Placing press articles or other publications in digital archives can lead to copyright violations even if the original article was legally permissible. The Federal Court of Justice recently had to decide whether a report about an art exhibition which contained photographs of copyright-protected works of art and originally appeared in a magazine could be stored in the on-line archive of the magazine publisher for a longer period. The reproduction of copyright-protected works – in the context of “Reporting on daily events” – is permissible under Section 50 of the German Copyright Act (UrhG) even if the publisher has not obtained the relevant usage rights from the copyright holder. However, the Federal Court of Justice decided that the report cannot be permanently regarded as a report on daily news, even if it met this requirement at the time when it was added to the archive. The archive operator must constantly check whether the event still constitutes daily news, and if appropriate it must remove the illustration of the copyright-protected work (Federal Court of Justice, ruling of 5 October 2010, I ZR 127/09).

The situation is different for a dedicated picture archive which is exclusively drawn on by other media companies to illustrate their publications. The archive operator is not responsible as a perpetrator or an accessory for any violations of copyright or personal rights by the users of the picture archive (Federal Court of Justice, ruling of 7 December 2010, VI ZR 30/09).

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The purchaser of a defective consumer product which has been installed into another object before the defect was detected can demand, in the course of subsequent fulfilment by delivery of a replacement, that the vendor must also uninstall the defective product and install the new product or bear the costs for removal and installation. This also applies even if the vendor did not install the defective product and if the costs of removal and installation exceed the value of the defect-free purchased product. In the national (German) court proceedings which led to the legal question being forwarded to the European Court of Justice, the case involved defective floor tiles which had already been laid and a dishwasher. In particular, the Federal Court of Justice asked the European Court of Justice whether the vendor of the tiles was entitled to refuse to bear the costs of removal and installation on the grounds that they were disproportionate. The European Court of Justice decided that there was no such entitlement. But it added that Article 3 (3) of the Consumer Sales Directive does not preclude a settlement in which “the consumer's entitlement to a reimbursement of costs for the removal of the non-conforming consumer goods and the installation of the consumer goods delivered as a replacement could be limited, if necessary, to an amount which corresponds to the value that the consumer goods would have if they conformed with the contract and which is reasonable in view of the significance of the violation of the contract”. (European Court of Justice, ruling of 16 June 2011, C 65/09 and C 87/09).

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All deliveries and other services rendered by a business entrepreneur for payment are fundamentally subject to VAT. However, turnover in the context of a transfer of a business or a separately managed enterprise as a whole is not taxable in accordance with Section 1 (1a) of the German VAT Act (sale of a business as a whole).

Under certain circumstances, the sale of a fully or partly let property may constitute such a sale of a business as a whole, even if the vendor also lets other properties. The purchaser then continues the letting business of the vendor. But a letting business which is eligible for such continuation does not apply if a land property which is not let is transferred.

In a ruling of 28 October 2010, the Federal Court of Finance (BFH) again had to deal with the concept of the sale of a business as a whole, and it decided that such a sale did not apply if the business activities of the vendor largely consisted of constructing a building and finding tenants for the rental units in order to sell it more lucratively after completion because of the units which have already been let. Such project development activities therefore fundamentally do not lead to the creation of a letting company which could be continued by the purchaser. Instead, the sale is classed as the provision of an individual economic asset.

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Tenants do not normally want to pay too much in prepayments of operating costs which would give their landlords an interest-free loan, and landlords do not want to finance the operating costs in advance by making the prepayments too low. According to Section 560 (4) of the German Civil Code (BGB), both parties to a rental agreement can therefore unilaterally demand a reasonable level for the prepayments of operating costs after an account settlement, so that the prepayments by the tenant are as close as possible to the actual costs. Many landlords also add a “flat rate security surcharge” of about 10% as a “buffer” for future cost increases. Up to now this was usually accepted, and this was the advice which was given.

In future, however, such a “flat rate security surcharge” will no longer be so easy to enforce. In a ruling of 28 September 2011 (VIII ZR 294/10), the Federal Court of Justice decided that an adjustment of the prepayments for operating costs is only “reasonable” according to Section 560 (4) of the Civil Code if it is based on the probably costs which actually arise in the current accounting year. The court states that the basis for the adjustment of the prepayments is always the last operating cost statement. The landlord is not entitled to impose an abstract “security surcharge” which is not justified by specifically anticipated cost increases for individual operating costs. But an anticipated development of the future operating costs may be taken into account in the forecast of the amount of the operating costs in the current year. Cost increases in the operating costs are an important factor - if not the decisive factor - for any change in the operating costs, so if there are specific reasons to expect such increases, they can certainly be taken into account. However, if the landlord wants to increase the account results from the previous year by a general “security surcharge” of 10% to allow for possible cost increases and to adjust the prepayments accordingly, this is not possible. This would go further than the justified interest of the landlord not to have to finance the tenant's share of the operating costs in advance. Only if price increases are specifically expected for certain parts of the operating costs - such as energy prices - can this be included in the calculation of the prepayments, but only after taking into account the ratio of the affected operating costs to the total operating costs.

In future, landlords will therefore only be entitled to increase the prepayments by a twelfth of the amount which had to be charged in arrears for the previous year, and any additional increase should at least be justified briefly and verifiably, because it will only be possible to demand a “security surcharge” in justified exceptional cases, e.g. if price increases are certain and the amount can also be reliably estimated.

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The VII. Division of the Federal Court of Justice (BGH) in its ruling of 28 July 2011 (VII. ZR 207/09) again had to consider the (in)validity of security clauses in contracts under the Standard German Building Contract Terms (VOB).

A contract under the Standard Building Contract Terms contained the general terms of business of the client which stated that “to secure the contractual settlement of the services after acceptance, especially but not limited to warranty”, a surety of 5% of the invoice total was agreed. The contract for work also stipulated that guarantees must be issued according to the client's template, although this provision on security in the contract for work did not demand any waiver of the defence according to Section 768 of the German Civil Code (BGB) by which the guarantor can assert the objections to which the primary debtor is entitled. However, the provision about the waiver of defences was included in the surety form which was enclosed with the contract for work. The respondent as the guarantor issued a guarantee according to the contract form, and waived the defences under Section 768 of the Civil Code in this guarantee. Subsequently defects arose and the contractor filed for insolvency. The client then demanded a payment under the guarantee from the respondent because of the costs incurred to remedy the defects.

The Federal Court of Justice, like the lower courts, rejected the claim and stated that the security agreement is null and void under Section 307 (1) of the Civil Code. With reference to the ruling of the XI. Division of 16 June 2009 (XI. ZR 145/08), the Federal Court of Justice stated in its ruling that the standard form agreement of the waiver of defences under Section 768 (1) of the Civil Code was null and void because it placed the contractor at an unreasonable disadvantage (Section 307 (1) of the Civil Code. The Federal Court of Justice regarded the provisions about the retention and the guarantee requirements as a “conceptual unity” which belonged together and was based on a “coherent concept”. It deemed that the waiver of defences in the guarantee form had become part of the security agreement by reference. It considered that this provision could therefore not be sustained when separated into parts which differed in their wording and were far apart. And the Federal Court of Justice also excludes the possibility of preserving the security agreement by a supplementary interpretation of the contract, because this would require a gap in the provisions whereas the contract explicitly claimed to be a full and final version.

Two points are of special interest here. Firstly, in the opinion of the Federal Court of Justice, the invalidity of the security agreement is not remedied by the fact that instead of the guarantee, security for the warranty claims can be provided by a security retention of 5% of the final invoice total. That means that the unreasonableness of the security provision results from the unreasonable redemption possibility.

Secondly, a notable feature of the ruling is the fact that the security agreement is found to be null and void as a whole, although the provisions about the security retention and the waiver of defences for the guarantee differ in their wording and are widely separated. With this decision on the invalidity of the security agreement as a whole, the VII. Division of the Federal Court of Justice is close to a case law ruling of the XI. Division of 16 June 2009. In a ruling of 12 February 2009 (VII. ZR 39/08) with a similar constellation, the VII. Division had decided that the waiver of defences used in the guarantee template was a provision which could be separated in content from the security agreement in the contract for work, with the consequence that the security agreement remained effective and the contractor was obliged to provide an absolute contract performance guarantee without any time limit. According to the opinion of the VII. Division at that time, they did not form a conceptual unity. It now remains to be seen whether this view of the invalidity of the security agreement as a whole is confirmed in the case law rulings of the Federal Court of Justice.

This has the following practical consequences: a standard form exclusion of the defence of the guarantor under Section 768 of the Civil Code renders the security agreement null and void. According to the latest ruling of the VII. Division this applies consistently, even if the exclusion is contained in a provision which differs in its wording and is far removed – for example in an attached waiver of defences – because this provision in combination with the security agreement in a contract for work forms a “conceptual” unity. The ruling therefore shows yet again that the design of the security agreement requires extreme care, because otherwise it may not be possible to use the guarantee when it is needed. The ruling underlines that these requirements must especially be taken into account in the drafting of enclosed guarantee forms. From the point of view of the contractor, this ruling indicates that it is worth studying the security agreements close if there is a risk of the security being called on.

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Rental and lease contracts often contain exact property descriptions which are initially (wrongly) understood as being non-binding. In fact, the property description is used to define the required quality, and this is the central factor used to decide whether there is a defect in the rented or leased property which justifies a reduction in the rent or lease.

In its ruling of 9 November 2010, the Higher Regional Court (OLG) of Düsseldorf (24 U 223/09) had to decide on the following situation: the lessee had leased from the lessor a completely equipped building to use as an old people's home and nursing care home. The standard form lease contract included the following wording: "The property has accommodation for 160 and is subject to the nursing homes inspectorate without any restrictions. It complies with the minimum building regulations for nursing homes." The lease contract then goes on to state that neither party is to be entitled to claim any price adjustments because of any deviation in the floor space. The parties also agreed to exclude any reduction in the lease. From November 2008, the lessee was no longer able to use 22 of the 160 places in the home due to a prohibition order of the inspectorate based on a violation of the minimum building regulations for nursing homes. The lessee then reduced the net lease payments by 14%, which amounted to a total of 12,101.82 Euros.

The Higher Regional Court ruled that a leased property is defective if it cannot be used in accordance with a property description contained in the lease contract because of a public law prohibition order. It ruled that the lease payment is then rightly reduced. It stated that the property description contained in the lease contract, in conjunction with the agreed purpose of the contract (operation of an old people's home and nursing home) served to define the required quality of the leased property (160 places). It considered that the order by the nursing homes inspectorate prohibiting the operator from occupying 22 places made the leased property defective. The court ruled that the exclusion of a reduction for deviations from the planned floor space does not prevent the reduction in lease payments, because the defect in question was not a deviation from the declared floor space, it was a limitation of the use of the property under public law, and the lessor itself should have taken steps to remedy this limitation. It stated that even the standard form exclusion of reductions for hidden initial and subsequent defects in the lease contract was legally invalid because of the violation of Section 307 (2) No. 1 of the German Civil Code (BGB).

However, the ruling also clarified that a property description does not normally constitute guaranteed characteristics with regard to the facts it contains, so in this respect no specific warranty is involved. But it stated that this does not preclude a general warranty obligation of the lessor, and that the required quality of the leased property must always be determined by interpreting the contract.

In view of the fact that the same legal provisions apply to both rental and lease contracts (cf. Section 581 (2) of the German Civil Code), the court's decision also applies to all rental contracts.

The regulations which have already been passed in North Rhine-Westphalia and Baden-Württemberg require stricter “single room ratios” compared with the provisions of national law up to now. The North Rhine-Westphalian implementation regulation for the Housing and Participation Act of 10 December 2008 (WTG-DVO) stipulates, for example, that rooms for more than two residents in a home are prohibited. This requirement must be fulfilled at the latest three years after the regulation came into force, i.e. from 10 December 2011. The operators of nursing homes must therefore fear that they will only be able to care for fewer residents in future. If the nursing home is rented or leased, this also poses the question of whether the introduction of a single room ratio entitles the operator, as the tenant of the nursing home, to reduce the rent. This would need to be assessed according to the case law policy described.

In future, when drafting contracts it will therefore be important to pay even more careful attention to the wording of the property description and the purpose of the contract.

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The Federal Court of Justice (BGH) has weakened the position of the insolvency administrator in collections of payment by direct debit.

The case in question:

The debtor, who received social benefits (housing allowance), had rented a flat from a housing association. After insolvency proceedings had been initiated in the assets of the tenant, a trustee (insolvency administrator) was appointed. She filed an objection to the collection of the rent, which the housing association had collected by direct debit, and caused the money to be returned to the tenant's account and thus added to the insolvency assets. The housing association took court action to claim the payment.

