VOL. 2 • 2013 - gaccny.com · Sicherungseigentums sieht der Uniform Commercial Code („UCC“) Sicherungsrechte an verkauften Waren bzw. an anderen beweglichen Gütern des Schuldners

VOL. 2 • 2013

VOL. 2 • 2013

I. Corporate & Finance 1. International Transactions Phillips Nizer LLP

Kreditsicherung durch bewegliches Eigentum im U.S. Recht ..................................3

Sidney N. Weiss Cloud Computing & Export

Control Compliance ..........................6

Chadbourne & Parke LLP Chinese Outbound M&A

in Germany ......................................8

II. Litigation and Arbitration 2. Litigation v.Einem & Partner

German Federal Constitutional Court on the Service of Statements of Claim ........................ 10

Nietzer & Häusler US-Produkthaftung:

Herstellerrisiko – Post-sale Duty to Warn, Retrofit or Recall ................ 12

3. Commercial Litigation Noerr LLP

Are you sure you know where you going to sue or be sued? – New Limits to Choice of Law and Choice of Venue Clauses in Cross-Border Agreements ................ 14

III. Tax 1. International Tax ParenteBeard LLC

Intercompany loans – A focus on three rules you should keep in mind.................................. 17

Rödl & Partner FATCA: It’s not just

for Financial Institutions ................... 19

2. State and Local Tax Deloitte Tax LLP U.S. Senate approves online

state sales tax legislation .................... 21

WeiserMazars LLP Income Tax Nexus is

a Tempting Way to Fill State Coffers ..........................23

3. Others AugustinPartners LLC Foreign Investment in Real

Property Tax Act – Withholding Certificate Applications for Reduced Withholding and New York State Estimated Tax Requirements ...........................25

4. Others – Excise Tax Hodgson Russ LLP Medical Device Excise

Tax Liability of Foreign Manufacturers Selling into the United States ......................27

IV. Others 1. Privacy Law Gibbons P.C. Monitoring of Employee

Computer & Email Usage under U.S. Law ..............................29

C O N T E N T S

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Steven H. ThalInternational CounselT +1 (212) 841 0742U.S. Mobile:+1 (917) 757 6200International Mobile:+49 (172) 67 33 36 [email protected]

Florian von Eyb, LL.M.Attorney at Law in New York Rechtsanwalt (admitted in Germany) T +1 (212) 841 [email protected]

Phillips Nizer LLP666 Fifth AvenueNew York, NY 10103F +1 (212) 262 5152www.phillipsnizer.com

Kreditsicherung durch bewegliches Eigentum im U.S. Recht

I. EinführungTäglich werden im Geschäftsverkehr Kredite vergeben und Waren wechseln ihren Besitzer, ohne vollständig bezahlt worden zu sein. Häufig werden dann US-Anwälte gebeten, solche Kredite in den USA durch Sicherungsübereignungen abzusichern, oder bei derlei Warenverkäufen vertraglich Eigentumsvorbehalte zu vereinbaren. Das deutsche Sicherungseigentum ist in den USA jedoch unbekannt. Ein Käufer erwirbt hier uneingeschränktes Eigentum. Das dem deutschen Recht eigene Prinzip der Trennung zwischen dem schuldrechtlichen Kaufvertrag und dem dinglichen Verfügungsgeschäft der Eigentumsübertragung gilt im U.S. Recht nicht in der gleichen Form. An Stelle des Sicherungseigentums sieht der Uniform Commercial Code („UCC“) Sicherungsrechte an verkauften Waren bzw. an anderen beweglichen Gütern des Schuldners vor, die zwar in einigen Eigenschaften mit dem Sicherungseigentum vergleichbar sind, jedoch andererseits mangels Eigentums des Gläubigers mehr einem deutschen Pfandrecht ähneln.

