Annual Tax Act 2009 Secures Cross-Association for Municipalities

A sigh of relief in municipalities and their companies: The federal government is strengthening the cross-association for municipalities. This is a declared objective of the Annual Tax Act 2009, which is currently being discussed in the Bundestag (BT-Drs. [Official Bundestag Records] 16/10/89) and is expected to obtain the approval of the Bundesrat on December 19, 2008. It is to ensure, for example, that profits from energy supplies may still be offset tax-free with losses from swimming pools and public transport.

Recently, the cross-association for municipalities was put at risk by means of the case-law of the Federal Finance Court (BFH). The BFH (I R 32/06) considered it impermissible for the operation of the indoor pool at a constant deficit before taxes to be offset with the profits of a real estate company. Correspondingly, there was great uncertainty among municipalities about the future of cross-association for municipalities.

The federal government now wishes to eliminate the consequences of this case-law. In its draft, it incorporates the possibility of combining individual public operations for taxation purposes in the Corporation Tax Act (KStG). In addition, it expressly includes public pool operations in the KStG. Finally, the draft clarifies that even ongoing losses in the area of the general public services may be used for offsetting.

"The change in the law is good news for municipal general interest service providers. However, it does not provide any permanent security for cross-association", Dr. Ute Jasper, partner at the Düsseldorf office of law firm Heuking Kühn Lüer Wojtek, comments. The grounds for the government draft fail to make any statements about European law issues. In 2007, the EU Commission had, however, introduced various subsidy review proceedings, in particular as a result of cross-subsidization for various German airports. "It can only be determined in accordance with the decisions of the EU Commission how secure the cross-association really is", her colleague Jan Seidel confirms.

Heuking Kühn Lüer Wojtek is a large independent German law firm with more than 200 lawyers. The partnership is represented with seven offices in Germany as well as with offices in Brussels and Zurich.

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