The decision of the court:

In its ruling, the insolvency law division of the Federal Court of Justice first of all states in general that the “approval theory” has become accepted for the direct debit process. The creditor – in this case the landlord – is only entitled to claim the collected amount if the debtor – here the tenant – has explicitly approved of the booking or has not objected to it within a certain period. The question is whether this also applies in cases of insolvency. Up to now, insolvency administrators have been granted far-reaching powers by the insolvency law division in relation to objections to bookings in the interest of increasing the insolvency assets. These case law pronouncements were criticised – even by the banking law division of the Federal Court of Justice. In its present ruling, the insolvency law division has also limited the powers of administrators. For natural persons, it states that administrators have no right to interfere with assets that are exempt from seizure (“protected assets“). On this basis, the housing benefits paid into the tenant's account were exempt from seizure because they are social benefits. They therefore did not form part of the insolvency assets. This meant that the insolvency administrator was no longer entitled to object globally to all direct debits which had not yet been approved. Instead, he was now obliged to check whether protected assets were involved. In spite of this, the housing association's claim to receive the rents that had been returned was unsuccessful. The court ruled that it had no claims either against the insolvency assets or against the administrator. It stated that the administrator was entitled to assume that he could make an objection under the previous case law, so he bears no blame, and any entitlements of the landlord are excluded. Any claim for enrichment against the insolvency assets is sure to fail because the insolvency assets did not gain anything from the return transfer. Where income that is exempt from seizure is involved – as in this case – the tenant as the holder of the exempt assets was entitled to the claim under the banking relationship both before and after the objection. But the tenant also earned nothing from the return transfer, only an entry in the accounts. But this is not an asset shift which needs to be remedied, because the landlord can still demand fulfilment.

Commentary:

This ruling is especially interesting for the landlord-tenant relationship, but also for the legal situation in other contractual relationships where payments are made by direct debit. Insolvency administrators are still entitled to object to direct debit bookings. However, they are no longer entitled to object globally to all direct debits in an insolvency of a private person or a business company. In addition the banking law division of the Federal Court of Justice, in a ruling of 20 July 2010, proposed a possible form for special terms and conditions for direct debit transactions, and thus gave the German banking sector an indication of a possible way to create an insolvency-proof direct debit process, i.e. one which is not subject to the risk of objection by an insolvency administrator. It remains to be seen whether this will lead to an even greater limitation on the rights of insolvency administrators than the ruling under consideration here. Until then, all affected parties will have to face the risk that a direct debit payment may be objected to by the insolvency administrator. Rental contracts are especially affected by this because they almost always involve direct debit payments.

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It was a long time ago that the Federal Court of Justice made a fundamental ruling in 2001 which departed from previous case law pronouncements and recognised the partial legal capacity of a partnership under civil law. It is entitled to participate in legal transactions, be the holder of rights and duties and, in particular, to acquire land ownership. As a logical consequence of this ruling, in 2008 the court also ruled that it is eligible for registration in the land register. Since then it has been possible to enter a partnership under civil law in the land register under the name which its partners stipulated for it in the articles of partnership. If the articles of partnership do not stipulate such a name, the partnership is registered as a “partnership under civil law consisting of” and the names of its partners. By this ruling, the Federal Court of Justice partly solved the difficulties which result from the lack of an eligibility for registration of the partnership under civil law by contrast with the other private companies, i.e. commercial partnerships (OHG) and limited partnerships (KG): The fact that the partnership under civil law is not registered in the register of companies, and thus does not have any company name there under which it conducts its business, is overcome by the possibility of registering the company in the land register under a name agreed in the articles of partnership, or registering the abstract legal form of the company and at the same time listing the partners.

But in practice there still were and are considerable problems in registering an existing partnership under civil law in the land register. Section 29 (1) of the German Land Registration Act (Grundbuchordnung) demands in this connection that all declarations and certificates which are necessary for a registration in the land register must be proved by public deeds or publicly certified deeds. This includes the proof of the existence of the partnership under civil law, its partners and the representative powers of the persons acting on behalf of the partnership under civil law in land transactions. Because they are not eligible for registration, partnerships under civil law cannot provide this proof by presenting an extract from the register of companies, by contrast with commercial partnerships (OHG) and limited partnerships (KG).

If the partnership under civil law is only formed for the purchase of a specific land property, it is relatively easy to fulfil the requirements by making the creation of the partnership part of the notary's land purchase deed.

Concerning the requirements for existing companies, on the other hand, there are only various rulings by Higher Regional Courts - so considerable legal uncertainty will continue to exist until the matter is clarified by the supreme court.

In a ruling of 7 October 2010, the Higher Regional Court (OLG) of Brandenburg (ref. 5 Wx 77/10) took a pragmatic approach and stated that for the proof under Section 29 (1) of the Land Registration Act it is sufficient if the representatives of the partnership under civil law declare in the relevant notarised purchase deed that a partnership under civil law exists at the time of notarisation, with the partners as named in the deed – i.e. the persons acting therein – and that at the time of creation of the deed it is within the legal power of the declarants to form a partnership under civil law with these partners. It states that the land registry is only entitled to doubt such a declaration if circumstances based on specific facts arise which call into question the factual correctness of the declaration made. But the decisive point, which the Higher Regional Court of Brandenburg itself underlines for emphasis, is that the persons acting in the matter must at the same time constitute all of the existing parties. But if a legally appointed representative acts for the partnership under civil law, his authorisation must also be proved in the form required in Section 29 (1) of the Land Registration Act. The power of attorney must therefore be present in a notarised form. In this case, the power of attorney is assumed to be still valid because of the plausible legal status of the deed, so if there is a long delay between the time when it is issued and the time when it is exercised, this may not be assumed to signify that it has lapsed.

This latter idea is also supported by the Higher Regional Court of Munich in its ruling of 20 July 2011 (ref. 34 Wx 131/10). It says that the assumption of continuation is justified for a power of attorney because its purpose is to prove the authorisation of the representative to third parties or the land registry. The court says that the situation is different if the individual power of attorney of the partner acting for the partnership under civil law is only based on notarised articles of partnership which are removed in time from the land property transaction. This is because the court says that the possibility that changes may have been made in the articles of association can never be ruled out. If the partnership under civil law is represented in property transactions by an arrangement other than the statutory provision of joint representation, the court concludes that presenting the articles of association stating the power of sole representation of the partner acting for the partnership – even in notarised form – is not sufficient to fulfil the requirements of Section 29 (1) of the Land Registration Act for proof of the power of representation.

Until the question of whether the proof of the power of representation can be provided by notarised articles of partnership without any connection with the time of the relevant transaction has been clarified by the supreme court, in any land transactions by existing partnerships under civil law where only one partner acts for the company it is recommended that in addition to any sole power of representation granted in the articles of partnership, an appropriately notarised “waterproof” power of attorney should always be presented.

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For further information please visit the German version of this site or contact the Practice Group Tax tax @ sibeth.com.

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For further information please visit the German version of this site or contact the Practice Group Tax tax @ sibeth.com

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In a ruling of 18 May 2011 (X R 4/10), the Federal Court of Finance (BFH) decided that the extended trade tax reduction under Section 9 No. 1 sentence 2 of the German Trade Tax Act (GewStG) does not apply to premises let to an affiliated company within the same entity. The extended reduction means that if companies which are normally liable for trade tax are exclusively active in the administration of their own properties, the resulting income is deducted in the calculation of the trade tax, so it is effectively deemed exempt from trade tax.

The Federal Court of Finance has now decided on a case in which an affiliated company let all land properties to a different company within the single entity. The court concluded from various special details within the trade tax single entity that the business relations within the single entity fundamentally did not involve any additions and reductions. Therefore, the applicability of the extended trade tax reduction had to be restricted in these cases in the light of the purpose of the legislation. The rental income was therefore included in the calculation of the trade tax.

This ruling not only represents a restriction in the application of the extended deduction for trade tax purposes, it also indicates a tendency to be increasingly restrictive in the interpretation of this tax exemption. So it is all the more important to ensure that the requirements for the applicability of the extended trade tax reduction are regularly checked in all cases in order to avoid risks in fiscal tax audits.

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The period for submitting prior objections to the display of buildings and land in Microsoft's street image service StreetSide runs from 1 August to 30 September 2011. Like its competitor and forerunner Google, Microsoft only accepts objections by natural persons, because legal entities are not protected by the data protection laws in Germany.

According to a ruling of the Higher Regional Court and Appeals Court of Berlin, it is not possible to file an objection to the preparation of the pictures themselves because although a legal violation by the pictures is not excluded, it is not probable enough to justify the granting of prior legal protection (Appeals Court, ruling of 25 October 2010, 10 W 127/10)

If a building is used by several parties who do not agree on whether or not the building should be made unrecognisable (pixelated), Google follows an interesting procedure which not all landowners know about. According to Google, the whole of the building is always pixelated if only one of the parties demands this – irrespective of whether this party is the owner or a tenant. The only exception is if there is a shop in the building: in this case, the rest of the building is pixelated. Microsoft, on the other hand, claims that it will decide individually on each application.

According to Google, the pixelation can generally not be removed subsequently, because where an objection has been made, the raw data was edited – as agreed with the data protection authorities. It is apparently possible for the user to submit his/her own picture material to Google to make pixelated buildings visible again if an objection is retracted.

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Cloud computing offers significant cost benefits for business companies, public authorities and private users because the user can call on memory capacity and functions flexibly as required and only needs to purchase a lower quantity of separate appliances, memory capacity and computer programs. But at the same time, it also involves risks in security and compliance because the client, and sometimes even the contractor, is hardly ever able to check where the data are transferred and who can access the data.

In July 2011 controversy arose because of the statement by Microsoft that US companies are obliged to grant US authorities access to stored data on request under the “Patriot Act”, and that the affected persons are not informed of this access. It was not previously known that this also applied to data stored exclusively in European data service centres. In the opinion of the Independent Data Protection Centre in Schleswig-Holstein, this is irreconcilable with German and European data protection.

In the spring of 2011, the Danish data protection authority had already forbidden the municipality of Odense from using the calendar and office package “Google Apps”. The municipality had planned to use this package to process especially sensitive personal data of school pupils. The data protection authority objected, for example, to the fact that the municipality could not guarantee sufficient control of the contract data processing firm Google, and that a forbidden transfer of data to insecure third party states outside the European Economic Area (EEA) could not be excluded. In addition, it considered that the assessment of risks by the municipality had been inadequate. The decision (J no. 2010-52-0138) can be downloaded on the Internet under  
http://www.datatilsynet.dk/english/processing-of-sensitive-personal-data-in-a-cloud-solution/ .

Detailed guidelines on the subject of cloud computing, data security and compliance have been issued by the EU authority for Cyber-security ENISA and by the Eurocloud industry association. The documents are available free of charge on the Internet under  http://www.enisa.europa.eu/act/rm/files/deliverables/cloud-computing-risk-assessment
and http://www.eurocloud.de/2010/12/02/eurocloud-leitfaden-recht-datenschutz-compliance/ .

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In the spring of 2011, a working party of the Conference of Data Protection Representatives at the national and regional level published a “Guideline for Hospital Information Systems (KIS)”. It contains specific normative goals and technical requirements. On 1 July 2011, the Medicine working party of the German Association of Data Protection Representatives issued a statement on the subject (https://www.bvdnet.de/ak-medizin.html).

The guideline is fundamental welcomed. But the statement points out that hospitals have problems implementing the requirements of data protection law in the day-to-day operation of hospitals in a practically viable and legally compliant manner. And it also states that the suppliers of hospital information systems do not implement the data protection requirements in their software, or only do at (high) extra cost. Processes for integrated medical patient care are apparently not yet implemented and taken into account by the hospital information systems and the guidelines.

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The data protection commissioner of the federal state of Schleswig-Holstein took regulatory action against the transmission of the data of patients between the Schleswig-Holstein Family Doctor Association and the health insurance institutions under the “Contract to Implement Family Doctor Based Services in Schleswig-Holstein under Section 73b of Volume V of the German Social Code (SGB V)”. The commissioner argued that the transmission of patient data is only permissible in the form of contract data processing as defined in Section 80 of Volume X of the Social Code (SGB X). He claimed that the requirements of this provision were not fulfilled by the contract because the individual family doctors are not able to select or monitor the service provider. The Higher Administrative Court (OVG) of Schleswig-Holstein accepted the view of the data protection commissioner in injunction proceedings. (Higher Administrative Court of Schleswig-Holstein, ruling of 12 January 2011, 4 MB 56/10)

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The taxpayer liable for VAT is normally the business which provides the performance, which then shows the VAT in the invoice. In certain legally defined cases the VAT liability can be reversed, i.e. the party liable for the VAT is the recipient of the performance (the "reverse charge method"). Under the German VAT Act (UStG) this applies to building work under the following conditions:

• If the taxable work performance or other performance serves to produce, repair, maintain, alter or remove buildings, with the exception of planning and supervisory services,
• If it is carried out for another contractor,
• And if the other contractor itself provides such building work.

In the opinion of the German tax authorities, the recipient of the performance must render such building work continually, and this is assumed to be the case if at least 10% of the recipient's total turnover for the previous year consisted of such building work.

