1

Tax Avoidance Revisited: Exploring the Boundaries
of Anti-Avoidance Rules in the EU BEPS Context

Germany

National Reporter: Ekkehart Reimer[*]

(Heidelberg University)

Structure

1. The Meaning of Avoidance and Aggressive Tax Planning and the BEPS Initiative

1.1. The Meaning of Tax Avoidance in National Legal Systems

1.2. Tax rulings as an instrument to restore legal certainty

2. Constitutionalisation of Anti-Avoidance – A New Phenomenon

2.1. Possibility of tax avoidance can make a tax act unconstitutional

2.2. Relation to statutory anti-avoidance

2.3. Conclusion

3. European Influence on German Anti-Abuse Measures

3.1. ECJ Case Law

3.2. EC Recommendation C-(2012) 8806 of 6 December 2012

3.3. The 2016 EU Proposal for National GAARs

4. Anti-Abuse Provions in German International Tax Law

4.1. Linking Rules

4.2. Deduction of Interest Payments

4.3. Transfer Pricing Rules

4.4. CFC Legislation

4.5. Saving Clause and Limitation of Benefits (LOB)

4.6. A Treaty GAAR – Treaty reference to domestic GAAR

4.7. Subject-to-tax rules

4.8. Activity provisos and switch-over clauses

1. The Meaning of Avoidance and AggressiveTax Planning and the BEPS Initiative

1.1. The Meaning of Tax Avoidance in National Legal Systems

1.1.1. The development of the German GAAR until the last (2008) reform

Drawing convincing and operable demarcation lines between different phenomena and species of tax avoidance schemes has belonged to the evergreen topics since the rise of modern tax law theory in Germany during the early 1920ies. Originally, the outstanding interest in concept(s) of tax avoidance was trigger by three elements: a sharp increase of the tax burden after World War I[1], an unprecedented centralization of tax legislation, tax administration and a specialized judiciary[2], and above all, the codification of general rules of tax law including a GAAR in the 1919 Reichsabgabenordnung. In its original version of 1919, the GAAR (sec. 5 RAO) read:

(1) Durch Missbrauch von Formen und Gestaltungsmöglichkeiten des bürgerlichen Rechts kann die Steuerpflicht nicht umgangen oder gemindert werden. / (1) The tax duty cannot be circumvened or reduced through an abuse of forms or freedoms of civil law.
(2) Ein Missbrauch im Sinne des Abs. 1 liegt vor, wenn: / (2) In the sense of paragraph1, an abuse exists
1. in Fällen, wo das Gesetz wirtschaftliche Vorgänge, Tatsachen und Verhältnisse in der ihnen entsprechenden rechtlichen Gestaltung einer Steuer unterwirft, zur Umgehung der Steuer ihnen nicht entsprechende, ungewöhnliche Rechtsformen gewählt oder Rechtsgeschäfte vorgenommen werden, und / 1. where the law imposes a tax on economic transactions, facts or circumstances in their appropriate arrangement, if inappropriate or unusual legal forms have been chosen or legal transactions performed for the purpose of tax avoidance, and
2.nach Lage der Verhältnisse und nach der Art, wie verfahren wird oder verfahren werden soll, wirtschaftlich für die Beteiligten im wesentlichen derselbe Erfolg erzielt wird, der erzielt wäre, wenn eine den wirtschaftlichen Vorgängen, Tatsachen und Verhältnissen entsprechende rechtliche Gestaltung gewählt wäre, und ferner / 2.where, according to circumstances, modalities and steps of the transaction, the economic outcome for the participants is substantially identical to the outcome which would have occurred if an arrangement appropriate to the economic transactions, facts or circumstances had been chosen; and moreover,
3.etwaige Rechtsnachteile, die der gewählte Weg mit sich bringt, tatsächlich keine oder nur geringe Bedeutung haben. / 3.where potential legal disadvantages of the way chosen have no or little relevance.
(3) Liegt ein Missbrauch vor, so sind die getroffenen Maßnahmen für die Besteuerung ohne Bedeutung. Die Steuern sind so zu erheben, wie sie bei einer den wirtschaftlichen Vorgängen, Tatsachen und Verhältnissen angemessenen rechtlichen Gestaltung zu erheben wären. Steuern, die auf Grund der für unwirksam zu erachtenden Maßnahmen etwa entrichtet sind, werden auf Antrag erstattet, wenn die Entscheidung, die diese Maßnahmen als unwirksam behandelt, rechtskräftig geworden ist. / (3) Where an abuse exists, the measures taken shall be irrelevant for taxation. Taxes shall be levied like for anarrangement appropriate to the economic transactions, facts or circumstances. Where taxes have been paid on the basis of the measures that shall now be regarded as irrelevant, those taxes shall be reimbursed upon application as soon as the decision that treats these measures as void has become final and conclusive.