II. Die Entstehung des UCC und die Bedeutung des Artikel 9Jeder Staat in den USA hat sein eigenes Handelsrecht. Das UCC wurde jedoch von fast allen Staaten weitgehend unverändert umgesetzt. Artikel 9 UCC regelt das Kreditsicherungsrecht für Mobiliarsachen. Ein Sicherungsrecht nach Artikel 9 UCC weist sowohl zum Sicherungseigentum, als auch zum Pfandrecht Ähnlichkeiten und Unterschiede auf. Ein entscheidender Unterschied zum Pfandrecht liegt darin, dass es – wie das deutsche Sicherungseigentum – weder unmittelbaren, noch mittelbaren Besitz des Sicherungsnehmers erfordert. Ein weiterer wichtiger und vorteilhafter Unterschied zu beiden deutschen Typen besteht in der öffentlichen Eintragung vieler Sicherungsrechte durch ein sogenanntes „UCC-1 Financing Statement“ (nachfolgend „UCC-1 Formular“). Die Einreichung („filing“) des UCC-1 Formulars ist fast mit einer Grundbucheintragung (z.B. einer Hypothek) in Deutschland vergleichbar. Sie ersetzt das Besitzerfordernis. Die Eintragungen kann jedermann zumeist kostenlos durch eine einfache und schnelle Nachsuche („UCC-Search“) im Online-Register des Department of State des Wohnsitzstaats des jeweiligen Schuldners einsehen.

III. Entstehung eines Pfandrechts – „Attachment“ Ein Pfandrecht entsteht durch (1) Einigung der Parteien, (2) Leistung des Sicherungsnehmers an den Sicherungsgeber, gewöhnlich des Kredites oder des Kaufgegenstandes und (3) Verfügungsberechtigung des Sicherungsgebers.

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IV. „Perfection“ – Wirksamkeit gegenüber DrittenUm ein anhängiges Recht auch gegenüber Drittgläubigern mit Sicherungsrechten an demselben Gegenstand durchsetzen und den Rang wahren zu können, muss das Sicherungsrecht noch „perfected“ werden, was u.a. eine Art der öffentlichen Bekanntmachung bedeutet. Es gibt verschiedene Möglichkeiten, die so genannte “Perfection” durchzuführen. (1) Die gängigste Methode der “Perfection” ist die Einreichung eines UCC-1 Formulars. Grundsätzlich erfolgt dies in dem Staat, in dem sich der Hauptwohnsitz des Schuldners befindet, zumeist zentral beim Department of State. In dem UCC-1 Formular muss das Sicherungsgut allgemein beschrieben werden. (2) Keinerlei Eintragung ist notwendig, wenn der Sicherungsnehmer den Pfandgegenstand in Besitz nimmt. (3) Ein Sicherungsrecht an Anlagevermögen wird durch Kontrolle „perfected”. (4) Hat der Sicherungsnehmer ein Pfandrecht an einem Kaufgegenstand, den er verkauft oder dessen Kauf von einem Dritten er für den Käufer finanziert hat („Purchase Money Security Interest“, nachfolgend „PMSI“) und handelt es sich dabei um ein Verbrauchsgut, Forderungen oder einen Wechsel, so gilt das Sicherungsrecht im Zeitpunkt des „Attachments“ (siehe III) automatisch als „perfected“. (5) Ein Sicherungsrecht setzt sich automatisch an dem Erlös („proceeds“) und Ersatz von Sicherungsgut fort. In der Praxis raten wir Sicherungsnehmern immer, ihre Rechte durch “filing” eines UCC-1 Formulars anzumelden.

V. „After-acquired Property“ und „Future Credits” Eine Sicherungsvereinbarung kann sich mit einigen Ausnahmen auch auf Gegenstände – typischer Weise Waren – erstrecken, an denen der Schuldner erst zukünftig Rechte erlangt („after-acquired property“).

VI. Vorrangregeln – “First to attach” und “First to file” Streiten sich zwei Gläubiger, von denen keiner die “Perfection” durchgeführt hat, so hat derjenige Vorrang, dessen Pfandrecht zuerst durch “Attachment” entstanden ist. Wenn beide Konkurrenten “perfected” haben, hat derjenige Gläubiger Vorrang, der zuerst „perfected“ hat. Erstreben beide Gläubiger die “Perfection” durch Eintragung, hat derjenige, der zuerst eintragen lässt, selbst dann Vorrang, wenn sein Sicherungsrecht erst nach der Eintragung des zweiten Gläubigers durch “Attachment” entsteht.