The Federal Court of Finance is now concerned about whether the German provisions for these restrictions are compatible with the EU regulations, which stipulate the reverse charge method for building work in general. For this reason, in its ruling of 30 June 2011 it presented several questions to the European Court of Justice and asked for a preliminary ruling:

• From a factual perspective, it is questionable whether the reverse charge method only applies to building services or whether it also covers deliveries, and if it also covers deliveries, whether any restriction to individual types of building services may be made.
• In relation to the persons involved, it is not clear whether it is permissible to include only services rendered for specific recipients, i.e. recipients which themselves offer building services, or whether services for all recipients which are business entrepreneurs should be covered.
• If it is permissible from a factual and personal perspective to form sub-groups for which the reverse charge method is applicable, the European Court of Justice is asked whether limitations for the creation of such sub-groups may be imposed by the national legislative body.
• Finally, the Federal Court of Finance asked what the legal consequences are if the present sub-grouping is contrary to EU law. It is conceivable that the reverse charge method would then be no longer applicable to any building services at all, or that it would at least be applicable to the sub-groups created by the national provision.

Due to the decision of the Federal Court of Finance to request a preliminary ruling, the whole process of the reverse charge method for building services is now subject to review. If appropriate, VAT notices should be kept open and contractual precautions should be taken.

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According to its press release of 17 August 2011, the Federal Court of Finance (BFH) has decided in its recent rulings of 28 July 2011 (VI R 38/10 and VI R 7/10) that the costs of an initial study course and the initial vocational training are costs incurred for work-related purposes – and thus an income-related expense incurred in advance – if the taxpayer took up this first training or course of study directly after leaving school.

A student of medicine and a trainee airline pilot had appealed against the provision which had applied since 2004 prohibiting the deduction of expenditure for initial vocational training if the costs did not arise in the course of employment.

The claims were successful and the Federal Court of Finance ruled that if these training costs are sufficiently directly related to the later career work of the taxpayer, they must be taken into account as an advance income-related expense in the tax return.

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In the opinion of the Finance Court of Düsseldorf, there are serious doubts about whether retrospective loan interest in relation to rental and lease income should continue to be excluded as an income-related expense (Finance Court of Düsseldorf, ruling of 30 May 2011 – 9 V 1474/11 A).

In its ruling of 12 November 1991, the Federal Court of Finance rejected the deduction of loan interest as an income-related expense for letting and leasing income if the loan interest arose after the sale of the rental property. The deduction as an income-related expense was rejected in this ruling even if the loan interest arose because the loans taken out to finance the rental properly could not be fully redeemed with the proceeds from the sale.

For an investment which forms part of private assets, however, the Federal Court of Finance decided in its ruling of 16 March 2010 that loan interest for the purchasing of the investment can be claimed as an income-related expense even if the loan interest arose after the sale of the investment or the dissolution of the company.

This decision now led the Finance Court of Düsseldorf – in spite of the earlier ruling of the Federal Court of Finance from 1991 – to allow retrospective loan interest as a deductible income-related expense even for rental and lease income.

There is already a pending case on this subject at the Federal Court of Finance under the reference number IX R 67/10. The ruling of the Finance Court of Düsseldorf was made as temporary relief and is therefore not yet final.

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The Federal Court of Justice (BGH) recently had to decide a case in which the debtors created a land charge to secure a loan claim resulting from the purchase of land property, including material subjection to immediate levy of execution in favour of a bank. In addition, the debtors declared their personal liability for the payment of a sum which corresponded to the amount of the land charge, and for this amount they also subjected themselves to immediate levy of execution under the deed against their entire assets. Part of the land purchase price was refinanced. To secure this portion of the loan, the bank assigned a corresponding part of the land charge and the declaration of personal liability to the later claimant. The claimant was registered in the land register as the land charge creditor. The claimant applied to the notary for a partial official copy of the notarial deed for the creation of the land charge, the acceptance of personal liability for the partial amount due to the claimant and the transfer of the enforcement clause to itself, as the successor to the bank. To this end, the claimant submitted an extract from the land register, the enforceable official copy of the notarial deed, a publicly certified declaration of assignment and a simple copy of the loan agreement between itself and the debtor. The notary rejected the application. The appeal which was then submitted by the claimant was rejected by the District Court of Koblenz. The District Court justified its decision by reference to a ruling of the 11th Senate of the Federal Court of Justice of 30 March 2010 which stated that in enforcement clause award proceedings, the notary must check whether the legal successor has also entered into the security agreement and thus the fiduciary purpose-bound nature of the land charge, because the court considered that a standard form submission to execution proceedings must be interpreted so that it only applies to claims arising from a fiduciary purpose-bound land charge. The court stated that this was the only way to ensure that in cases in which the land charge is assigned without the involvement of the borrower, e.g. in a sale of the loan receivable, the borrower can also file objections to the legal successor. It stated that entry into this provision must be proved by public or publicly certified deeds.

In its ruling of 29 June 2011, the 7th Senate of the Federal Court of Justice overturned the decision of the District Court. In enforcement clause award proceedings, the court ruled that the notary must always base his work on the wording of the deed. If a condition such as the entry of the legal successor into the security agreement is absent in the wording of the deed, an interpretation derived solely from a balance of interest is not deemed permissible. An interpretation by the notary derived solely from a balance of interest is considered inconsistent with the fact that the extent of the examination in enforcement clause award proceedings is limited because of its formalisation. The enforcement clause award proceedings are not designed for a material and legal evaluation of the deed. The debtor is sufficiently protected because he can file court action against the allowability of the levy of execution under the enforcement clause and make his material and legal objections in these proceedings.

With this ruling, the 7th Senate confirms the strict formalisation of the enforcement clause award proceedings with the restricted extent of examination by the notary, and thus removes the difficulties which have arisen in practice from the ruling of the 11th Senate, which did not refer to the enforcement clause award proceedings. In some cases in which the land charge was assigned by the lender, e.g. for revaluation or refinancing, notaries have refused to grant an enforcement clause in favour of the legal successor because the legal successor was often not able to prove by public or publicly certified deeds that the land charge had been assigned at the instigation of the borrower. The ruling thus ensures the marketability of the land charge and the assumption of personal liability as a form of loan security which is often used in practice. If the wording of a notarial deed does not contain any relevant provisions, an entry of the legal successor into the agreement on security is not necessary. The notary must grant the enforcement clause if the legal succession is proved and there are no other objections which are permissible in enforcement clause award proceedings.

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Schlusspunkt im Streit um die Anforderungen an die Grundbucheintragung bei Eigentumserwerb einer GbR

Die Gesellschaft bürgerlichen Rechts (GbR) ist aufgrund ihrer einfachen Gründung ohne strenge Formerfordernisse, des geringen Verwaltungsaufwands und auch der steuerlichen Vorteile eine bevorzugte Gesellschaftsform zum Erwerb von Immobilienvermögen.

Im Jahr 2001 stellte der Bundesgerichtshof (BGH) die Rechtsfähigkeit der (Außen-)GbR fest. Dem folgte in konsequenter Fortsetzung 2008 die Feststellung der Grundbuchfähigkeit der GbR, da diese aufgrund ihrer Rechtsfähigkeit auch Grundeigentum erwerben kann. Dies hatte gravierende Auswirkungen für die Praxis, da aufgrund der damals geltenden Vorschriften der Grundbuchordnung (GBO) die GbR ohne weiteren Zusatz in das Grundbuch einzutragen war. Aufgrund der Möglichkeit zur Änderung des Gesellschaftsvertrages, ohne dass dies für einen Grundstückskäufer aus dem Grundbuch oder einem sonstigen Register ersichtlich wäre, war für einen Grundstückskäufer keine Rechtssicherheit hinsichtlich der Verfügungsbefugnis einer als Grundstückseigentümerin auftretenden GbR gegeben. Faktisch waren Grundstücke im Eigentum einer GbR dem Wirtschaftsverkehr entzogen.

Der Gesetzgeber reagierte zügig und führte den § 47 Abs. 2 GBO ein. Danach sind zusätzlich zur Grundbucheintragung einer GbR deren Gesellschafter namentlich einzutragen.

Die konkreten, hieraus resultierenden Anforderungen an die GbR bzw. deren Gesellschafter zum Nachweis der Richtigkeit der Angaben als Voraussetzung für eine Eintragung im Grundbuch wurden sowohl in der Rechtsprechung als auch im Schrifttum kontrovers beurteilt. Weitgehend Einigkeit bestand dahingehend, als dass für die Eintragungsvoraussetzungen jedenfalls § 29 GBO, also der Nachweis durch öffentliche oder öffentlich beglaubigte Urkunden, zur Anwendung kommt. Eine Auffassung wollte eine Erklärung der Gesellschafter im notariellen Grundstückskaufvertrag über die rechtlichen Verhältnisse der GbR, deren Existenz und Identität sowie die Vertretungsberechtigung der handelnden Personen nicht ausreichen lassen, da dies lediglich die Abgabe der Erklärung, nicht aber deren inhaltliche Richtigkeit beweise (z.B. Oberlandesgericht (OLG) München vom 20.07.2010 – Wx 63/10). In der Praxis hätte dies zur Folge, dass ein Grundstückserwerb durch eine GbR lediglich dann möglich bleibt, wenn die GbR selbst im Rahmen der notariellen Auflassung des Grundstückskaufs neu begründet wird, da ausschließlich in dieser Gestaltung keine Möglichkeit zur Veränderung der Rechtsverhältnisse der GbR besteht. In Konsequenz wären danach alle bestehenden GbRs von der Möglichkeit des Grundstückserwerbs rein aufgrund grundbuchverfahrenstechnischer Anforderungen faktisch vom Grundeigentumserwerb ausgeschlossen.

Eine zweite Ansicht, die grundsätzlich ebenso von der Anwendbarkeit des § 29 GBO ausging, wollte jedoch in Anlehnung der Grundsätze zur Vollmachtsbestätigung die Erklärung der Gesellschafter über die Existenz, den Gesellschafterbestand und die Vertretungsberechtigung anlässlich der Beurkundung des Grundstückskaufvertrages ausreichen lassen, um die Eintragungsvoraussetzungen in der gebotenen Form nachzuweisen (z.B. OLG Saarbrücken vom 26.02.2010 – 5 W 371/09).

Hingegen hielt eine Ansicht im Schrifttum einen Nachweis der rechtlichen Verhältnisse der GbR in der Form des § 29 GBO nicht für erforderlich. Zwar müssten die handelnden Personen bei der Auflassung Erklärungen zur Existenz, Identität und Vertretung der GbR abgeben, einen Nachweis der Richtigkeit könne das Grundbuchamt jedoch grundsätzlich nicht verlangen. Diese Ansicht wurde nun vom BGH bestätigt.

Der BGH entschied mit Beschluss vom 28. April 2011 (V ZB 194/10), dass es beim Grundstücks- oder Wohnungseigentumserwerb einer GbR für die Eintragung des Eigentumswechsels in das Grundbuch ausreicht, wenn die GbR und ihre Gesellschafter in der notariellen Auflassungsverhandlung benannt sind und die für die GbR Handelnden erklären, dass sie deren alleinige Gesellschafter sind; weitere Nachweise der Existenz, der Identität und der Vertretungsverhältnisse dieser GbR bedarf es gegenüber dem Grundbuchamt nicht.

Der BGH führt aus, dass ein Rechtsgeschäft, bei dem eine GbR Grund- oder Wohnungseigentum erwirbt, im Grundbuch vollzogen werden darf, wenn erstens die Identität der Gesellschaft feststeht und dies, zweitens, in ausreichendem Maße nachgewiesen ist.

Das Identitätserfordernis dient der Unterscheidung von anderen GbRs und ist Folge des Bestimmtheitsgrundsatzes, welcher das gesamte Grundbuchrecht beherrscht. Dieser Grundsatz verlangt im Hinblick auf die Sicherheit des Rechtsverkehrs, dass nicht nur das betroffene Grundstück selbst sowie der Inhalt des dinglichen Rechts, sondern auch die Person des Berechtigten eindeutig feststehen. Diese Anforderungen werden bei einer entsprechenden Erklärung der Gesellschafter in der notariellen Auflassungserklärung gewahrt, was wiederum aus § 47 Abs. 2 GBO folgt. Hiernach erfolgt die Identifizierung der GbR über die notwendige Benennung ihrer Gesellschafter. Ist dies erfolgt, liegt eine hinreichende Bestimmtheit der Gesellschaft vor, ohne dass noch weitere Angaben erforderlich sind. Insbesondere ist kein Nachweis in der Form des § 29 GBO bzw. ein Nachweis der inhaltlichen Richtigkeit der Erklärungen der Gesellschafter erforderlich. Dies ergibt sich aus der systematischen Stellung des § 47 Abs. 2 GBO in der GBO sowie aus dem gesetzgeberischen Zweck. § 47 Abs. 2 GBO betrifft als Sonderfall des § 47 Abs. 1 GBO nur den Inhalt der Grundbucheintragung, nicht aber ihre Voraussetzungen. Eine Regelung über die zur Eigentumseintragung einer GbR zu erbringenden Nachweise enthält die Vorschrift nicht.