Albert Hensel’s 1923 essay “Zur Dogmatik des Begriffs ‘Steuerumgehung’” [conceptualizing tax advoidance] has established the common core of doctrinal reflection on this old German GAAR. Based on Roman law and modern private law concepts on the abuse of lawconcepts on the one hand and a genuine substance-over-form approach on the other, Hensel tries to develop sharp contours for the term “abuse”. Above all, however, he is very clear on the side of the legal consequences of the GAAR: The GAAR does not prohibit any behaviour (not even any form of tax avoidance or tax fraud) but spoils the desired effect of the scheme, i.e. reverses (neutralizes) the tax advantage.

The post 1920ies developments of the GAAR are heterogeneous. Like other indefinite norms, the GAARsoon appeared as a perforation, if not an open door for the intrusion of Nazi ideology into the application of tax law by the administration and the Reichsfinanzhof. More and more, tax case law of the second half of the 20ieth century aimed at restricting the impact of the GAAR. This restrictive development has at least three different, but overlapping reasons.

  • First, it can be regarded as a direct counter-reaction to the abuse of the GAAR during the 1930ies and early 1940ies, based on negative experience with, and a strong commitment not to continue, any judicial activism driven by ideology and/or obedience to real or anticipated expectations of the government.
  • A second explanation is the increasing impact of the Federal Constitution, the Grundgesetz, on the application of general and vague rules. On the basis of strict standards of legal certainty and the upcoming of verfassungskonforme Auslegung (interpretation of vague rules in conformity with the constitution), tax avoidance was contained by way of a purposive (teleological) interpretation of the single (ordinary) tax laws rather than by recourse to the GAAR[3].
  • Third, the more reluctant tax judges became, the more urgent was the need for the tax legislator to introduce special anti-avoidance rules (SAARs)[4]. The existence and the concrete design of those special anti-avoidance rules had repercussions on the interpretation of the GAAR: Courts argued that wherever Parliament banned or restricted frequently-used tax avoidance schemes, the SAARs should be regarded as definite and conclusive, i.e. leave to space for a second-tier recourse to the GAAR. Moreover, the fact that the legislator was able to introduce (but refrained from introducing) SAARs brought the Bundesfinanzhof to a considerable self-restraint in the application of the GAAR even where a tax avoidance scheme did not show any proximity to the topics of any SAAR.

Consequently and subsequently, Parliament reacted by ongoing refinements (rectius, aggravations) of both the SAARs and the GAAR. The 1977 re-codification in sec.42 of the new Abgabenordnung reduced the 1919 text to only to sentences, viz.

Durch Missbrauch von Gestaltungsmöglichkeiten des Rechts kann das Steuergesetz nicht umgangen werden. Liegt ein Missbrauch vor, so entsteht der Steueranspruch so, wie er bei einer den wirtschaftlichen Vorgängen angemessenen rechtlichen Gestaltung entsteht. / Tax law cannot be circumvened through an abuse of legal freedoms. In the case of an abuse, the tax claim is established as if it would have been established for anarrangement appropriate to the economic transactions.

In 2001, these two sentences were numbered as paragraph1 and a second paragraph was added:

(2) Absatz 1 ist anwendbar, wenn seine Anwendbarkeit gesetzlich nicht ausdrücklich ausgeschlossen ist. / (2) Paragraph1 applies unless its application has been excluded explicitly.

The preliminary end of the evolution of the GAAR has been reached in 2008. In accordance with the broad picture sketched above, a legal definition of tax avoidance was re-introduced. This might be seen as a shift from a broad judicial margin of appreciation back to a statute-based, thus somewhat anti-judicial approach. At the same time, however, legislators withdrew the 2001 rule in sec.42(2) AO, viz. that only an explicit ban on sec.42 AO was able to overcome the applicability of sec.42(1) AO.