VII. Ausnahme: „Superpriority“ des PMSIEin PMSI (siehe IV (4)) hat auch dann „Supervorrang“, wenn ein anderes Sicherungsrecht früher begründet und “perfected” wurde, da der Schuldner ohne den Kredit des PMSI-Gläubigers nie das Eigentum an dem Sicherungsgut erlangt hätte.

Kreditsicherung durch bewegliches Eigentum im U.S. RechtSteven H. ThalInternational CounselT +1 (212) 841 0742U.S. Mobile:+1 (917) 757 6200International Mobile:+49 (172) 67 33 36 [email protected]



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VIII. „Accession“: Verbindung von verpfändeten WarenFür die Verbindung von verpfändeten Waren, bei der die Identität der beiden Einzelteile erhalten bleibt – z.B. dem Einbau von Hardware in einen Computer – gelten grundsätzlich die allgemeinen Vorrangregeln. Hat das Sicherungsrecht an der Hauptsache Vorrang, hier an dem Computer, so erstreckt es sich auch auf die damit verbundene Sache („Accession“), hier auf die Hardware.

IX. FazitArtikel 9 UCC bietet ein gut funktionierendes System für eine verlässliche Absicherung von Krediten und Finanzierungsverkäufen durch bewegliches Eigentum des Schuldners. Bei Einhaltung aller Formalien gewährt das UCC Filing System dem Finanzierungsverkäufer oder Kreditgeber den gleichen oder aufgrund der Eintragung sogar besseren Schutz als Sicherungseigentum oder ein deutsches Pfandrecht.

Kreditsicherung durch bewegliches Eigentum im U.S. RechtSteven H. ThalInternational CounselT +1 (212) 841 0742U.S. Mobile:+1 (917) 757 6200International Mobile:+49 (172) 67 33 36 [email protected]



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Cloud Computing & Export Control Compliance

U.S. export control laws do not require that an actual exportation occur for a violation to occur. It is sufficient that a “deemed exportation” has taken place. Deemed exportation occurs when foreigners (non-U.S. citizens or green card holders) obtain access to controlled U.S. technology, services, or products – whether such access is in the United States or not. When companies utilize cloud computing to process or store their data they may be violating U.S. export control laws without any knowledge that they are doing so. The Government has not defined cloud computing, but it exists at least when information and data is stored or processed “in many computers spread out in a multitude of locations and include data stored and shared by many users of the service for applications such as e-mail, calendar, messaging, and …data loaded onto web-based programs.” U.S. persons who transmit data through the cloud are deemed to have exported that data. If that data or information contains information or technology for which an export license is required, and no export license was obtained, then a violation of U.S. export control laws has occurred. Thus an inter-company e-mail containing such information or technology which is e-mailed from one location in the United States to another location in the United States, may be deemed to have been exported if the e-mail was transmitted via the “cloud.” A violation of the export control laws occurs when non U.S.-citizens/residents have access to that information while the information is in the cloud. Those parties may be employees and technicians at the cloud service or actual recipients of the information. Since most information and data is either stored in, or transmitted via, the cloud, every company involved with export-controlled or licensable information, technology, or data must have an effective policy limiting access to its information while it is in the cloud. These companies must insure that their systems, and the clouds that they utilize, prohibit unlicensed recipients to have access to the information and data. Many cloud service providers are aware of this requirement of the law, and provide cloud services where access is restricted. But these enhanced security services are currently much more expensive than normal cloud services. However, it is expected that as the export control restrictions on cloud computing services become better known, the cost of such enhanced security services will drop. Nevertheless, regardless of costs, companies using the cloud to store, process, or transmit technology or services, are under an obligation to ensure that if such information or technology is subject to an export license, then such information is not transmitted to computers abroad; and that no non-U.S. citizen or resident have unlicensed access to that information. The first step for every company is to determine whether it uses the

Sidney N. WeissAttorney at Law

Sidney N. Weiss675 Third AvenueNew York, NY 10017C +1 (914) 262 2346T +1 (212) 986 5309F +1 (212) 986 [email protected]

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cloud in any way. The next step is to determine whether any information, etc. stored or transmitted via the cloud is subject to export licensing or controls. If so, a compliance program limiting access must be utilized.

Sidney N. Weiss is a customs and international trade lawyer in New York, and the former president of the Customs and International Trade Bar Association, the largest association of customs and trade lawyers in the world.