Zudem war es gerade das Ziel des Gesetzgebers bei der Einführung des § 47 Abs. 2 GBO, dass die GbR gerade nicht allein unter ihrem Namen in das Grundbuch eingetragen werden kann, da sich die rechtlichen Verhältnisse oftmals nicht in der Form des § 29 GBO nachweisen lassen. Mit der Regelung des § 47 Abs. 2 GBO sollen für den Fall der Eintragung nur unter dem Namen der GbR gegenüber dem Grundbuchamt zu führende Nachweise gerade entbehrlich werden.

Mithin wird das dingliche Eigentumsrecht der GbR grundbuchverfahrenstechnisch durch die Gesellschafter vermittelt. Das Erfordernis eines Nachweises der rechtlichen Verhältnisse der GbR in der Form des § 29 GBO ist damit nicht vereinbar. Das Grundbuchamt darf solche Nachweise nur dann anfordern, wenn konkrete Anhaltspunkte vorliegen, dass das Grundbuch durch die beantragte Eintragung unrichtig werden würde. Die theoretische Möglichkeit der – auch mündlichen – Abänderung des Gesellschaftsvertrages ist hierfür nicht ausreichend.

Im Ergebnis hat der BGH damit eine praktikable Lösung für den Grundstücks- und Wohnungseigentumserwerb auch für eine bereits bestehende GbRs gefunden und damit wohl den notwendigen Schlusspunkt unter das im Jahr 2001 begonnene Kapitel um die Rechtsfähigkeit der GbR gesetzt. Mit einer Erklärung der Gesellschafter im Rahmen der notariellen Auflassung ist der notwendige Nachweis an eine Grundbucheintragung erfolgt.

Außergewöhnlich an dieser Lösung ist das Auseinanderfallen von materiellem Eigentum durch die GbR und der formellen, grundbuchverfahrensrechtlichen Vermittlung durch die Gesellschafter.

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The final settlement of the dispute about the requirements for the entry of land purchase by a partnership under civil law (GbR) in the land register

A partnership under civil law (GbR) is a popular legal structure for companies wishing to purchase land property because such companies are easy to found without strict formal requirements, involve a relatively small amount of administrative work and offer tax advantages.

In 2001 the Federal Court of Justice (BGH) ruled that an (external) partnership under civil law is legally capable. As a logical consequence of this position, it was ruled in 2008 that a partnership under civil law is also eligible for inclusion in the land register, because if it is legally capable it is also able to purchase land property. This had serious effects in practice, because the provisions of the German Land Registration Act (GBO) at the time did not allow a partnership under civil law to be entered in the land register without additional details. Because it is possible to change the articles of partnership without the land purchaser being able to see the changes in the land register or any other register, it was considered that a future purchaser of the land property would have no legal certainty about the powers of representation for a partnership under civil law which claims to be the owner of the property. Effectively, this meant that land properties owned by a partnership under civil law were excluded from commercial transactions.

The legislative body reacted quickly and introduced Section 47 (2) of the Land Registration Act. Under this provision, the partners of a partnership under civil law had to be named in the land register entry in addition to the partnership itself.

The resulting specific requirements for the partnership under civil law or its partners to prove the correctness of the details given, which were regarded as a condition for registration in the land register, were the subject of controversial discussion both in case law and in the literature. There was mainly agreement that the requirements for registration should be subject to Section 29 of the Land Registration Act, i.e. that proof should be provided in the form of public or publicly certified documents. One opinion did not consider it sufficient for the partners to make a declaration in the notarial land purchase contract about the legal circumstances of the partnership under civil law, its existence and identity and the representation powers of the persons acting for the partnership, because it was suggested that this merely proved that the declaration had been made, but not the correctness of its content (e.g. Higher Regional Court (OLG) of Munich on 20 July 2010 - Wx 63/10). In practice, this would have meant that a purchase of land property by a partnership under civil law was only possible if the partnership itself was newly founded in the course of the notary's conveyance of the land purchase, because this was the only configuration which would exclude the possibility that the legal circumstances of the partnership under civil law could be changed. As a consequence, all existing partnerships under civil law would be effectively excluded from any purchase of land property because of the technical rules of the land registration process.

A second opinion, which fundamentally also assumed the applicability of Section 29 of the Land Registration Act, followed the principles for confirmation of powers of attorney in accepting the declaration of the partners about the existence, the partnership situation and the powers of representation as sufficient proof of the requirements for registration to meet the formal conditions for the notarisation of the land purchase contract (e.g. Higher Regional Court (OLG) of Saarbrücken of 26 February 2010 – 5 W 371/09).

On the other hand, one opinion in the literature considered that proof of the legal circumstances of the partnership under civil law in the form stipulated in Section 29 of the Land Registration Act is not necessary. It was suggested that the persons acting for the company in the conveyance must make declarations about the existence, identity and representation situation of the partnership under civil law, but that the land register was fundamentally not entitled to demand proof of correctness. This opinion has now been confirmed by the Federal Supreme Court (BGH).

The Federal Court of Justice decided in its ruling of 28 April 2011 (V ZB 194/10) that in any purchase of land or residential property by a partnership under civil law, it is sufficient for the registration of the change of ownership in the land register if the partnership under civil law and its partners are named in the notary's provisional notice of conveyance and the persons acting for the partnership under civil law declare that they are its sole partners; further proof of the existence, identity and representation situation of the partnership under civil law need not be provided to the land registry.

The Federal Court of Justice states that a legal transaction in which a partnership under civil law purchases land or residential property can be completed in the land register on two conditions: firstly the identity of the company must be established, and secondly this must be sufficiently proved.

The identity requirement serves to distinguish it from other partnerships under civil law and is a consequence of the principle of clarity and definiteness which governs land registry law as a whole. When this principle is applied to the certainty of legal transactions, it means that not only the affected land property itself and the content of the material rights must be clearly determined, but also the identity of the entitled party. The court argued that these requirements are met by an appropriate declaration by the partners in the notary's provisional notice of conveyance, which in turn is based on Section 47 (2) of the Land Registration Act. Under this provision, the identification of the partnership under civil law is implemented by the necessary designation of its partners. When this has been done, there is then deemed to be sufficient certainty about the company without any need for further details. In particular but not exclusively, no proof in the form stipulated in Section 29 of the Land Registration Act or proof of the correctness of the declarations of the partners is necessary. This is concluded from the systematic significance of Section 47 (2) of the Land Registration Act and the purpose of the legislation. Section 47 (2) of the Land Registration Act is regarded as a special case of Section 47 (1) of the Land Registration Act which only applies to the content of the land register entry, not its requirements. The court points out that the text does not contain any provision for the proofs which must be provided to register the property of a partnership under civil law.

Moreover, the goal of the legislative body when it introduced Section 47 (2) of the Land Registration Act was not to allow a partnership under civil law to be registered in the land register under its name alone, because the legal circumstances can often not be proved in the form stipulated in Section 29 of the Land Registration Act. The provision in Section 47 (2) of the Land Registration Act in fact aims to dispense with the need to present proof to the land registry if the property is registered only under the name of the partnership under civil law.

Therefore, the material ownership right of the partnership under civil law in the land register is technically and procedurally conveyed via the partners. A requirement to prove the legal circumstances of the partnership under civil law in the form stipulated in Section 29 of the Land Registration Act would be inconsistent with this provision. The land registry is only entitled to demand such proof if there are specific grounds to suspect that the land register would become incorrect as a result of the desired entry. The theoretical possibility of a change in the articles of partnership – even by word of mouth – does not constitute sufficient grounds for such a suspiction.

By this ruling, the Federal Court of Justice has found a practicable solution which also covers the purchase of land and property by an existing partnership under civil law, a solution which has probably finally settled the controversy about the legal capability of a partnership under civil law which started in 2001. A declaration by the partners in the course of the notary's conveyancing is deemed to be the necessary proof for an entry in the land register.

This solution is unusual because of the separation between the material ownership by the partnership under civil law and the formal mediating role of the partners in the land register procedure.

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For further information please visit the German version of this site or contact the Practice Group Tax tax @ sibeth.com

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Medical practitioners are often faced with uncertainty about the extent to which they can advertise. The Internet offers them many new possibilities, but they are only used hesitantly. This is because doctors are subject to professional regulations on advertising which only permit objective advertising and information. A violation of these provisions could be classed as a breach of professional regulations and competition standards, and this could have negative consequences. Nevertheless, there is an increasing liberalisation in the permissibility of advertising. Thus, the Federal Court of Justice decided in a ruling of 1 December 2010 (I ZR 55/08) that an Internet portal which enables counter-offers by dentists is permissible (“second dentist's opinion”).

The ruling was based on the following situation: on certain Internet portals, patients can upload the treatment and cost plan drawn up by their dentist. This enables other dentists to give their own (non-binding) cost estimates for the diagnosis and suggested treatment in the treatment and cost plan. The portal operator then notifies the patient of the most favourable cost estimates. The patient can then decide on a dentist, and the patient's contact details are then notified to the selected dentist, and the details of the dentist are notified to the patient.

The courts of first and second instance both regarded this portal as not permissible under the professional regulations and the competition standards. They argued that such a comparison portal was a breach of the professional principle of a respectful treatment of colleagues and the professional standards for advertising. The Federal Court of Justice rejected this argument and justified its ruling on the allowability of such portals as follows: merely displacing a dentist from the treatment of a patient was regarded as merely a consequence of a form of competition which is fundamentally desirable. The participating dentists were deemed to be merely presenting their own services. The court argued that the professional restrictions on competition must not lead to a situation in which the patient's justified interest in information which meets his needs and is objectively reasonable cannot be satisfied. It also stated that the dentists do not make a direct approach to the patients (which would be prohibited advertising for a surgery by advertising to individual patients); rather, the patient himself approaches the dentist via the portal. The court stated that the situation would be different if the dentist learned of the treatment needed by a patient from a colleague and then directly approached the patient. As a result, the court ruled that this portal was not a breach of the professional principle of a respectful treatment of colleagues or the professional standards for advertising.

The ruling by the Federal Court of Justice illustrates yet again that the restrictions on advertising with objective information by many freelance professionals should not be interpreted restrictively, and that these restrictions are being increasingly loosened in case law. Nevertheless, every advertising measure by a freelance professional must be examined separately. Such advertising is not comparable with advertising by a commercial company, and not everything is equally permissible.

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The Bavarian federal state tax authority, in its decree of 28 January 2011, dealt with the income tax treatment of a redemption of a reserved right of usufruct in return for payment. Typically, a reserved right of usufruct arises when a land property is donated but the donor reserves the right of usufruct. This means that the donor remains entitled to the income from the use of the property. Therefore the right of depreciation remains with the donor as long as he uses the property because he paid for the cost of purchase or production and he earns income from the property. But the donee is not entitled to any depreciation. The reserved right of usufruct is not deemed to be a consideration given by the donee for the transfer of the property. This means that the donee acquires the property free of charge.

If the donee later redeems the usufruct, this leads to retrospective acquisition costs for the property. From the time of redemption, the donee must continue two lines of depreciation, firstly as a result of the acquisition for a cost (= redemption) and secondly as a proportional continuation of the depreciation by the donor.

But if the usufruct lapses by the death of the donor, the donee then continues the depreciation by the donor for the residual service life.

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The exemption limit for a company party can be calculated on the basis of the planned number of participants

For company events, there is currently an exemption limit of 110.00 Euros per employee. That means that expenditure of up to 110.00 Euros including VAT which is incurred for a company event does not need to be assigned to the earnings of the participating employees. And the exemption limit has an effect on the deduction of input tax (see previous section).

In its ruling of 17 January 2011, the Finance Court of Düsseldorf (11K 908/10L) had to decide whether the exemption limit of 110.00 Euros can be calculated on the basis of the planned number of participants. In the case under dispute, a private limited company (GmbH) had planned and then carried out a company party. On the basis of registrations, 600 participants were expected. But in fact, only 348 persons actually attended the party. The costs per planned participant were less than 110.00 Euros, but the costs per actual participant were above the limit.

The Finance Court of Düsseldorf ruled that the planned number of participants can be assumed to calculate the exemption limit. The non-participation of registered employees did not constitute any enrichment of the participating employees which could be deemed to be a pecuniary advantage.

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In its ruling of 9 December 2010, the Federal Court of Finance also commented on the necessity of a direct connection between the performance received and the performance rendered which permits a deduction of input tax. The specific case revolved around the question of whether a business owner is entitled to deduct input tax for a company outing if the cost exceeds the small gift income tax limit of 110.00 Euros per employee.

If at the time when he receives the performance the business owner intends to use the performance not for his company, but exclusively and directly for a private withdrawal for himself or for the private needs of his employees, he is not entitled to deduct the input tax for this performance. This also applies if the withdrawal is indirectly for purposes which would justify a deduction of input tax.

In the opinion of the Federal Court of Finance, a deduction of input tax is not possible if the limit of 110.00 Euros is exceeded. In this case, the expenditure for the company trip is assigned exclusively and directly to the private needs of the employees. This means that there is no direct connection to a performance rendered which would make a deduction of input tax possible. It is deemed immaterial if the business owner intends to use the outing to improve the atmosphere in the company and thus the motivation of the employees. This indirect connection is not deemed to be sufficient.