In course of the 2008 reform, the GAAR was phrased as follows:

(1) Durch Missbrauch von Gestaltungsmöglichkeiten des Rechts kann das Steuergesetz nicht umgangen werden. Ist der Tatbestand einer Regelung in einem Einzelsteuergesetz erfüllt, die der Verhinderung von Steuerumgehungen dient, so bestimmen sich die Rechtsfolgen nach jener Vorschrift. Anderenfalls entsteht der Steueranspruch beim Vorliegen eines Missbrauchs im Sinne des Absatzes 2 so, wie er bei einer den wirtschaftlichen Vorgängen angemessenen rechtlichen Gestaltung entsteht. / (1) Tax law cannot be circumvened through an abuse of legal freedoms. If the preconditions of an anti-avoidance rule in a single tax Act are fulfilled, the legal consequences shall be based on the latter rule. If not, the tax claim in the case of an abuse under paragraph2 is established as if it would have been established for anarrangement appropriate to the economic transactions.
(2) Ein Missbrauch liegt vor, wenn eine unangemessene rechtliche Gestaltung gewählt wird, die beim Steuerpflichtigen oder einem Dritten im Vergleich zu einer angemessenen Gestaltung zu einem gesetzlich nicht vorgesehenen Steuervorteil führt. Dies gilt nicht, wenn der Steuerpflichtige für die gewählte Gestaltung außersteuerliche Gründe nachweist, die nach dem Gesamtbild der Verhältnisse beachtlich sind. / (2) An abuse exists where an inappropriate legal arrangement has been chosen that, compared to an appropriate legal arrangement, results in a tax benefit on the side of the taxpayer or a third person, if such benefit is not provided by law. This does not apply where the taxpayer can prove non-tax reasons for the arrangement chosen if, with a view to the overall circumstances, these reasons are significant.

In conceptualizing and interpreting these rules, there seems to be a factual dualism. One could even speak of two faces of the GAAR.

  • The first face (at least in the chronological order of a tax case) is the way how most German tax officers including, above all, tax auditors interprete and apply sec.42 AO. In their hands, the GAAR is usually not applied with highest sensitivity for its complex textual structure, the literal meaning of its single textual elements and the constitutional framework in which it is embedded. Rather, auditors tend to use the GAAR in a somewhat deterring manner. They indicate they might apply the GAAR unless the taxpayer gives in on disputable factual matters, e.g. in a valuation (e.g. transfer pricing) context. In this perspective, the GAAR appears as a powerful instrument from a psychological or game-theory viewpoint, with a practical bias to the detriment of taxpayers[5].
  • Quite disconnected is the second, i.e. the juridical and judicial face of the GAAR. When judges (especially of the second and highest instance, the Munich-based Bundesfinanzhof) are confronted with what the tax administration considers to be a case for sec.42 AO, they tend to fall back into their long-standing reluctance to replace the exact wording of the single tax rules by the GAAR. Even after the 2008 reform with the the new definition in sec.42(2) AO, they are remarkably shy to affirm an “abuse”.

Empirically, the number of cases where the courts have accpeted the application of sec.42 AO by the tax administration is significantly lower than the number of cases where the courts decided against the application of sec.42 AO.

1.1.2. Functions, constitutionality and dynamics of the GAAR

These two faces of the GAAR reflect its dual function. On the one hand, it is a powerful tool to maintain a safety distance between taxpayers (and their advisors) and an “aggressive”, i.e. less desired tax planning. This function cannot be fulfilled without a considerable degree of incertainty. On the assumption that substantive tax law will always remain imperfect, i.e. leave undesired loopholes, the uncertainty of one or more terms used in the GAAR is indispensable.

On the other hand, the GAAR functions as part of an overall rule-of-law framework and thus aims at contributing to a clear-cut demarcation between taxable and non-taxable arrangements. This juridical function emphasizes that the GAAR and its application are subject to constitutional limits. It is true that the GAAR is phrased wide, indefinite and vague. Considering, however, that this lack of legal certainty is necessary (and even the raison d’être) if the GAAR wants to fulfil the first-mentioned object and purpose, the GAAR itself will not be regarded as unconstitutional. Rather, the way-out of this constitutional dilemma is a restrictive interpretation of the GAAR: Wherever possible and as soon as possible, Parliament itself must declare which typical arrangements are abusive and which are tolerable. This needs to be done by legislative concretization of anti-abuse rules (most notably, by the introduction or refinement of SAARs) for typical arrangements.