Cloud Computing & Export Control ComplianceSidney N. WeissAttorney at Law

Sidney N. Weiss675 Third AvenueNew York, NY 10017C +1 (914) 262 2346T +1 (212) 986 5309F +1 (212) 986 [email protected]

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Chinese Outbound M&A in Germany

Investment by Chinese enterprises in Germany has grown in recent years. Acquisitions and mergers of small and medium-sized enterprises constitute the main thrust of such investments and this trend is expected to continue. China became the third largest foreign investor in Germany in 2012, with investments rising year on year at a rate of 22%.

A Mutual Appeal Germany, like the United States, is an attractive destination for Chinese investment. Both countries offer highly skilled work forces, well established brands and networks and access to high tech sectors. The focus of Chinese foreign direct investment (FDI) in both the US and Germany has been on manufacturing, industrial machinery, the automotive sector and information technology. While the US has attracted China as a source of natural resources and fuels, Germany is becoming an increasingly popular destination for renewable energy projects. Amid Euro zone debt woes, German companies are looking to Chinese investors to provide the capital that they are seeking. M&A is attractive for Chinese investors in Germany as they can enter the EU market and diversify globally, access Euro currency, acquire strategic assets and management know how, and acquire technical expertise and IP. The structure of the M&A transaction is often critical to the success of Chinese outbound investments. For some years, Chinese investors have generally favored the direct purchase of private companies and joint ventures with other multinationals as their preferred mode of entry. There is now a clear trend away from 100% acquisition or control of an offshore target. The logistical challenges of integrating two very different types of business operating styles and the successful transfer of know how essential to the business present significant difficulties in practice. The current preferred structure is acquisition of a stake in the target company. This structure offers the Chinese purchaser clear advantages. Where the seller remains involved in the day to day operations of the company, the Chinese may benefit from the seller’s knowledge of the business and its customers. Chinese investors often then seek equity step up rights, with a put/call option, to obtain a controlling interest in the future. In August 2012, Chinese automotive manufacturer Weichai Power Co. (Weichai) took a 25% stake in Germany’s Kion Group, the world’s second-largest forklift maker, for €738 million (USD 965 million). The investment comprised of a 70% in Kion’s hydraulics subsidiary for €271 million (USD 354 million). This was the largest direct investment by a Chinese company in a German firm. Four months later, Weichai said it had obtained an option to increase its stake in Kion to one-third. While an initial minority acquisition may not trigger competition clearances, the exercise of subsequent step up rights may require them.

Louise GongAssociate

Chadbourne & Parke LLP30 Rockefeller PlazaNew York, NY 10112T +1 (212) 408 5168F +1 (212) 541 [email protected]

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Louise GongAssociate

Chadbourne & Parke LLP30 Rockefeller PlazaNew York, NY 10112T +1 (212) 408 5168F +1 (212) 541 [email protected]

Another example is the outright acquisition earlier this year for €360 million (USD 475 million) of the German engineering firm Putzmeister Holding GmbH, the global market leader for cement mixing equipment.

The German Approach Compared with investment controls in the US, Germany has a less restrictive foreign direct investment regime and, unlike the US, no investment veto has yet occured. Germany is also less concerned with national security issues that stem from investments by Chinese state-owned enterprises, which continue to be the dominant players in the outbound market. The most important objective associated with inbound FDI for Germany is the creation of jobs. Any foreign investment which creates new jobs or safeguards employment in Germay is highly welcomed. The German FDI policy is also non-discriminatory. No matter how large the potential investor or investment, which industrial branch and from which country, every investor is treated equally. This contrasts to that of the US FDI regime where a lack of transparency surrounding the clearance process of the Commiteee on Foreign Investment in the United States, particuarly the criteria guiding that process (including certain blacklisted industries), may contribute to uncertainty among some Chinese investors. The Chinese President Li Kegiang’s recent inaugural visit to Germany in May further emphasized to the German business community China’s serious interest in building a China-German strategic partnership.

Chinese Outbound M&A in Germany

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German Federal Constitutional Court on the Service of Statements of Claim

The German Federal Constitutional Court (Bundesverfassungsgericht) ruled recently on the admissibility of a service of a US statement of claim to a plaintiff in Germany. With order of January 9, 2013 (2 BvR 2805/12) the German Federal Constitutional Court rejected constitutional complaints with regard to the service of a statement of claim issued by a court in the United States. The main reason why the complainant had filed a constitutional complaint (Verfassungsbeschwerde) was the fact that the statement of claim contained the request to condemn the defendant to pay punitive damages (treble damages). Indeed, the execution of a sentence convicting the plaintiff to pay punitive damages would not be enforceable in Germany.

The rejection of the constitutional complaint was based on the following facts:

The plaintiff, a US company, claimed damages before the Unites States District Court, Northern District of California, for the alleged infringement of Federal Trademark, for Unfair Competition and False Designation of Origin as well as the violation of the Anti-Cybersquatting Consumer Protection Act by a German company, the defendant. While the Court having jurisdiction over the case was located in California, the statement of claim had to be served to the plaintiff in Germany through the competent German court as the Central Authority. The formalities of this kind of “international” service are laid down in the Hague Service Convention of 1965. The complainant had first sought in vain legal remedies against the service before the Higher Regional Court (Kammergericht Berlin) and then filed constitutional complaints before the Federal Constitutional Court asserting that the service of the statement of claim would infringe the sovereignty or security of the Federal Republic of Germany and would therefore have to be refused pursuant to Art. 13 of the Hague Service Convention. The Federal Constitutional Court, however, held that the requirements established by Art. 13 of the Hague Service Convention for refusing the service were not met and that the service of the statement of claim would also not violate the complainant’s fundamental rights protected by the German Constitution. The mere fact that the statement of claim contains the request to condemn the plaintiff to punitive damages cannot be considered as being contrary to the rule of law and fundamental rights in Germany. Nor do peculiarities of the American legal system, such as the pre-trial discovery and the American rule for attorney’s fees (no reimbursement of attorney’s fees to the winning party), violate inalienable rights of the complainant. Rather, these are – in the reasoning

Dr. Thomas RinnePartner

v. Einem & Partner Rechtsanwälte Goethestraße 760313 Frankfurt am MainT +49 (69) 92 03 47 90F +49 (69) 92 03 47 91 [email protected]

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of the Federal Constitutional Court – consequences of the participation of a company in cross-border business activities. The decision of the Federal Constitutional Court is of great importance for companies involved in cross-border business between Germany and the US. It confirms the prevalence of the Hague Service Convention and – implicitly – postpones the decision whether a judgment rendered in the US is enforceable or not against a company in Germany to the point in time when the judgment has actually been handed down – provided the German plaintiff objects against its enforcement which could be the case if punitive damages are actually awarded.

German Federal Constitutional Court on the Service of Statements of ClaimDr. Thomas RinnePartner

v. Einem & Partner Rechtsanwälte Goethestraße 760313 Frankfurt am MainT +49 (69) 92 03 47 90F +49 (69) 92 03 47 91 [email protected]

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Marcus Römer, LL.M.Fachanwalt für Handels- und GesellschaftsrechtAttorney at Law (New York, U.S. Supreme Court)

Nietzer & HäuslerRechtsanwälte • Attorneys at Law (USA) • NotarAllee 40, 13. Stockwerk74072 HeilbronnT +49 (71) 31 20 39 10F +49 (71) 31 20 39 12 [email protected]: www.usa-recht.de www.nietzer.info

US-Produkthaftung: Herstellerrisiko – Post-sale Duty to Warn, Retrofit or Recall

Während sich die meisten Hersteller über die Eigenschaften und die Sicherheit ihrer Produkte zum Zeitpunkt des Verkaufs bzw. des Inverkehrbringens umfassend Gedanken machen, übersehen sie häufig die sich zeitlich daran anschließenden Obliegenheiten („Post-sale Duties“): diese können sowohl in einer Verpflichtung bestehen, betreffend neu entdeckter Risiken ihrer Produkte zu warnen als auch Umrüstungen vorzunehmen oder die Produkte gar zurückzurufen. Diese Fälle können eine erheblich wirtschaftliche Belastung darstellen und den Boden für Klagen nähren. Die Rechtslage wird für den Hersteller aufgrund unterschiedlicher Rechtsprechung in den einzelnen US-Bundesstaaten zusätzlich erschwert. Während ein Großteil der Staaten eine Verpflichtung der Hersteller zu Warnungen grundsätzlich anerkennt, ist die Mehrheit bei der Verpflichtung der Hersteller zur Umrüstung oder Rückruf zurückhaltend. Als Konsequenz der sich entwickelten Rechtsprechung zumindest betreffend einer „Duty to Warn“ hat das American Law Institute (ALI) im Rahmen des „Restatement (Third) of Torts: Products Liability § 10 (a) (1998)“ (nachfolgend „Restatement“) zumindest diesem Punkt Rechnung getragen, indem es eine Haftung aufstellt für Fälle, in denen eine „vernünftige“ / „reasonable“ Person gewarnt hätte. Dies sei im Folgenden bei folgender Konstellation gegeben:

(1) der Verkäufer weiß oder hätte vernünftigerweise wissen müssen, dass das Produkt ein erhebliches Risiko für Personen oder Eigentum darstellt; und

(2) diejenigen, die gewarnt werden müssten, sind identifizierbar und es kann davon ausgegangen werden, dass diese, vernünftig betrachtet, unwissend bezüglich des Schadensrisikos sind; und

(3) es kann eine Warnung an sie kommuniziert werden und diese können entsprechend der Warnung handeln; und

(4) das Schadensrisiko ist hinreichend hoch um die Belastung einer Warnung zu rechtfertigen.

Einige Staaten haben diese „Voraussetzungen“ übernommen, andere haben eine Haftung betreffend einer Verpflichtung zur Warnung an höhere Voraussetzungen geknüpft, bzw. noch keine abschließende Meinung hierzu manifestiert. Betreffend einer „Duty to Retrofit or Recall“, der sicherlich noch sehr viel weitergehenden und kostenintensiveren Verpflichtung, gibt es keine entsprechende Parallele im Common Law.

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Zur Frage des Rückrufs von Produkten knüpft das ALI im selben Restatement unter §11 eine Haftung bei unterlassenem Rückruf an folgende Voraussetzungen:

(a) (1) eine behördliche Direktive aufgrund Gesetz oder Verwaltungsvorschrift sieht speziell einen Rückruf des Produkts vor; oder

(2) der Verkäufer oder Händler, ohne unter vorstehender Ziff. (a) (1) verpflichtet zu sein, unternimmt einen Rückruf; und

(b) der Verkäufer oder Händler unterlässt entgegen einer vernünftigen Person den Rückruf.

Hierbei ist interessant zu sehen, dass selbst im Rahmen einer freiwilligen Rückrufaktion eine Haftung eintritt, wenn der Rückruf fehlerhaft erfolgt. In diesem Zusammenhang ist es für Unternehmen wichtig zu beachten, dass von den vorgenannten Risiken betreffend Post-sale Duties nicht nur die Hersteller direkt, sondern auch Rechtsnachfolger/ „Successors“ und Scheinhersteller / „Apparent Manufacturer“ betroffen sein können.Als grobe Leitlinien empfehlen wir, mindestens folgende Maßnahmen zu treffen:

– Behalten Sie im Rahmen der Weiterentwicklung Ihrer Produkte insbesondere sicherheitsrelevante Neuerungen im Auge.

– Beobachten Sie die für Sie relevante Entwicklung im Bereich der Post-sale Duties und möglicherweise bestehende Rechtstreitigkeiten hierzu.

– Prüfen Sie Ihren aktuell bestehenden Versicherungsschutz in den USA. Dieser sollte neben entsprechender Produkthaftung in ausreichendem Maße Rechtsverteidigungskosten mitumfassen, denn in den USA erfolgt in der Regel auch bei erfolgreichem Prozessausgang keine Kostenerstattung durch die gegnerische Partei („American Rule“).

– Und last but not least: Lassen Sie sich nicht verunsichern. Gute Vorarbeiten und schnelles Reagieren sind die halbe Miete. Und dazu gehört oftmals auch die „präventive“ Zusammenarbeit zwischen interner Rechtsabteilung und externem Anwalt mit entsprechender Praxiserfahrung.

