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The outcome of pending litigation involving a German brewery owned by Anheuser-Busch InBev could significantly change the extent to which regional and federal tax authorities can demand payment from businesses retroactively after new tax legislation takes effect.
In fact, if Germany’s Federal Constitutional Court decides that businesses have a right to be grandfathered in to old regulations once new tax legislation takes effect—after they’ve made business decisions based on existing laws—it could lead to new legislation that clarifies retroactive taxation, Bremen city officials told Bloomberg Tax.
In the current case ( 1 BvR 1236/11), the Constitutional Court heard oral arguments Sept. 25 challenging the constitutionality of an amendment to provisions in Germany’s Trade Tax Act, enacted in 2002, that addresses when and for whom trade tax can be levied after the sale of a firm’s shares.
In the case of Germany’s Bremen-based Beck’s Brewery—one of Germany’s largest breweries owned by the world’s largest brewer, Anheuser-Busch InBev, or AB Inbev—partners of the company designed the sale of their shares in 2001 according to the regulations outlined in the previous version of the Trade Tax Act, which included a loophole that allowed for companies to restructure during a sale to avoid paying trade tax.
Because the $1.6 billion sale wasn’t finalized until the following year—after the loophole had already been closed—the company was retroactively taxed on the sale to the tune of 81 million euros ($95 million), Dagmar Bleiker, a spokeswoman from the city-state of Bremen’s Administration for Finance, confirmed to Bloomberg Tax Oct. 19
After losing appeals on paying the tax in lower courts over the past 15 years, Germany’s Federal Constitutional Court is expected to issue its ruling on the constitutionality of the retroactive payment and other provisions of the Trade Tax Act before the end of the year, Bodo Bender, a partner with White & Case law firm in Frankfurt, told Bloomberg Tax Oct. 18.
Depending on the scope of the court’s ruling, corporate taxpayers could be granted relief across an array of situations since “maybe it could be questioned whether the retroactive application must be applied in a less strict manner so that there is some extended grandfathering of existing transactions,” Bender said.
Partners of Beck’s forged a preliminary agreement to sell their shares of the company to Belgian brewer Interbrew GmbH in August 2001, with the sale to be signed in February 2002, according to information provided to Bloomberg Tax Oct. 18 by Germany’s Federal Chamber of Tax Consultants.
Under the original provisions of Germany’s Trade Tax Act, a loophole existed in which a sale of shares of a company could be made exempt from trade tax if corporations contributed their assets directly into a partnership during the transaction, Bender told Bloomberg Tax.
At the time of the sale, partners in the brewery entered into a sales agreement designed in line with the former law, AB Inbev spokeswoman Claudia Hauschild told Bloomberg Tax in an Oct. 19 statement.
At the same time, however, German legislators announced plans to close the loophole in the Trade Tax Act, making profits arising from disposals of partnership interests liable to trade tax, but preserving exemptions for individuals selling shares of a company.
The amendment to the provision—outlined in Paragraph 7, Sentence 2 of the Trade Tax Act, but changed in Germany’s Corporate Tax Development Act—became law in December 2001 and took effect in January the following year, according to information from Germany’s Federal Chamber of Tax Consultants.
As a result, the Administration of Finance in the city-state of Bremen collected tax on the sale accordingly—while the brewery’s sale was agreed upon by all parties in September 2001, the shares weren’t transferred until the following February, making the sale subject to retroactive taxation.
The brewery challenged the taxation in the Financial Court of Bremen in 2007 ( 3 K 73/05), and then again in Germany’s Federal Finance Court in 2010 ( IV R 29/07). In both cases, the court ruled that both the retroactive nature of the taxation, and the fact that the Trade Tax Act preserves exemptions for individual sales, were indeed legal.
“There were already two previous court cases in which it was confirmed that we properly applied the law,” said Bleiker with Bremen’s Administration of Finance. “Both the Financial Court of Bremen and the Federal Finance Court have declared the present case to be lawful in their judgments.”
AB Inbev’s Hauschild said that “it’s completely implausible to differentiate between partnerships, meaning indirectly involved individuals, and involved individuals,” in trade taxation, adding that the brewery will be patient in awaiting the decision of Germany’s highest court now that oral arguments have concluded.
The case at hand addresses the principle question of whether corporations should be afforded the same tax benefits during sales as individuals, and whether businesses can trust legislators to provide leeway in business transactions forged, but not finalized, before the conclusion of new legislation, Bender told Bloomberg Tax.
By challenging Article 3 of the German Constitution, which guarantees equal treatment under the law, the brewery is arguing that “a corporation should also benefit from the exemptions” granted to trades conducted by individuals “because there’s no reason why a corporation should be put in a worse position,” he said.
“The company thought it could still rely on and trust in the old legislation,” Bender added. “Maybe they would not have sold in the same way if this law would have already been in place.”
Should the Constitutional Court do an about-face on the rulings of the lower courts, there could be far reaching ramifications for the future of trade tax, depending on the scope of the ruling, Bender said.
“Taxpayers could benefit from this decision if the Constitutional Court takes the position that there are some restrictions in applying this retroactively,” he said.
“Nevertheless, the company entered into the agreement and signed the sale later in the year,” he added. “It might be possible that the Constitutional Court may not decide in a very concrete manner to what extent the retroactive application of laws is generally possible or not, but may find a solution why this specific case isn’t violating the Constitution.”
Should the court indeed order a complete restructuring of the law, that would mean a hefty repayment for the city-state of Bremen, one of Germany’s most impoverished states. Such a decision would have a ripple effect throughout the entire country, Bleiker with Bremen’s Administration of Finance told Bloomberg Tax.
“If the law is declared unconstitutional, many other communities would be affected—they would have to pass a new law, and that naturally wouldn’t only impact Bremen,” she said.
“We would have to pay back 146 million euros ($171.8 million) if the law is declared unconstitutional: The taxes that were paid at the time, plus 6 percent interest,” she added. “That would be a huge burden for our city.”
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