A future perspective (not yet adopted by the courts on a large-scale basis) is the following: Courts and scholars should further develop this approach of a restrictive interpretation of the GAAR in a dynamic manner: Guided by the Constitution, Courts could stress the importance of the timeline: The indefiniteness of the GAAR can be maintained if, on the level of application of the GAAR, it is kept free from the need to cover standard arrangements. As soon as Parliament can be more precise in identifying abusive arrangements, it must be more precise. Consequently, an abusive arrangement that was initially covered by the GAAR grows out of the GAAR as time goes by. Where the legislator does not react, a certain behaviour or a certain tax-planning scheme will then change from the status as “taxable” (while covered by the GAAR) to “non-taxable” (when silently tolerated by an informed legislator). In other words, the GAAR remains sustainably effective for all cases where it simply prevents taxpayers from realizing an arrangement. Where, however, the taxpayer does realize the arrangement and tax inspectors apply the GAAR, the GAAR itself wears down and erodes. It is then up to Parliament to decide if arrangements of this kind should continue to be treated as taxable also on the future. This dynamic approach could best reconcile the factual needs to combat unknown or unforeseen abusive arrangements with the constitutional need for legal certainty.

1.1.3. Judicial and scholarly interpretation of the GAAR today

Looking at the GAAR from a technical viewpoint, and considering the overarching need that the GAAR catches (or prevents) new and unknown arrangements, is is little surprising that guidance on how to apply cannot be found in any statutory or quasi-statutory codification. There are, however, administrative concretisations for the application of sec.42 AO[6]. Moreover, many special ordinances and ministerial letters on specific rules, transactions or situations mention sec.42 in the context of special tax provisions that are not themselves accompagnied by a SAAR.

For these reasons, the conceptualization of sec.42 and the way how an operable test of a case against the GAAR should look like, recourse should be made to judicial case law and (as always in Germany) to accompagnying scholarly literature. Based on these two sources, the following test reflects the current state-of-the-art for the application of the GAAR by German courts[7]:

1.1.3.1. Delimitation to SAARs

The first step is the delimitation of the material scope of the GAAR against anti-abuse rules in separate, i.e. special tax rules (see infra4. for details).

1.1.3.2. Choice of an inappropriate legal arrangement

Where the lex specialis rule does not inhibit recourse to the GAAR, the arrangement at issue needs to be tested against the positive and negative preconditions of the concept of “abuse” under sec.42(2) AO. Above all, an abuse requires that the taxpayer has chosen an “inappropriate legal arrangement”. In its General Decree on the application of the Abgabenordnung, the Federal Ministry of Finance convincingly states that the yardstick for this test are the values (Wertungen) contained in theprinciples and sub-principles of the respective type of tax at issue[8].

Neither the motive to save taxes is inappropriate in itself, nor is an unusual arrangement necessarily abusive. Arrangements can be regarded as inappropriate only if, in a world without taxes, theyshould be regarded as

  • detrimental from an economic viewpoint,
  • circuitous[9], complicated or cumbersome,
  • artificial,
  • redundant or useless,
  • ineffective, counterproductive or even
  • absurd.

Moreover, the Ministry has exemplified indications for the characterisation of an arrangement as “abusive”, viz.

  • that a sound unrelated party had not set up the arrangement solely for the tax advantage, taking into account the economic circumstances and the object and purpose of the transaction,
  • the interposition of family members or other related persons/entities was merely motivated by tax considerations,
  • the shift or transfer of earnings or assets to a third person were merely motivated by tax considerations.
1.1.3.3. Tax benefit

Third, this inappropriate legal arrangement must result in a tax benefit on the side of the taxpayer or a third person. This sub-test requires a comparison between the (actual) arrangement in casu and the (fictitious) sound arrangement that has been conceptualized for the “appropriate” test supra 1.1.3.2. Moreover, the arrangement must be causal for the tax benefit.

1.1.3.4. Deviation from a notional legal model

Fourth, the benefit must be “not provided by law”. In the grammatical structure, this requirement reverses the ordinary rule-exception relation, as guaranteed by the constitution: As a rule, it is the burden of tax that needs to be “provided by law”, and no tax is due in the absence of such explicit legal provision. By contrast, the 1st sentence of sec.42(2) AO takes the burden of tax for granted where an arrangement is both “inappropriate” (supra 1.1.3.2.) and beneficial (supra 1.1.3.3.), thus requires a positive justification for the benefit.

This inversion of the substantive-law relation between rule and exceptioncorresponds to an inversion of the burden of proof in administrative and court procedures: While normally, the State must justify a burden, the verdict of an inappropriate benefit brings the taxpayer in a position where (s)he must justify the absence of such burden.