However, the business owner is entitled to deduct input tax from the expenditure for  the company outing if the small gift limit of 110.00 Euros per employee is not exceeded. Here, it is assumed that the employer merely wishes to make a small gift, and not an allowance to meet the private needs of the employees.

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In a ruling of 27 January 2011 (V R 38/09) the Federal Court of Finance decided a case in which a company which generally carries out taxable transactions, and is therefore eligible to deduct input tax, makes a tax-free sale of an investment in a subsidiary. The question in dispute was whether the company was entitled to deduct input tax for the consulting services which it received for the sale of the investment as a result of its general business activities, or whether this right did not apply because of the tax-free nature of the sale of the investment.

Here, the Federal Court of Finance ruled against the deduction of input tax for the consulting services because it considered that the necessary direct connection only existed with the tax-free sale of the investment. The question of which services are in a direct connection with the tax-free transfer of shares depends on the objective circumstances.

The fact that the company sold the investment to use the resulting income for its taxable business activities is deemed to be only an indirect purpose and not to justify any different assessment. This means that the actual purpose intended by the taxpayer is deemed to be immaterial.

According to the Federal Court of Finance, an exception to this principle can only be assumed if the sale of the investment constitutes a sale of the business as a whole (Section 1 (1a) of the German VAT Act (UStG)). A non-taxable sale of the business as a whole can be achieved either if all shares of the company (100%) are sold or if the subject of the sale is a controlled company and the purchaser also intends to integrate the purchased company into a group of companies which is taxable for VAT. If one of these requirements is fulfilled, the transaction is a sale of the business as a whole and is not taxable for VAT. In this respect, there is no tax exemption which would eliminate the deduction of input tax.

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Under Section 9 No. 1 sentence 2 of the German Trade Tax Act, the trade earnings of companies which exclusively manage and use their own land property are reduced on application by the amount which is ascribed to the management and use of the company's own land property (extended deduction). The aim of this provision is to exempt income from the mere management and use of land property owned by a stock corporation, which is liable for trade tax because of its legal form, from trade tax if it exclusively engages in property management.

The Federal Court of Finance, in a ruling of 19 October 2010 (ref. IR 67/09), decided that exclusive property management does not apply if the rental income is attributable to the stock corporation via an asset management partnership. The rental income received via the subsidiary company is therefore liable for trade tax. Moreover, holding an investment in a property management partnership means that the management of the land property owned by the stock corporation is also liable for trade tax.

In future, if a stock corporation wishes to obtain rental income which is exempt from trade tax, it must limit itself to the management of its own land property.

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The European Court of Justice, in its ruling of 12 May 2011 (Rs. C-115/09, not yet published in the official collection), decided that environmental protection organisations are also entitled to take court action against construction projects on the grounds of a violation of legal provisions which solely serve the public good. In the view of the European Court of Justice, national legal provisions which only allow environmental protection organisations a right to take court action in cases based on a violation of a provision which protects a right of individuals are not compatible with Article 10a of Directive 85/337/EEC (European Economic Community). The European Court of Justice had to deal with this question because of a request for a preliminary ruling by the Higher Administrative Court (OVG) of Münster of March 2009 which resulted from pending court action filed by Friends of the Earth Germany (Bund für Umwelt und Naturschutz Deutschland, BUND) against the preliminary approval and permit for the construction and operation of a coal power station by the supply company Trianel in Lüneburg. Originally, the Higher Administrative Court of Münster considered that Friends of the Earth Germany had no power to file court action and was consequently not entitled to do so, and it submitted this question to be decided by the European Court of Justice.

In its current ruling, the European Court of Justice significantly strengthens the right of environmental protection organisations to take  court action. Although it remains to be seen whether this will really lead to an increase in court proceedings against construction projects which could have a significant impact on the environment, the ruling is nevertheless of major importance. In future, even where there is agreement between the approving authority and the principal or project developer, greater care must be taken to comply with the legal requirements for the protection of nature and the environment because environmental protection organisations may now assume the role of an independent monitoring body which can take action against the approval of the project. Time-consuming inspections in the preparatory phase of the approvals (environmental impact assessment etc.) may also have a significant effect on the projects in view of the extremely long time taken by proceedings in administrative courts. It should be noted that even the preliminary ruling proceedings before the European Court of Justice took over two years. It remains to be seen what effect this ruling will have in practice.

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Up to now there has frequently been a clause in building and architect's contracts stating that any set-off by the client against the fee entitlement of the planner or contractor is only permissible for claims which are undisputed or have been finally awarded, and such a provision was often applied to disputes about the payment of the remuneration. In a ruling of 7 April 2011 (VII ZR 209/07), the Federal Court of Justice (BGH) departed from the view that was often taken in case law rulings of higher courts and declared that an exclusion of set-off is not valid because it violates the law relating to general terms of business.

In this respect, the Federal Court of Justice referred to a ruling from 2005 (VII ZR 197/03) and stated that it is unreasonable for the client to pay in full for defective or incomplete performance although he is entitled to counterclaims for the amount of the defect remediation or completion costs or compensation arising from the same contractual relationship. The court considers that this basic principle applies both to contracts for work agreed under part B of the Standard German Building Contract Terms (VOB/B) and to the conclusion of architect's contracts.

If the exclusion of set-off were effective, this would mean that the client would be obliged to pay the remuneration, at least initially, as long as his counterclaim for the cost of remediation or completion or his claim for competition has not been finally awarded by a court. It was stated that this would place the client at an unreasonable disadvantage because the synallagmatic combination of the demand for the payment for work carried out and the client's entitlement to the defect-free fulfilment of the contract is the major basic principle underlying the law of contracts for work and services. It considered that an exclusion of set-off in the general terms of business would undermine this basic principle.

In this connection, the Federal Court of Justice rightly points out, for example, that the right to refuse performance under Section 320 (1) of the German Civil Code – which in any case only has a temporary effect – must not be limited by general terms of business because of the synallagmatic combination of remuneration and the successful performance of the work. But if this already applies to the enforceability of rights which limit the claim, it must apply all the more to set-off rights which can cause a claim to lapse.

In terms of court proceedings, this also means that a provisional judgment must not be made if it awards a claim to payment for work and services rendered, but a set-off of claims for the remediation of defects under the same contractual relationship is deferred to subsequent proceedings. Here, too, the synallagmatic balance would be seriously disrupted.

With this judgment, the Federal Court of Justice again explicitly underlines the close connection between the successful performance of the work and the resulting remuneration and clarifies the consequences of this connection in relation to the law of general terms of business. In future, the clause excluding set-off will presumably only be possible in relation to rights arising from different contractual relationships. The Federal Court of Justice explicitly did not decide whether a set-off clause is permissible for rights arising from claims which are not synallagmatically linked, i.e. different contractual relationships, or whether this too would conflict with the law governing general terms of business.

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The Federal Court of Justice (BGH) ruled that building permission authorities are obliged to grant the local community consent in building permission proceedings if it has been unlawfully refused.

1. The problem

In building permission proceedings, the building authority reaches its decision by mutual agreement with the local community. The consent of the local community may only be refused for planning law reasons which are defined in detail in Section 36 of the German Building Code (BauGB). Section 36 (2) sentence 3 of the German Building Code stipulates that the responsible authorities are authorised to grant consent by way of substitution. In Bavaria, Article 67 of the Bavarian Building Regulations (BayBO) defines the circumstances under which the building permission authority can grant the local community consent by way of substitution. The provisions are designed as “discretionary” regulations. According to Article 67 (1) sentence 2 of the regulations, there is no legal entitlement to the award of the local community consent by way of substitution.

Problems arise if the building authority and the local community are not identical. The background to this federal state regulation involved liability considerations. If the local community consent is unlawfully withheld and the building permit is subsequently refused, it was claimed that damages for the loss suffered by the principal should not only be paid by the Free State of Bavaria as the legal entity responsible for the district administrations, but also by the relevant local communities. The Federal Court of Justice has now rejected this claim (ruling of 16 September 2010 – III ZR 29/10).

2. Content of the ruling

In a case on the question of public liability in which the principal claimed damages from the local community because of a delay in the award of the building permit, the Federal Court of Justice (BGH) rejected any entitlement to liability damages. In view of the provision in the federal state regulations which states that the building authority must obtain the consent of the local community but is authorised to grant this consent by way of substitution, the local community consent is merely an internal affair within the administration. If the consent is unlawfully withheld by the local community, the building permission authority has a legal obligation to grant the consent by way of substitution. Therefore the legal entity responsible for the building authority is the only agency which could bear any public liability.

This is in fact remarkable in view of the fact that the federal state legislation explicitly states that there is no legal entitlement (of the principal) for the local community consent to be granted by way of substitution. Here, the Federal Court of Justice states that even though the party wishing to build does not have a specific legal entitlement to this consent, if the building permission is refused in this case, this violates the party's legal rights which are protected by the German constitution. It considers that the principal has a constitutional entitlement to be granted building permission by the building authority. The court says that this right cannot be called into question by provisions of federal state law. Because of the unchanged power and obligation of the building permission authority to grant local community consent by way of substitution, Article 67 (1) sentence 2 of the Bavarian Building Regulations has no effect on the question of liability.

The result is therefore a liability of the legal entity responsible for the building authority.

3. Conclusion

The ruling by the Federal Court of Justice is fundamentally positive. In public liability cases it provides certainty about which party to take action against. But more important is the clearly stated obligation for the building authority – generally the district administration offices – to grant local community consent by way of substitution. In practice, local communities often unlawfully refuse to grant local community consent. This is partly because the local community building offices and building committees have insufficient resources or expertise. But in part it also results from a tendency to block disliked building projects. Thus, the grounds given for rejection often include reasons which fall outside the remit of the local community. Nevertheless, district administrations have often shied away from granting the consent by way of substitution to avoid straining their relationship with the local communities. The only remedy for the principal is then the long and arduous process in the administrative courts. And the loss arising from the delay had to be claimed in civil courts. The fact that the district administration offices are now obliged to provide the unlawfully withheld consent by way of substitution is definitely welcome from the principal's point of view. It remains to be seen whether the ruling by the Federal Court of Justice will have the desired effect in practice in the administration.

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The parties to rental contracts for commercial premises often agree “priority rental rights”. In practice, this concept is used to cover a whole series of legal structures. They range from fixed options for the tenant to a promise made by the landlord as a business policy that if any additional premises become available, they will be offered to the tenant.

The Berlin Court of Appeal (Kammergericht) made a ruling on such priority rental rights in insolvency which has recently been published (ruling of 23 September 2010, 8 W 46/109).

In this ruling, the appeal court defined a “priority rental right” as a right of the tenant which is similar to the pre-emptive right of purchase defined in Sections 463 ff of the German Civil Code (BGB). On the basis of such priority rental rights, the tenant is entitled to become a party to a rental contract for specific premises which the landlord has concluded with a third party, and the landlord must notify the tenant of the conclusion of this contract. The tenant must exercise its right to enter into the rental contract concluded with the third party within a certain time limit, which is either contractually agreed or defined as two months from the notification by the landlord as specified in the law. Such a priority rental right can be created for a specific tenancy or for all future lettings of the relevant premises.

In the case before the appeal court, the tenant had such a priority rental right for all future lettings of the premises.

But in this case, the rental contract developed in such a way that that the landlord became insolvent and the rented premises were purchased from the insolvency administrator by a buyer; this buyer was thus entitled to a special right of termination under Section 111 of the German Insolvency Act (InsO), and the buyer then exercised this right and thus terminated the original rental contract. After the conclusion of a further rental contract between the purchaser and a third party, the tenant then claimed its priority rental right under the rental contract in order to use the rented premises again.

Normally, such a priority rental right - like a rental option - passes to the purchaser under Section 566 of the German Civil Code if the property is sold.

According to the ruling by the Berlin Court of Appeal, the priority rental right under the original rental contract which has been transferred to the purchaser does not exist after the termination. This is the consequence which the court draws from the purpose of the right of termination under Section 111 of the German Insolvency Act, which entitles the purchaser to terminate a rental contract to which it has become a party by transfer, even if the fixed rental period or any further option periods to which the tenant was entitled under the rental contract have not yet expired. In the view of the appeal court, the same right must apply to priority rental rights because in this respect they have the same function as a rental option. This applies both to a non-recurring priority rental right and to a priority rental right which extends to all future lettings. Nor did the appeal court accept the argument that the purchaser could change the priority rental right by revising the rental contract and agreeing new terms with the third party which the tenant with the priority rental contract would then have to take over. Instead, the court ruled that under Section 111 of the German Insolvency Act the purchaser should have complete freedom of disposal over the purchased property, and especially the right to bring about a change of tenancy.

