61,35 Taxable dividends70,1842,1130,68 Flat tax 25% -17,54--- Income tax (45 %)----18,95-13,80 Solidarity surcharge-0,96-1,04-0,76 Tax at shareholder level-18,51-19,99-14,56 Total tax-48,33-49,81-53,21

Inheritance and gift tax reform Driven by the decision of the German Federal Constitutional Court, which declare current rules as non-constitutional Heavy ongoing discussion To completed by the end of 2008

Thanks for your attention

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Sten Günsel Professional background: University of Halle/Wittenberg School of Law, Mandatory Legal Clerkship – Focus on Tax Law From 1995 – 2000 PwC Hanover, 1999 qualification as tax advisor according to German law From 2000 – 2005 PwC Czech Republic, Brno/Prague, Leader of the German tax desk From 2005 – 2006 Leitner & Leitner, Czech Republic, Partner Since 2006 Ebner, Stolz & Partner, Stuttgart – works in his capacity as tax advisor and attorney Main Areas of Focus: International taxation, Expatriate taxation, Tax structuring, Central and Eastern Europe Business Sectors: Investment - Service - Distribution – Manufacturer - Automotive German Tax advisor – Attorney at Law Phone: Fax:

Dr. Markus Emmrich Professional background: Studied business administration at the University of Bayreuth Research assistant to the Professional Chair for Economics Tax Law and Auditing at the University of Bayreuth Completed his Doctorate (Dr. rer. pol.) Appointed Certified Tax Consultant in 1999 Employee at Mönning & Partner since 1999 Since 2001 teaching appointment, lecturing in Conversion Tax Law at the University of Bayreuth European Chairman of SC International from 2002 until 2007 From December 2007 Board member of NEXIA International and Deputy Chairman NEXIA Europe 2002 Partner at Mönning & Partner / Ebner, Stolz, Mönning GmbH Works in his capacity as Tax Consultant Main Areas of Focus: Group Restructuring Acquisitions and Sale of Companies Company Succession Concepts focusing an International Tax Law German Tax advisor Phone: Fax: