The German anti-treaty/directive-shopping rule sec. 50d para. 3 German Income Tax Act (“ITA”) constitute an obstacle for many inbound investments.
In its landmark decision dated 14 June 2018 in Case GS, the European Court of Justice (“ECJ”) concluded that the German anti-treaty/directive-shopping rule is not in line with the European fundamental freedom of establishment and the EU-parent-subsidiary-directive.
The German anti-treaty/directive-shopping rule sec. 50d para. 3 German Income Tax Act (“ITA”) constitute an obstacle for many inbound investments. Generally, withholding tax on certain cross-border income such as dividends or royalties may be reduced or even eliminated for eligible persons based on the parent-subsidiary-directive or the relevant double tax treaty. However, in Germany an exemption or reimbursement of withholding tax requires an application to the German tax authorities. Only if the strict substance requirements as stipulated in sec. 50d para. 3 ITA are met, the application will be approved.
In particular holding companies are often not able to meet these conditions as it is required that the income recipient performs an own business activity which goes beyond the mere holding of participations. In the worst case that means that a withholding tax of 25 % is levied and no relief is granted.
Already in December 2017, the ECJ ruled in Case Deister Holding that the former version of the German anti-treaty-shopping rule applicable until 2011 violates European law and is not in line with the parent-subsidiary-directive.
Recent ECJ decision
In its recent decision of 14 June 2018 in Case GS, the ECJ came to the conclusion that also the current version of the German anti-treaty/directive-shopping rule violates the freedom of establishment and the parent-subsidiary-directive.
According to the ECJ, a member state cannot predicate the parent-subsidiary-directive on certain conditions and presume a general fraud or abuse. Instead, the rule needs to be precise in preventing tax evasion or abuse, so that it complies with the principle of proportionality. Furthermore, it is essential that each case is examined individually and the taxable person has the possibility to provide counterevidence.
Thus, there is generally a need of an amended law that considers these clarifications and is limited to wholly artificial constructions to be in line with European law. In response to the first decision regarding the former German anti-treaty/directive-shopping rule and obviously in anticipation of the latest court decision, the Federal Ministry of Finance has published a tax decree on 4 April 2018. According to this decree, which only considers dividend distributions, the German anti-treaty/directive-shopping rule for the years 2007 - 2011 is abolished and the current rule shall be relaxed. With regard to the latest ECJ decision, these changes in the application of the law appear to not be sufficient.
Tax payers should consider challenging rejected withholding tax refund claims based on the former and current sec. 50d para. 3 ITA. In case such tax refund claims have not yet been made, tax payers should request a refund of withholding tax withheld in a timely manner because of the time limitation for reimbursements.
Although the ECJ’s decision only deals with dividend distributions to shareholders resident in the EU, their rationale may also be transferable to other cross-border income items such as royalties and interest income.
Further, based on settled ECJ case law, sec. 50d para. 3 ITA in its former and current version should also constitute an infringement of the free movement of capital. The rule is not limited in scope to shareholdings which give its holder definite influence over the company’s decisions. Thus, irrespective of the actual facts of the case, an inbound investor resident in a non-EU country may invoke the free movement of capital which geographical scope is not limited to the EU and challenge rejected withholding tax refund claims on the basis of the recent ECJ decisions.
Author: Dr. OIiver Middendorf and Dr. David Eberhardt, HLB Dr. Stückmann und Partner mbB
For countries within Central and Eastern Europe (CEE), finding the right talent is an even greater worry.
When you ask business leaders across the globe what’s high on their agenda, chances are recruiting and retaining top talent is on the list. For countries within Central and Eastern Europe (CEE), finding the right talent is an even greater worry. Economic growth in this region is outperforming the EU average and businesses are growing fast. At HLB’s recent CEE regional meeting in Budapest, talent scarcity was identified as a top threat to business growth. We took a snapshot survey among finance and accounting graduates from Poland, the regions largest economy, in an attempt to better understand the views and expectations of young talent entering the CEE labour market. What are the take-aways for business leaders? What can businesses do to attract graduates and young professionals?
Promote a good work-life balance
When it comes to recruiting Millennials and Gen Z talent, businesses need to understand how important work-life balance is to this group. Our snapshot survey showed that 65% of graduates are aiming for a good balance between their personal and professional lives compared to only 17% for whom a high income is their main objective. Through building trust with your workforce and allowing for flexibility in time and space, you don’t just become more attractive as an employer, it is also the type of behaviour that drives innovation for your business. Just think about it for a moment. I’ve you are a business owner or part of the leadership team, does your brain just log-off when it’s 5 o’clock and you physically remove yourself from the office? It doesn’t! Same goes for highly engaged individuals working for you. It doesn’t matter where they physically are or what time of day it is, ideas to grow value for your business can spark anywhere. Don’t be afraid of allowing your people more flexibility.
Invest in tech to recruit tech talent
It seems like such a cliché thing to say, but young talent cares about the technology available to do their job. To them - and perhaps to all generations nowadays - it seems bizarre that their own personal devices (smart phones, tablets, voice assistants, you name it) are lightyears ahead of the corporate devices you’re using in the office. Often consumers apps have more UX design, functionality and capability than some commonly used, pricy enterprise software. If you want to recruit digital talent, invest in your technology.
Work on your employer branding
What is the reputation of your company from an employee’s perspective? Your employer brand describes your reputation as an employer, and its value proposition to your employees, as opposed to your more general corporate brand reputation and value proposition to customers. When we asked the question ‘when it comes to the reputation of a future employer, what is most important?’ 65% of students responded ‘friendly & respectful environment’ opposed to 13% who answered ‘authority & prestige’. Businesses that are most successful recruiting top talent are those who understand the value of employer branding.
Offer a competitive base salary
Just a friendly work environment that promotes work-life balance is not enough. There is more demand for top talent than there is supply. And in today’s globalised world, you’re competing with global employers who are happy to invest in talent mobility and drain talent from the region to other parts of the world. You can’t expect to recruit the best talent, if you’re not offering the right price. However, going back to my previous point, Millennials and Gen Z do take a good employer brand and friendly work environment into consideration when choosing an employer. It’s a package deal.
In short, overcoming the talent scarcity challenges in CEE is not easy. The corporate culture and tech element of the workplace, together with compensation and the basic needs or working conditions influence young CEE professional’s decision-making when choosing the right company to work for. These elements will separate the winners from the losers in CEE’s competitions for top talent. Does your organisation have a plan in place to implement these elements in your people strategy.
Europe is not the only market where the agricultural sector is under pressure.
While most of us are enjoying the long, hot summer all cross Europe, the hot weather may cause dark clouds to form over the agricultural sector and leave supermarket shelves empty in autumn. So far there is no reason to panic just yet, as last year’s harvest was fruitful and there is a good stock leftover. However, we are expecting the arable crops to yield less this year. In the coming months it will become clear what the proceeds will do to market prices.
Some important corn fields in Europe are suffering from long term drought, with continued warm weather forecasts for the coming days. Concerning messages about the drought are coming from all key grain regions across the continent. Even the main European wheat suppliers, mainly France and Germany, are expecting to harvest less this year.
Europe is not the only market where the agricultural sector is under pressure. The trade war between China and the US pulled the price for soybeans down last week and thus took the whole grain market into its trap. Wheat prices temporarily were low, but there were sufficient reasons to justify a higher wheat price. Last week, the stock markets resumed their upward trend after new reports of a disappointing yields. In Russia, the persistent drought is damaging crops. Western European suppliers are also fearing the yields will be considerably lower than previously expected. Take the wheat fields in Germany for example. While at first it seemed that mainly the fields in the north and east of Germany suffered severely from the heath, now expectations for the whole of Germany have been adjusted downwards. In addition to the yield of wheat, the yield of rye is also keeping farmers up at night. Even in France, the region that has so far stayed clear of issues, the forecast is that less product will be harvested this year.
In the course of next week, the wheat harvest in Europe will gradually start; more than two weeks earlier than usual. Then it will become clear what the actual effect of the long, hot summer has been on the crops. If all goes well, we should see the market return back to normal. But if further alarming reports continue to spread, the Matif could go through the roof and surpass the €200 mark.
Author: Jan Coppens, HLB Netherlands
From 1 July 2018, Italian government introduces the Budget Law 2018
From 1 July 2018, the Italian government introduces the Budget Law 2018 which puts limitations on the forms of payment of employee salaries. It will no longer be possible to pay employees in cash.
The purpose of this new law is to prevent fraud and malpractices. Payments to employees or continuous collaboration contracts (i.e.“collaborazioni coordinate e continuative”) can only be made via traceable methods, such as bank transfer, electronic payment instruments or cash payment at the bank counter with a special payment order on treasury account.