This ruling is not only relevant for sales from the insolvency assets and the special right of termination to which the purchaser is entitled under Section 111 of the German Insolvency Act. The appeal court explicitly underlined that the right of termination under the German Insolvency Act is subject to the same provisions as the right of termination under Section 57a of the German Compulsory Auction and Administration Act (Gesetz über die Zwangsversteigerung und die Zwangs¬verwaltung, ZVG) when property is purchased by compulsory auction. Therefore, a priority rental right of the tenant also does not protect the tenant in a compulsory auction.

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In its ruling of 2 March 2011 (I-3 Wx 236/10), the Higher Regional Court (OLG) of Düsseldorf recognised the notarisation of the sale and transfer of shares in a German private limited company (GmbH) before a notary in Basel as valid. This clearly refuted the doubts which had been expressed since the amendment of the German Act Concerning Limited Liability Companies (GmbH-Gesetz) and the Swiss Law of Obligations (Obligationenrecht), especially by the District Court (LG) of Frankfurt am Main.

Background

The sale and transfer of shares of a German private limited company (GmbH) is only effective under German law if it is notarised. German notaries are not allowed to enter into negotiated remuneration agreements, so the charges are always based on the transaction value. The higher the purchase price, the greater the costs of notarisation before a German notary. Although the same principle applies to Swiss notaries, their charges rise more slowly. Thus, travelling to Switzerland could be economically worthwhile for a transaction value of 1.5 million Euros or more.

In more complex situations and larger transactions, the sale process always involve lawyers who draft the contracts and take liability for faulty advice, so many people feel that the compulsory use of a notary and the associated costs are unnecessary and unjustified. It is therefore not surprising that the services of Swiss notaries are often called on to save costs, although these notaries exclude any liability for the contracts.

However, a foreign notarisation must fulfil certain requirements to be effective under German law. For  this purpose, either the formal requirements of the law which is applicable to the legal relationship forming the subject matter of the legal act, or the law of the country in which the act is performed must be complied with. The position expressed by the Higher Regional Court (OLG) of Düsseldorf was largely limited to the formal requirements  so this aspect will be considered in more detail here. The formal requirements are fulfilled if the foreign notarisation satisfies the formal requirements of German law on private limited companies (GmbH) and is therefore equivalent to German notarisation. According to the case law pronouncements of the Federal Court of Justice (BGH), this is the case if the foreign person notarising the document exercises a function which requires an education and a legal position which are equivalent to the work of a German notary and if the foreign notarisation procedure is equivalent to the German procedure. In the past, case law has accepted this for the Swiss notarisation procedure and for notaries from the cantons of Basel City, Zürich Old City and Zug.

Changes in the law

As a result of the changes in the German Companies Act (GmbHG) which came into force on 1 November 2008 as part of the Act to Modernise the Law on Private Limited Companies and Combat Abuses (the “MoMiG” reform), misgivings were expressed about the effectiveness of this policy. In particular, the list of shareholders was assigned greater importance.

According to the new provisions, a person is only deemed to be a shareholder vis-à-vis the company if he/she is registered as such in the list of shareholders in the register of companies. In addition, legal provisions for the purchase of shares in a private limited company (GmbH) were defined for the first time. For example, a purchase from a non-entitled party is possible under certain circumstances if this party is shown as the holder of the shares in the list of shareholders.

Even before the reform, the list of shareholders had to be updated by the managers after every change and submitted to the commercial register. But if a notary is involved in the changes, this notary is then obliged to sign and submit the list. To reflect the greater importance of the list, the notary must now also confirm that the changed entries correspond to the changes in which he was involved, and that otherwise there have been no changes from the list that is already registered.

And finally, in 2008, changes were also made in the Swiss Law of Obligations. Under these changes, only a written contract was necessary for an effective transfer of shares in a private limited company (GmbH). A notarisation was no longer required, although the parties are at liberty to notarise the contract as an option.

Consequences for foreign notarisation

In view of these changes, doubts arose about the effectiveness of foreign notarisation. The Regional Court (LG) of Frankfurt am Main also expressed its misgivings in one of its rulings: it suggested that the notary's obligation to sign and submit the list of shareholders was an official duty under public law which could only be imposed on a domestic notary, and not on a foreign notary. It stated that a foreign notary is unlikely to be able to give the necessary guarantee of correctness, and that the legislative body therefore wanted to exclude foreign notarisation.

Ruling of the Higher Regional Court (OLG) of Düsseldorf

The Higher Regional Court of Düsseldorf has now clearly contradicted this opinion. It states that neither the change in the law in Germany nor the change in the law in Switzerland undermines the effectiveness of foreign notarisations in Switzerland. It agrees that the new provisions on the list of shareholders create an obligation of notification which cannot be imposed on a foreign notary by German law, but that these provisions do not affect the notarisation as such. “The fact that a foreign notary is not subject to an obligation of notification does not change the fact that he can notarise a document effectively.” The court considers that the notarisation as such is equivalent to notarisation by a German notary. And it states that this is not changed by the formal simplification of the transfer of shares in private limited companies (GmbH) under the Swiss Law of Obligations, because the parties can voluntarily choose a stricter form – i.e. notarisation.

Consequences in practice

After the ruling of the Higher Regional Court of Düsseldorf, an increase in notarisation tourism can be expected. The Higher Regional Court of Düsseldorf considered all of the arguments which can be used against foreign notarisation and rejected them with convincing reasons. This restored the necessary security for foreign notarisations. In the light of the cost savings in Switzerland, transfers of shares of medium to large private limited companies (GmbH) will again be increasingly notarised there. This development is also indicated by the consistently positive response of lawyers working in company law.

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For further information please visit the German version of this site or contact the Practice Group Tax tax@sibeth.com 

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For further information please visit the German version of this site or contact the Practice Group Tax tax@sibeth.com 

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in Case of indirect holding of the Real Estate Owner

For further information please visit the German version of this site or contact the Practice Group Tax tax @ sibeth.com 

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For further information please visit the German version of this site or contact the Practice Group Tax tax @ sibeth.com

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The case law position of the Federal Labour Court (BAG) on the expiration of holiday entitlements, which has effectively been uncontested for many years, has now been rejected by the European Court of Justice. In its ruling of 20 January 2009 ("Schultz-Hoff") it decided that the expiry of a holiday and compensation entitlement at the end of the period for which holiday can be carried forward according to Section 7 III of the Federal Leave Act (BUrlG) – which up to now was 31 March of the following year at the latest – is irreconcilable with European law if the holiday could not be taken because of an incapacity for work. The Federal Labour Court then changed its previous case law policy so that the claim to compensation for the statutory holiday does not expire if the employer is incapable of work due to illness up to the end of the holiday year or the period for which the holiday can be carried forward. This has far-reaching consequences for the employers, because employees who have been ill for year suddenly have enormous "reserves of holiday entitlement" which they can claim from their employers.

The possibilities which can be adopted by employers to combat this are currently being reviewed in court. Nevertheless, employers should not wait, and they should prepare precautionary possibilities to avoid the problems. One possibility – in extreme cases – is to terminate the contracts with the affected permanently ill employees; in addition, provisions in the employment contract could prevent the claims from arising – at least in part.

However, termination due to illness as an effective defence is questionable because it actually means that the protection of employees which was intended by the European Court of Justice actually makes things worse. Nevertheless, it could be an effective possibility to bring the collection of holiday entitlements to an end. The question of whether termination is valid in such cases can only be decided in each individual case.

In any case, however, it is advisable to adapt the standard employment contracts. As the ruling by the European Court of Justice only applies to the statutory minimum holiday, the employer and employee are at liberty to differentiate between the statutory and contractual holiday entitlements. This means that contractual terms relating to holiday should define the principles for any extra holiday over and above the statutory entitlement. So it should be specified that the holiday in excess of the statutory holiday will lapse at the end of the period for which holiday can be carried forward even if it could not be taken because the entitled employee was incapable of working. It is important to make a clear distinction between the statutory holiday and the extra holiday, and to ensure that such a provision has the necessary clarity.

In view of the major financial risks which have now arisen, the only possibility which is available to the employer up to now to limit the claims is the "emergency brake" – in other words, termination. On the whole, however, it remains to be seen whether case law will create other possibilities to limit the risk. In any case, the present situation is very unsatisfactory for all parties.

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The European Court of Justice caused a commotion with its ruling of 21 January 2010 (C-398/08). It decided that the advertising slogan of Audi AG "Vorsprung durch Technik" was eligible for registration as a Community trademark. But this decision does not mean that all advertising slogans can now fundamentally be registered as a trademark. Such slogans must always fulfil the registration criteria under trademark law, in particular that they must have a distinctive character. The subject of the distinctive character of an advertising slogan was the decisive point in the ruling of the European Court of Justice on the Audi slogan "Vorsprung durch Technik". The following section presents the major considerations which led to this decision and concludes with a practical note.

The fact that a trademark consists of symbols or statements and is otherwise used as an advertising slogan does not prevent its eligibility for registration. Instead, the sole criterion is the distinctive character of the trademark, and thus its suitability as a statement of origin. A distinctive character means that the trademark has the effect of marking the goods for which the registration is sought as originating from a specific company and thus distinguishing these goods from goods produced by other companies.

The court stated that no stricter requirements can be justified for the registration of advertising slogans as trademarks than those which are made for other symbols. In particular, the perception of the trademark as an advertising slogan by target audience does not alter these requirements.

The distinctive character of the slogan is not prevented by the fact that it naturally contains a factual statement. Especially if the slogan is in some way original or striking and thus makes the advertised products or services memorable, requires a minimum of interpretation or triggers a thought process in the target audience, it can fulfil its trademark function of indicating its origin.

The trademark "Vorsprung durch Technik" is a play on words and can be regarded as imaginative, surprising, unexpected and thus memorable. The existence of these qualities gives the trademark a distinctive character. Thus it is eligible for registration.

In practice this means that advertising slogans are fundamentally eligible to be registered as trademarks. However, they must have a distinctive character. It is in the nature of a slogan that it does not automatically indicate the company of origin of the goods or services, and it often has a merely descriptive character. We will be pleased to advise you in more detail.

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VAT correction if a down payment has been received and the performance has subsequently not been rendered

In taxation on the basis of the agreed remuneration, the VAT fundamentally arises at the end of the tax period in which the contractor has rendered its performance. However, if down payments are made, the contractor must pass on the VAT which arises on the down payment to the tax office at the time when the down payment is received (minimum cash accounting for VAT).

In its ruling of 2 September 2010, the Federal Court of Finance (BFH) had to decide when the contractor can correct the VAT arising from the down payment (and claim a refund) if the agreed performance is then not rendered. The court decided that for a correction of the VAT, it is necessary for the contractor to have repaid the down payments to the party which paid them. A mere agreement between parties not to implement the transaction was not deemed to be sufficient.

This ruling is of special importance in insolvency proceedings. If the insolvency administrator decides not to fulfil the outstanding contracts after the institution of insolvency proceedings (Section 103 of the German Insolvency Act), he can only claim a VAT correction from the tax office if the payment has really been refunded to the creditor.

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If an individual asset which forms part of a business asset is sold, this leads to a fair value adjustment of the hidden reserves ("Aufdeckung stiller Reserven). The realisation of hidden reserves fundamentally also occurs in cases of exchange. Here, Section 6 (5) of the Income Tax Act makes an exception for certain cases by stipulating that it is mandatory to carry forward the book value, especially in the following constellations:

• Transfer of an asset from one business asset to another business asset of the same taxpayer;
• Transfer of an asset from the taxpayer's own business asset to the taxpayer's special business assets in a private company and vice versa;
• Transfer between different special business assets of the taxpayer with different private companies;
• Transfer free of charge, or transfer in return for granting or reducing the price of shareholder rights, from a business asset or special business asset of a partner to the jointly owned assets of a partnership in which he is a participant, and vice versa.

However, the law does not explicitly define the case of a transfer of an asset of the jointly owned assets of a private company to the jointly owned assets of an affiliated partnership (with identical shareholders). The 1st Senate of the Federal Court of Finance (BFH) decided in its ruling of 25 November 2009 that this leads to a fair value adjustment of the hidden reserves. But the 4th Senate of the Federal Court of Finance (BFH), in its ruling of 15 April 2010, came to a different conclusion. According to the 4th Senate, where there is a transfer of an asset between affiliated partnerships with identical shareholders, it is mandatory to carry forward the book value in accordance with Section 6 (5) of the Income Tax Act (by analogy). In a circular 29 October 2010, the Federal Ministry of Finance followed the opinion of the 1st Senate connected and accepted a realisation of profit.

At the moment there is therefore legal uncertainty concerning the transfer of an asset between affiliated partnerships with identical shareholders. Because the 4th Senate issued its decision, which is more favourable for the taxpayer, in temporary injunction proceedings, we will have to wait for the ruling in the main proceedings. It is advisable to keep any tax assessment notice open by filing objections.

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I. Introduction
In direct debit transactions, up to now a distinction has been made between direct debit orders issued to the bank (Abbuchungsauftrag) and direct debit authorisations issued to the payee (Einzugsermächtigung).

