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The consolidated taxation system became effective in August 2002. The original consolidated tax rules were partly amended under the Tax Reform Act, which includes amendments to make up for the incompleteness of the original rules.

As a measure of further liberalization, the government has now decided that all companies that have entered into foreign technology collaboration agreements may be permitted, on the automatic approval route, to make royalty payments up to 8% on exports and up to 5% on domestic sales. They may do this without any restriction on the duration of the royalty payments and this is irrespective of the extent of foreign equity in the company's share capital. Previously, royalty payments to foreign companies by companies other then their wholly owned subsidiaries were allowed only for a specific period. This measure establishes the principle that payment for technology should not be governed by the relationship between the payer and payee and puts to rest the discrimination between royalty payments made by wholly owned subsidiaries and others.

A draft Trade Tax Reform Act was approved by the German cabinet on August 132003. Under the German constitution and the revenue-sharing arrangements currently in place, the revenue from the trade tax is largely payable to municipal government (cities and local governmental subdivisions) to help defray the additional infrastructure cost caused by commercial businesses located in the respective municipalities. A decline in the revenue from this tax is partially responsible for the severe economic difficulties many municipalities are experiencing. The reform of this tax is the subject of intense political controversy.

Companies which have overpaid UK tax due to a generally held but mistaken view of the effect of UK tax law may be prevented from seeking compensation for the full amount of their loss. This is the effect of draft legislation published on September 8 2003. Claims brought before September 8 are not affected by this change. This move is particularly topical for multinational groups considering seeking compensation for UK tax law breaching EU law.

In a decision dated June 20 2003 (Conseil d'Etat, n 224407, Sté interhome AG), the French Administrative Supreme Court had to interpret the permanent establishment concept in the light of the tax treaty signed between France and Switzerland.

The European Court of Justice (ECJ) decided on September 18 2003 in the Bosal Holding BV case that the Dutch tax rule that denies a deduction for expenses relating to foreign participations, while allowing expenses with respect to Dutch participations, is illegal under the EC Treaty. The decision confirms the earlier opinion of the advocate general. The Netherlands is expected to introduce thin-capitalization rules to mitigate the future impact of the decision.

Following the March 2003 issuance of the Provisional Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, the State Administration of Taxation (SAT) issued a circular clarifying the tax treatment of such acquisitions. In particular, the circular confirms that if a foreign investor's equity in the new enterprise exceeds 25%, the new enterprise will be treated as a foreign invested enterprise (FIE) for tax purposes and therefore will be eligible for the preferential tax treatments granted to FIEs. Further, the circular clarifies the following points:

Roberto Haddad of Branco Consultores gives a thorough run-down of how the country taxes imported services is becoming more complicated

Margie Rollinson, Michael Mundaca, David Benson and Howard Berger of Ernst & Young reveal how Washington plans to replace the Extra Territorial Income Act

Alan Tsoi & David Kuo of Deloitte Touche Tohmatsu analyze the new representative office rules and the implications for multinationals investing in the country