JUVE Law Firm of the year

Tax

Robust M&A market and stricter fiscal authority

International aspects are visibly shaping the activities of tax practices, with the booming M&A market, esp. in cross-border transactions, reinvigorating activity. What is more, the fight against international tax abuse (Base Erosion and Profit Shifting, BEPS) is gradually taking shape: in the summer, together with over 60 countries, Germany signed the multilateral instrument against harmful tax practices.

Confusion over tax saving models

In the course of the BEPS initiative, the European Commission also caused a stir: with a draft directive, it wants to ensure that lawyers, tax advisors and accountants pass on to the financial authorities any “aggressive” tax saving models they advise their clients on in the future. The draft mainly concerns cross-border models. The Commission also hopes that the reporting obligation will improve the exchange of information between Member States. This push is unsettling advisors, as the Commission left it relatively open as to when it will categorize tax structuring as a model. What exactly an “aggressive” tax saving model is also remains unclear.

But it is not only the European Commission causing confusion. An expert opinion commissioned by the German Finance Minister last year also came to the conclusion that advisors should have to report “aggressive” tax saving models to tax authorities. If Wolfgang Schäuble prevails with this demand, it will not only be cross-border structuring that is affected.

The German authorities are already taking a tougher stance and audits are becoming more exhaustive. For law firms, this means more work: the number of audits rose substantially, with the fiscal authorities targeting sales tax above all. The trend towards stricter rulings means that more and more preliminary proceedings are leading to trials, as firms report, which, in turn, is generating demand for advice.

Steady flow of work from dividend stripping and “cum-cum” deals

One key driver of the legal market is work dealing with the fallout from dividend stripping cases. The range of issues is diverse: from reviewing tax compliance structures to disputes with tax authorities over refunds – such as that conducted without success by Commerzbank – to pursuing potential claims against former decision makers, such as that at HypoVereinsbank.

?White collar crime and tax criminal lawyers are often heavily involved in these cases as, even though some fundamental aspects of dividend stripping have yet to be clarified by the highest financial courts, numerous preliminary criminal proceedings result in prosecution. And the next wave of advice on tax transactions with stock dividends is already on the way: the Finance Minister is taking a more consistent approach when it comes to so-called “cum-cum” transactions as well in order to retrieve billions in tax revenues from banks. In the financial sector, the investment tax reform, which will come into force in 2018, is also raising demand for advice.

More demand for law firms is also coming from the decree on the application of Section 153 of the Fiscal Code. This is causing uncertainty when it comes to the correction of tax returns, especially in companies yet to set up a tax compliance system. Meanwhile, the discussion surrounding another decree is ongoing: in February, the Federal Finance Court (Bundesfinanzhof) discarded an important tool for rescuing companies at risk of bankruptcy, the Recapitalization Decree, and called on legislators to pass a law to make recapitalization gains exempt from income tax. The European Commission could classify this law as state aid in violation of EU law.

This is just one of the reasons why firms are positioning themselves to address aspects of European law, especially on the interface with state aid law. Tax rulings, where the European Commission made waves with some decisions concerning state aid law infringements (e.g. the Apple case), are playing a growing role. Here, firms with a Brussels office enjoy a clear advantage.

Rising influence of digitalization

The ongoing digitalization of the financial and tax system is having a huge influence on the work of tax specialists, who are working closely with IT experts increasingly often.

And work involves much more than just expert programs or artificial intelligence: tax law is having an ever deeper impact on companies’ value chains, e.g. in transfer pricing. For tax compliance reasons alone, both companies and advisors need a growing number of interfaces between the company’s IT systems and the electronic systems of advisors and fiscal authorities. For many firms, this is the most pressing issue for the future, besides HR development. Larger firms like Rödl & Partner are therefore developing complex systems and processes of their own, closely related to standard IT tools. But small outfits like Peters Schönberger & Partner have also established notable expertise. The answer to the question of whether technical solutions will reduce the growing complexity of tax law, or could perhaps even exacerbate it, is a tricky one at the moment.

Generation changes and specializations result in lateral moves

To better staff the in-demand areas of tax advice and to safeguard the generation change within practices, there was movement within the tax teams once again: Baker Tilly Rechtsanwälte was given a major boost by a sales tax expert from KPMG and the former head of tax at Deutsche Bank. At Clifford Chance, a young trio took over the reins of the tax team, while a young Dentons partner in Frankfurt was promoted to national and European co-head of the tax practice.

Dentons is also an example of how many previously small practices are expanding, to round off their advisory portfolio internationally. This trend is now bearing fruit at top tax firm Flick Gocke Schaumburg, a firm which has long focused on Germany: teaming up with the international Taxand alliance in 2016 led to a visible rise in inbound and outbound work. This cemented the Bonn firm’s status as number one in the legal scene. But this is put into perspective when the whole German market for tax advice is taken into account. Although Flick Gocke Schaumburg is a central player here too, compared to the high profile enjoyed by the Big Four it soon becomes clear why these are referred to as such.

 

Tax advice is usually provided on the interface with other legal areas. For specialist expertise, readers are therefore advised to consult the following chapters: ?banking and finance, ?corporate, ?M&A, ?company succession and trusts, ?private equity and venture capital, ?real estate. Firms with a specialty in tax criminal law are listed in the chapter ?white collar crime and tax criminal law. An overview of firms providing advice related to current (internal) investigations within interdisciplinary teams or advising companies on compliance structuring can be found under ?compliance audits and investigations.


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