1. Direct debit orders issued to the bank (Abbuchungsauftragsverfahren)
In a direct debit order to the bank, the payer issues a direct debit order to the bank instructing the bank to pay a direct debit on his behalf and against his bank account, with the effect of discharging his payment obligation to the payee. In the relationship between the payer and the paying bank, the direct debit is finalised if the debit is not cancelled at the latest on the second banking day after it has been posted.

2. Direct debit authorisations issued to the payee (Einzugsermächtigungsverfahren)
In the direct debit authorisation procedure, the payer authorises the creditor to collect certain payments from his account. The payer does not issue any instruction to his bank. Because of this, the payment obligation is deemed to have been fulfilled not when the direct debit is paid, but when it is approved (the "approval theory"). Usually, this approval is not explicitly granted. In practice, a notional or implied approval is customary. According to No. 2.4. II 3 of the terms and conditions for direct debit authorisations, the approval is deemed to have been given, at the latest, if the payer has not objected to a direct debit collected by a payee to whom he has given a direct debit authorisation within six weeks after receiving the statement of accounts for the relevant current account period. Until the approval has been given by the payer, there is a state of suspense both between the payer and his bank and between the payer and the creditor, because any valid objection by the payer would cause the payment to be reversed by the banks, so that the direct debit would have to be returned to the creditor's bank, which in turn would then debit the amount to the creditor's account. In addition, the creditor's claim to receive payment from the payer would not have been met. This can be unpleasant for the creditor if insolvency proceedings have been initiated against the payer's asset during this period of suspense.

II. Case law rulings of the Federal Court of Justice (BGH)
Since 2004 there have been considerable differences of opinion between the IX Senate of the Federal Court of Justice, which is responsible for insolvency law, and the XI Senate, which is responsible for banking law, on the question of whether direct debit payments based on a direct debit authorisation are insolvency-proof.

On the basis of a ruling by the IX Senate of the Federal Court of Justice of 2004 about an objection to a direct debit in insolvency, insolvency administrators then made extensive use of their right of objection to direct debits processed on the basis of direct debit authorisations. The IX Senate justified this right of objection on the grounds that the insolvency administrator was duty-bound to safeguard the debtor's assets to protect the future insolvency assets. For this reason, it was ruled that the right of objection would exist  – without triggering any compensation obligation for the administrator – even if no factual objections can be made against the claim. The XI Senate of the Federal Court of Justice saw this differently and argued that even an insolvency administrator is not entitled to carry out any action, e.g. by filing an objection, if the same action would lead to an obligation to pay compensation if it were taken by the payer.

In two rulings by the IX Senate and the XI Senate of the Federal Court of Justice of 20 July 2010, each of which was supported in its justification by the other Senate, the dispute about whether direct debits paid by a direct debit authorisation process are insolvency-proof has now been brought to an end. Basically, both Senates now agree that the "approval theory" applies. The legal consequence is that direct debit bookings made with a direct debit authorisation are not insolvency-proof. This is because an administrator can prevent the approval of the payer and the existence of the notional approval by objecting to the booking. But both Senates recognise three exceptions:

1. SEPA direct debit
A new procedure alongside direct debit orders issued to the bank and direct debit authorisations issued to the payee is the SEPA direct debit, an Interbank procedure which defines rules and standards for the fully automated collection of direct debits in euros within the territory of the Single Euro Payments Area (SEPA). In the SEPA direct debit procedure, the payee is authorised to collect direct debits from the payer's account with the payer's bank. In addition, the payer's bank is instructed to honour direct debits received from the specific payee and debit the amounts to the payer's account. But the payer does not issue this instruction directly to his bank. Instead, it is transmitted to the payer's bank electronically by the payee's bank, and it is the basis which authorises the payer's bank to honour a SEPA direct debit.

2. Expiry of the period for an objection
Even before the end of the six weeks, an implied approval may apply after the receipt of the statement of accounts, taking into account the specific circumstances in individual cases. This is the case, for example, in business to business transactions where there are regular recurring direct debits arising from permanent contractual agreements if the payer has effectively approved them on an occasion in the past.

3. Personal assets
Finally, in an insolvency of natural persons, the insolvency administrator can no longer globally object to or refuse approval for all direct debits which have not yet been approved. The court stated here that the insolvency administrator has no legal power over the assets which are exempt from attachment ("personal assets"), which remain with the payer. Before filing any object, the insolvency administrator must therefore inspect the debtor's account to ascertain whether direct debits are being paid from the personal assets or from the insolvency assets.

III. Future development
The rulings of the Federal Court of Justice of 20 July 2010 now mean that insolvency administrators dealing with the insolvency of both natural persons and businesses can no longer globally object to all direct debits that have not yet been approved. For businesses, the possibility of an implied approval must be checked, and for natural persons the personal assets must be taken into account. This has already significantly weakened the position of insolvency administrators. Whether the direct debit is in fact insolvency-proof is decided by the Central Credit Committee (ZKA), a committee formed by the five major associations of the German banking sector. The Central Credit Committee is currently checking an adaptation of the special terms and conditions for direct debits. In the changes in the special terms and conditions for direct debits which were envisaged by the XI Senate of the Federal Court of Justice, even payments made by direct debit on the basis of a direct debit authorisation issued to the payee were insolvency-proof from the outset.

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The cancellation of calls for tender, like the whole of the tender process, must be carried out in accordance with public procurement law. Reasons for cancellation in Europe-wide procurement processes are given in Section 20 of the Procurement and Contract Regulations for Services within the European Community (EG VOL/A 2009) and Sections 17 and 17a of the Standard German Building Contract Terms (VOB/A) 2009) earmarked. Under these provisions, the client is only entitled to cancel a procurement process subject to certain requirements. The same applies to cancellations of calls for tender below the threshold values according to Section 17 of the Procurement and Contract Regulations for Services (VOL/A) and Section 17a of the Procurement and Contract Regulations for Services (VOB/A). Nevertheless, it is accepted that a public sector client has a certain discretion to decide whether a contract should be awarded. In a ruling of 10 November 2010 (Verg. 28/10), the Higher Regional Court (OLG) of Düsseldorf has now pointed out that in the event of a cancellation of the tender process, any defects in the reasons can be remedied. This means that bidders are not able to force an award of contract, so in the contract award review proceedings the review body is not entitled to rule that the procuring organisation must continue the proceedings and end them by awarding a contract.

The background to this decision was a call for tender for concrete repair work with the associated corrosion protection work by a public sector client. This client had demanded the submission of references as proof of the bidder's suitability to execute the work, and certain minimum standards had been specified. A bidder, the later claimant,, submitted a bid which quoted sub-contractor work carried out for cathodic corrosion protection. The references referred to services rendered for for similar projects by the sub-contractor. However, it was not able to present any references for the concrete work which was to be rendered by the bidder, so the procuring body excluded the bid because of the lack of the required documents. Because other bidders had also not remained in the contract award proceedings, the procuring body then cancelled the call for tender because of the lack of bids which were eligible for evaluation.

In the contract award review proceedings the Higher Regional Court (OLG) found that the required minimum conditions had been contradictory, or at any rate not clear. The court stated that the claimant was entitled to assume that the appropriate references only needed to be submitted for the cathodic corrosion protection. This meant that there was no reason to exclude the bid by the claimant. Nevertheless, the court stated that the procuring body could not be placed under an obligation to award the contract: It considered that the statements made by the procuring body in the course of the contract award review proceedings clearly showed that the procuring body also placed great importance on the presentation of references for concrete repair work. It concluded that the fact that this requirement was not unambiguously apparent in the call for tender did not force the client to continue the award of contract on the basis of this call for tender in spite of the lack of the appropriate references. Instead, the fact that the procuring body regarded further references as necessary for objective reasons was deemed to be sufficient reason to cancel the current tender process. The court ruled that this discretion could not be taken away from the client. The Higher Regional Court considered that the mere lack of an previously existing reason for cancellation could fundamentally be remedied, so an obligation to award the contract could not be applied here.

This ruling by the Higher Regional Court of Düsseldorf shows that the client has considerable scope for a decision to cancel a call for tender as long as the client can present sufficiently documented and solid factual reasons to do so.

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In a ruling of 9 December 2010 (VII ZR 7/10) the Federal Court of Justice stated its opinion on when a client has excessive security and a security agreement could be invalid.

In the case before the court, the special conditions of contract (ZVB) stipulated that the contractor must provide the client free of charge with a contract performance guarantee of 10% of the agreed order total. According to the special conditions of contract, this guarantee was to secure the contractual and punctual implementation of the performance and to provide security for any rights of the client to repayment arising from over-payments during the construction period. At the same time, the general terms of business stipulated that the client was entitled to hold back a security retention of 10% of the part payments which result from the checked and recognised claims for work performed until such time as the sub-contractor's final invoice is checked and paid. In addition, they allowed the client to set of the retained payments against other receivables arising from the contract for work at any time.

The Federal Court of Justice (BGH) ruled that a contract performance guarantee of 10% which is included in the client's terms of business is null and void if there is a combination of the provision for a security agreement and another provision concerning the agreements about the part payments because this leads to excessive security to the disadvantage of the contractor.

The decisive consideration for the Federal Court of Justice was that on the one hand, each of the two provisions on its own did not constitute a violation of the law on general terms of business. The court stated that a contract performance guarantee for 10% of the order total is effective if it applies on its own and is not reinforced by one or more other contractual provisions in such a way that the other party to the contract is at an unreasonable disadvantage (a position also taken by the Higher Regional Court (OLG) of Munich, ruling of 22 December 2009 – 9 U 1937/09).

In the case under consideration, however, the court believed that the combination of provisions leads to an unreasonable disadvantage. As a result, the Federal Court of Justice ruled that both provisions were null and void because it was not up to the court to decide which of them should remain valid (Federal Court of Justice (BGH), ruling of 26 October 1994 – VIII ARZ 3/94).

Previously it had been disputed whether security of 5% of the order total as mentioned in Section 14 No. 2 of the old version of the Standard German Procurement and Building Contract Terms (VOB/A) could be seen as an upper limit for the fulfillment of all obligations arising from the contract, although in practice a security of 10% had become established in practice. The Federal Court of Justice (BGH) now confirms the allowability of a claim to this level of guarantee: it considers that security of 10% of the order sum does not place the contractor at an unreasonable disadvantage because the contract performance risk especially arises if the contractor becomes insolvent during the performance of the contract and a third party must therefore be commissioned with the completion of the construction project. It states that the resulting extra cost is often even greater than the contract performance guarantee of 10% of the order total. It considers that even an agreement to provide a guarantee on first demand to secure the performance of the contract does not constitute an unreasonable disadvantage for the contractor. Nevertheless, the principle of the prohibition of excessive security remains: a combination of different forms of security could create an unreasonable disadvantage for the party to the contract, and the provision therefore becomes null and void.

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Until the terror attack on the New York World Trade Center on 11 September 2001, the risk of a terrorist attack was regarded as negligible, and it was usually included in the fire insurance without any extra premium. After that, the insurance companies changed their conditions for fire insurance – and damage resulting from acts of terror was usually no longer covered for buildings with an insured value of more than 25 million euros. Many building owners therefore wanted to take out separate terror insurance and to allocate the resulting costs to the tenants.

The ruling by the Higher Regional Court (OLG) of Stuttgart of 15 February 2007 (13 U 145/06) was very kind to the landlords. The judges assumed that the costs of terror insurance can be allocated to the tenants if the rental contract defines the costs of property insurance as allocable operating costs – irrespective of whether the building is particularly at risk, because they considered that it cannot be predicted where a terrorist attack will take place, so any building in the world is therefore at risk. They stated that terror insurance is therefore necessary and reasonable for any building.

On the basis of this clear ruling, it was then possible to advise landlords that the costs of terror insurance can be allocated to the tenants if the costs of property insurance are agreed as allocable auxiliary costs in the rental contract. This also applied to new insurance policies which arose during the term of the rental contract where the previous insurance no longer covered the risk of terror.

A recent ruling of the Federal Court of Justice BGH of 13 October 2010 (XII. ZR 129/09) has now called this customary advice into question. The Federal Court of Justice (BGH) ruled that the costs of terror insurance can now only be allocated to the tenants under very specific circumstances.

It stated that costs of terror insurance can fundamentally be allocated to the tenants as auxiliary costs because it is building insurance and therefore falls under the category of property insurance. However, landlords must always take the principle of economy into account when allocating auxiliary costs. This refers to the landlord's auxiliary contractual obligation to act in good faith and only to allocated auxiliary costs to the tenant which are necessary and reasonable. For rented residential premises this obligation is defined in Section 556 (3) sentence 1 of the German Civil Code, and for rented business premises it is stipulated in Section 242 of the Civil Code. The definitive criterion is the perspective of a sensible landlord who ensures a justifiable cost/benefit ratio in the course of proper management. However, the landlord is granted a certain scope for decision-making. For example, he is not always obliged to select the cheapest solution, he is also entitled to take into account other criteria 
which are relevant to proper property management such as the reliability of the contracting party.

