Co-ordination
centers have traditionally been taxed at the standard
German corporate income tax rate on the sum total of
5-10% of their costs. Since the taxable base of most
other corporate entities is accounting profit, this
concession potentially represents a considerable fiscal
benefit. However it should be noted that the mark-up
rate can be retrospectively increased by the tax authorities.
NB:
The European Commission has attacked Co-ordination Centres
in a number of Member States under its 'Harmful Tax
Practices' initiative (The Code of Conduct Committee)
and has succeeded in severely limiting their appeal
in a number of cases.
Pre-conditions
for Qualification as a Co-ordination Centre
Co-ordination
center status is not open to any entity engaged
in any economic activity. A company must meet
the following criteria:
Administrative Consent: The company must obtain
administrative consent prior to being granted
the fiscal benefits that go with having a co-ordination
center status.
Permitted activities: German co-ordination centers
are strictly limited in what activities they
can engage in. They are limited to the provision
of administrative services to a group of affiliated
companies and any assets used by the co-ordination
center must be in the name of the German company.
A German co-ordination center cannot engage
in the following activities:
Holding Company: It cannot hold shares in
or grant loans to affiliated corporate entities
from which in return it receives dividend
income & loan interest in a tax-friendly
environment.
Ownership of Patents & Other Assets:
It cannot own patents & other assets
to be rented out to other group members
or corporations in return for rental income
which it receives in a tax friendly environment.
As with assets in general, any intellectual
property assets owned by the co-ordination
center must be for its own use and must
be in its name.
Comparison
With Other Co-Ordination Centre Regimes
Co-ordination
centers offering discriminatory fiscal incentives
exist in Belgium, Spain and France. German corporate
income tax rates payable by co-ordination centers
located on its territory do not compare favorably
with those levied in competing jurisdictions,
except perhaps for Spain in certain circumstances.
As
previously mentioned, co-ordination centres in
EU member states have come under varying degrees
of EC fire, and in March 2007, the
European Commission announced that it was extending
an investigation into Belgian coordination centres.
In
its judgment of 22 June 2006, the European Court
of Justice confirmed that the tax scheme for coordination
centres was incompatible with the common market,
but partly annulled the transitional measures
laid down by the Commission for the phasing-out
of the scheme.
This
annulment leaves the procedure initiated by the
Commission on 27 February 2002 partially open.
The procedure must therefore be closed by a new
decision laying down appropriate transitional
measures for the centres concerned. The Commission
is therefore extending the procedure before adopting
a new decision in order to give interested parties
the opportunity to submit their observations.
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