While excluding that the signature placed by an employee on the payslip constitutes proof of payment of the remuneration, paragraph 912 defines the scope of application of the law, which will affect the following cases:
- Employment relationships referred to in article 2094 Civil Code;
- Working relationships originated from coordinated and continuous collaboration relationships;
- Employment contracts established in any form by cooperatives with their members.
The employment relationships established with Public Administrations and those relating to family and domestic services are excluded. In case of violation, an employer can be fined between €1,000 - €5,000. Advanced cash payments on wages can be fined as well.
It is important for any business with employees based in Italy to take note of this new law coming into effect next week to avoid fines. We believe this absolute novelty in the Italian legislative scenery undoubtedly represents a simplification in the relationship between employer and employee.
Author: Marco Gragnoli and Luca Insabato, Studio Taxlex
Six tips to building better relationships with your clients
The way that businesses go about managing their client relationships can vary greatly. Nevertheless, there are a few basic tenets of client relationships that hold true, regardless of the size or primary purpose of your business.
Building client relationships is a long-term strategy that requires time, preparation and planning. Every business should have a well-developed approach to client relationship management. This includes a clear understanding of who interacts with clients and under what circumstances – having the right team working alongside the client can also make a positive difference. Managing relationships with new clients is also an important part of the process. For example, who and how new client details are added to your Client Relationship Management (CRM) systems to receive updates, promotional materials, invitations, or other general information, all while making sure you comply with data protection rules. Gathering the right client information provides an understanding when further face-to-face contact might be required. Make sure everyone in the business who has contact with clients – from receptionists to the accounts department and, more specifically, the internal team designated to work closely with the client on an ongoing basis – understands the basics of client interaction, the client’s values, and the steps to take if there are any issues which need to be addressed. Understanding how the client likes to interact is also an important factor.
Know the client
It’s important to invest time and resources to ensure the business is positioned to meet client needs. Back in September 2016, Harvard Business Review published an article on, in which the real-life examples illustrated the added value created by researching customers’ needs and understanding what value looks like to them. Knowing your client is crucial to meeting their needs and building a long-lasting client relationship. Also, try to learn what makes the client tick, not just on a business level but also a personal level. Rather you sell products or services, at the end of the day you’re always dealing with people. This might seem tricky in the beginning but will become easier as the relationship evolves. You have to gain their trust, which may take some time. It is also important to note that as the relationship develops over several years, there is potential for those initial needs change. In the long run, asking for regular feedback can be invaluable with regards to understanding how your processes are working and if client needs are being met. These also allow the client an additional opportunity to evaluate your service.
Keep in touch
Even if the relationship with clients doesn’t necessarily require regular personal contact, it is worthwhile to find a way to “chat” from time to time. For example, an occasional follow up phone call following completion of work is always a good idea. A phone call or a face-to-face interaction does help build rapport with the client and provides the opportunity to address issues immediately and allows the client to provide additional information they may not express via email. Additional communication tools such as regular newsletters, news alerts, feedback forms further the personal approach and facilitate relationship building. It shows you value your clients, and you are actively seeking feedback on your service. It also helps ensure any problems or misunderstandings are identified early.
Tailor the approach
Different clients appreciate different types of service and interaction and it is important to tailor your approach to suit. Some might appreciate a regular phone call to touch base, while others might find this intrusive or irritating. Some might welcome electronic contact by email, while others would find this impersonal. You need to be extra aware of this when dealing with clients in different countries or with different cultural backgrounds from your own, to avoid any miscommunications or unsuitable behaviour. Don’t assume a blanket approach will work for all, and if in any doubt ask clients in your regular dealings with them about their preferences.
Not just new clients
A mistake many businesses make is to focus primarily on gaining new clients and forgetting to look after existing ones. According to New York Times best-selling author, speaker and business strategist Fred Reichheld, customer acquisition is 5x more expensive than customer retention. Cultivating ongoing relationships with every client is imperative and takes time – aim to generate deeper and better relationships with all clients at various stages of their relationship with your organisation as this serves both sides of the relationship in the long term. Make the effort to keep existing clients happy and grow the client base from there. Existing clients who are happy with the service are an excellent form of third party endorsement and referral. In other words, investing in existing client relationships pays off.
Say thank you
Whether it is thanking a long-standing client for their support or for passing your name on to a prospective new client, a simple thank you shows appreciation and recognition as well as an established personal link. Businesses that pay attention to these tenants of client relationships will find they have a better understanding of what clients are looking for from the service provided and will build longer-lasting relationships with clients in the long run.
Author: Litsa Christodulou, HLB Mann Judd