On this basis, a landlord can only allocate the costs of terror insurance to the tenants if the costs are necessary and reasonable. The Federal Court of Justice therefore demands that for each insured building a check is made to ascertain whether insurance against acts of terrorism is necessary in individual cases and whether the selected insurance policy is reasonable if there are specific circumstances which justify the risk of damage to the building as a result of a terrorist attack.

The Federal Court of Justice also explained for what buildings "a justified risk of terrorist attacks" is deemed to exist. According to the judges, acts of terrorism are "any acts of persons or groups of persons which are committed to achieve political, religious, ethnic, ideological or similar goals which are likely to create fear in the public or any section of the public and thus to influence any government or government institution". The attacks are therefore aimed to weaken major state structures by creating fear in the population. According to the Federal Court of Justice, the buildings which are at risk are therefore especially buildings with a symbolic character (e.g. the Eiffel Tower), buildings in which the power of the state is exercised (military facilities, government and parliamentary buildings), buildings in which a large number of people congregate, especially in big cities or conurbations (stations, airports, tourist attractions, sports arenas, office or shopping centres), and buildings in the immediate vicinity of such buildings.

A building which meets these conditions can therefore fundamentally be insured against the risk of a terrorist attack, and the costs can be allocated to the tenants. But the landlord must also take the obligation of economy into account in the selection of the specific insurance policy and is not entitled to select an excessively expensive policy. However, as outlined above he has a certain scope for his decision.

Conclusion: the costs of terror insurance can be allocated to the tenants if the rental contract includes the appropriate provisions for the auxiliary costs, if there is a justified risk of terrorist attack for the building and if the cost/benefit ration for the specific policy is reasonable.

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The appeal court (Kammergericht, KG) of Berlin, in a ruling of 8 June 2010, gave a decision on whether a consortium (ARGE) consisting of several building companies is eligible for registration in the land register and therefore able, after submitting a writ of execution that is issued in its name to secure outstanding receivables for work performed, to apply for the registration of a claim-securing mortgage. The appeal court (KG) ruled that this is possible - thus contradicting the court of first instance.

According to the appeal court, a consortium (ARGE) is eligible for inclusion in the land register irrespective of whether it is classified as a partnership under civil law (GbR) or a commercial partnership (OHG) under German law, because the eligibility of a partnership under civil law (GbR) can be derived from the consistent case law pronouncements of the Federal Court of Justice (BGH), and the eligibility of a commercial partnership results directly from Section 124 (1) of the German Commercial Code (HGB).

The Local Court (AG), as the court of first instance, had previously rejected the application for the registration of a claim-securing mortgage and the eligibility of the consortium for registration in the land register on the grounds that the writ of execution, which only designated the consortium as a consortium (ARGE), did not sufficiently show whether it was legally constituted as a partnership under civil law or a commercial partnership. In contrast to this ruling, the appeal court accepted the designation as a consortium (ARGE). The appeal court justified this by stating that a consortium normally meets the criteria for a partnership under civil law (partnership of persons, pursuit of a joint purpose on a contractual basis, with a specific contribution to be rendered by each party). This means that a consortium should fundamentally be registered as a partnership under civil law (GbR) in the land register. The only exception to this principle is when there are specific indications that the consortium is a commercial partnership (OHG). However, this only applies when there is a permanent consortium which is designed from the outset to carry pit more than just a single construction project, i.e. a consortium which is formed for an indefinite period to carry out several construction projects.

But when a consortium is registered in the land register, the following must be taken into account:

In the exceptional cases in which it is a permanent consortium, and therefore a commercial partnership (OHG), no further details of the partners need to be declared. In the normal case, where the consortium is a partnership under civil law, the revised version of Section 47 of the Land Registration Act (GBO) stipulates that not only the consortium itself must be registered, but also all of its partners. They should therefore also be listed in the underlying writ of execution.

Previously, after long discussions about the legal capacity and eligibility for registration of the partnership under civil law, it was possible to register only the partnership in the land register, without declaring the individual partners. This repeatedly led to heated discussions because the land register did not show the persons who formed the partnership. For this reason, the legislative body gave its attention to this subject and solved the problem by amending Section 47 of the Land Registration Act (GBO). However, it is not necessary to correct previous entries which were only made in the name of the partnership by adding the details of the partners.

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In Germany, it has still not been clarified by a ruling in the highest German courts whether and to what extent lawyers who are employed in the legal departments of business enterprises can claim protected lawyer-client confidentiality for their work for their employer. In the first place this applies to the right to refuse to testify (under Section 53 (1) No. 3 of the Criminal Procedure Code (StPO) in criminal law and Section 383 (1) No. 6 of the Civil Procedure Code (ZPO) in civil law) if parties and judicial authorities in court disputes, administrative proceedings or even criminal investigations cite employed lawyers from the legal department of a company as witnesses in order to obtain information which could not otherwise be obtained. The issue is also relevant for the question of whether the internal correspondence of the company and the documents drawn up in the framework of the employment are exempt from seizure and confiscation (Section 97 (1) and (2) of the Criminal Procedure Code).

It is undisputed that any claim of lawyer-client confidentiality by lawyers who are employed as permanent legal advisers is only possible if they are licensed to practise as lawyers. But even today there is still controversy about whether an employed lawyer, who only differs from a lawyer in free practice because of his employed status for his employer, can claim the same rights of confidentiality from judicial authorities and public bodies for this work as a permanent legal adviser.

Case law rulings in the lower courts have in some cases made this dependent on whether the company's trust in the confidential nature of the communication in which it seeks legal advice is worthy of protection in the individual case. This was in particular deemed not to be the case if the work of the employed lawyer for the company was more like the work of a clerical employee rather than a lawyer. However, the case law does not provide any specific criteria for this distinction. Positive opinions in the literature, on the other hand, suggest that the question is dependent on whether the employed lawyer has carried out classical legal consultation work in the individual case, such as providing legal advice or legal support in contract negotiations and court cases (rather than carrying out purely management-related tasks such as planning and investment decisions), and also on whether the lawyer acted in a higher capacity and with an independence which allowed him both to refuse assignments from his employer and to accept mandates from third parties.

The "double career theory" which the Federal Court of Justice (BGH) has always held, which assumed that the employed lawyer has two separate spheres of work – his non-lawyer work as an employee of his company and at the same time his work as a free and independent lawyer dealing with his own mandates – tends to counteract the view that the privilege of lawyer-client confidentiality should also extend to his work within the company. But this issue has never been actually decided by the Federal Court of Justice (BGH).

In view of the fact that the European Court of Justice decided, in a ruling of 14 September 2010 (C-550/07 Akzo Nobel chemicals Ltd. et al against the European Commission), that the protection of confidentiality is subject to two requirements: firstly that the correspondence was conducted in the framework and in the interest of the client's right to a legal defence, and secondly that it was carried out by "independent lawyers, i.e. lawyers who are not bound to the client by a contract of employment", any hope of a change in policy at the national level has also dwindled. It can be pointed out that the ruling only affects matters of European community law, specifically European competition law, and that the level of national law is not fundamentally affected. But the statement by the European Court of Justice that a lawyer who is employed as a permanent legal adviser does not enjoy the same level of independence in relation to his client as a lawyer working in an external law firm because of his economic dependence and his close allegiance to the employer is so fundamental in its scope that this ruling is also likely to have an effect on other areas of European community law. And it will not be without influence on the already controversial national discussion. This will further strengthen the tendency, which has already been apparent in German case law, to largely refuse the privileges of lawyer-client confidentiality for an employed lawyer when he acts on behalf of his employer.

Even outside competition law it is therefore not possible to assume that internal communication with an employed lawyer is covered by the protection of lawyer-client confidentiality. At the very least, in view of the case law ruling by the European Court of Justice, any legal advice in relation to competition law should be taken from external lawyers if it is important for the confidentiality of the correspondence to be protected from public and judicial authorities.

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In a ruling of 12 May 2010, the First Civil Chamber of the Federal Court of Justice (BGH) decided that cease and desist action can be taken against private persons, but no claims for damages can be made against them, if their inadequately secured WLAN connections are used by unauthorised third parties to commit copyright violations on the Internet via the connection.

The claimant, the owner of the rights to a music title, had learned that this title had been offered for download on an online exchange service from the respondent’s Internet connection. It filed legal action to cease and desist, combined with a claim for damages and the reimbursement of the warning costs. The respondent defended himself by saying that at the time of the violation he had been away on holiday, that his computer had been in a locked office, so he had no liability.

The action was partly successful. The Federal Court of Justice clarified that the respondent was not himself a perpetrator or collaborator of a copyright violation committed by the unauthorised use of his WLAN connection, but on the basis of the legal principles of “liability as a co-liable party” he can be liable for cease-and-desist action and the reimbursement of the costs of the warning. The court stated that the owner of a WLAN connection is obliged to protect it from misuse. If this obligation is not sufficiently fulfilled, the owner of the connection is liable according to the above principles, even if the connection is misused by unauthorised third parties.

The press release of the Federal Court of Justice No. 101/2010 comments on the obligations to check network security as follows: “Even private connection owners are obliged to check whether the appropriate protective measures are in place to protect their WLAN connection from being misused by unauthorised third parties to commit copyright violations. However, private operators of a WLAN network cannot be held responsible for ensuring that their network security is continually in line with the latest state of the available technology and for expending the necessary funds. Their obligation to check network security therefore involves complying with the security measures which are standard market practice for private consumers at the time when their router is installed.”

In the opinion of the Federal Court of Justice, the respondent violated this obligation by leaving the standard security settings of the WLAN router which were pre-set by the manufacturer, and not replacing the password by a sufficiently secure personal password. He is therefore liable under the legal principles of “liability as a co-liable party” to cease and desist the violation and to reimburse the costs of the warning. However, although the respondent is a “co-liable party”, he is neither the perpetrator nor a participant in the copyright violation, so he is not obliged to pay any damages.

The ruling clearly shows that a liability of the owner of a WLAN connection for copyright violations by unauthorised third parties is fundamentally conceivable. This liability can only be excluded by adopting the appropriate security measures. The court states in detail what elements the owner of the connection is obliged to check. For private owners of WLAN networks, this means that to a to take care to ensure reasonable security from misuse. According to the Federal Court of Justice, liability for misuse can be excluded if the owner of the connection “complies with the security measures which are standard market practice for private consumers at the time when their router is installed”.

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The profit for business entrepreneurs must be calculated for the financial year. The financial year is normally the calendar year, but it may deviate from this arrangement by agreement with the tax office. But income tax is a tax that is based on the calendar year, so where there is a different financial year, the profit calculated for the financial year must be allocated to a tax assessment period. For business entrepreneurs, Section 4a (2) No. 2 of the Income Tax Act stipulates that where there is a different financial year, the profit is deemed to have been earned in the calendar year in which the financial year ends.

Up to now, it was a matter of dispute whether this provision also applied to capital gains which arise when a business partner leaves the partnership. In its ruling of 18 August 2010 (Ref.: X R 8/07), the Federal Court of Finance has now decided that this does not apply. The gains are based on the calendar year in which the business partner leaves the partnership because the level of the partner must be separated from the level of the company.

This judgement of the Federal Court of Finance means that a reliable tax arrangement can be achieved by selecting the time of retirement.

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According to Section 233a of the German Fiscal Code (AO), demands for arrears of tax and tax refunds accrue interest under certain circumstances. If the taxpayer receives interest payments from the tax office, case law and the tax authorities so far assumed that this amounted to capital gains which were taxable as income tax. The only case in which the interest payment was not taxed was if it was a repayment of previously paid interest on payments of arrears.

In a ruling of 15 June 2010 (Ref.: VII R 33/07) the Federal Court of Finance changed its case law policy. It decided that the statutory interest under section 233a of the Fiscal Code is not taxable if the interest relates to personal tax which may not be deducted in the calculation of the tax according to Section 12 No. 3 of the Income Tax Act, i.e. especially income tax. In the opinion of the court, this tax and the auxiliary costs are completely non-taxable. So not only the payment of such tax and auxiliary costs is excluded from tax, this also applies to any refunds.

The Federal Court of Finance did not consider the parallel case for corporation tax. But there are plausible reasons to assume that this change in the case law should also apply to corporation tax because here, too, the underlying tax payment does not reduce the basis of assessment for tax.

As a result of this change in case law, any tax assessment notices which can still be changed should be reviewed especially to check whether any reimbursement interest has been classed as income from capital gains. If appropriate, these assessment notices could be objected to, or applications to revise the tax assessment could be filed. This applies especially to assessment notices which are still subject to review.

However, in the draft of the Annual Tax Act 2010 the Federal Ministry of Finance reacted to this ruling of the Federal Court of Finance. It proposed to the legislative body that the provisions for capital income should be extended and that reimbursement interest should explicitly be subject to tax for all cases which are still outstanding. The parliamentary finance committee has already approved the draft.

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For further information please visit the German version of this site or contact the Practice Group Tax tax @ sibeth.com

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For further information please visit the German version of this site or contact the Practice Group Tax tax @ sibeth.com

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