Als eine seit über 17 Jahren auf deutsches und U.S.-amerikanisches Unternehmensrecht spezialisierte Wirtschaftskanzlei (nunmehr auch auf China und UK ausgerichtet) verfügt NIETZER & HÄUSLER über entsprechende Erfahrungen im Umgang mit US-Produkthaftung und berät Sie gerne bei der Beurteilung der entsprechenden Rechtslage, bei der Abwehr geltend gemachter Ansprüche bzw. Klagen, sowohl in Deutschland als auch in den USA.

US-Produkthaftung: Herstellerrisiko – Post-sale Duty to Warn, Retrofit or RecallMarcus Römer, LL.M.Fachanwalt für Handels- und GesellschaftsrechtAttorney at Law (New York, U.S. Supreme Court)

Nietzer & HäuslerRechtsanwälte • Attorneys at Law (USA) • NotarAllee 40, 13. Stockwerk74072 HeilbronnT +49 (71) 31 20 39 10F +49 (71) 31 20 39 12 [email protected]: www.usa-recht.de www.nietzer.info

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Are you sure you know where you going to sue or be sued? – New Limits to Choice of Law and Choice of Venue Clauses in Cross-Border Agreements

You thought your choice of law and choice of venue clause in your cross-border agreements would give you peace of mind? You might want to think again. A recent decision by the German Federal Court of Justice (BGH) invalidated a choice of venue clause, because the chosen venue would not have recognized “mandatory international law” and subsequently found that jurisdiction of German courts and German law applied to the case.

What’s the background?The agreement at hand had been entered into by a German commercial agent and a US company, whose products the agent helped to market in Germany. The agency agreement provided for the laws of the State of Virginia to be applicable and the courts of the State of Virginia to have exclusive jurisdiction over any dispute arising out of or in connection with the agency agreement. The US company terminated the agreement. Subsequently, the agent claimed damages for loss of clientele, filing a suit at the Regional Court (LG) in Heilbronn, Germany. The legal reference for such claim is Sec. 89 b of the German Commercial Code (HGB). This particular section was implemented in accordance with, and as required by, the European Union Directive No. 86/653/EWG, which contained a respective model rule.

What did the court find?The German Federal Court of Justice found the claim to be admissible and found jurisdiction of German courts over the case at hand, invalidating the choice of law and choice of venue clauses of the agreement. The ruling of the BGH (BGH, 5.9.2012, Az. VIII ZR 25/12) can be summarized as follows:

– (a) Sec. 89 b of the German Commercial Code, by virtue of the fact that it was introduced into German law in accordance with a EU directive, constitutes “mandatory international law”;

– (b) Virginia law does not provide for a respective rule, granting the agent a comparable right to claim damages. Hence, application of Virginia law in a Virginia court would deprive the agent of his rights pursuant to “mandatory international law” and therefore the choice of law could not be upheld; and

Dr. Robert C. J. LoefRechtsanwalt

Noerr LLPRepresentative Office885 Third Avenue, Suite 2610New York, NY 10022T +1 (212) 433 [email protected]

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– (c) It would be highly unlikely that a Virginia court would apply German law in order to accord the agent its rights under “mandatory international law”. Thus, the choice of venue could not be upheld either, giving German courts jurisdiction.

What is still left undecided?However, the decision leaves several questions unanswered. First and foremost, the BGH failed to provide a definition of “mandatory international law” abstract from the case at hand. Also, it remains unclear under what exact circumstances contractual choice of law and venue clauses will be considered invalid. So far the courts only provided a rather vague guideline, by stating that “it must be certain that the agreed upon jurisdiction would ignore mandatory international law.” Furthermore, the court did not specify if the invalidity of the choice of law and venue clauses only applies to those sections of the agreement that concern “mandatory international law” or to the entire agreement, even though the decision at hand appears to support the latter assumption.

What you can do going forward.With its decision, the German Federal Court of Justice indirectly affirmed several previous judgments rendered by lower German courts. It is likely that German courts will decide similar cases in the same fashion going forward. Therefore, you should be aware of and prepare for the fact that German courts might assume jurisdiction because of the application of “mandatory international law”, invalidating the parties’ explicit choice of law and venue. To prevent unwanted consequences associated with such a decision, the following steps should be considered:

– (a) In the case at hand, “mandatory international law” is applicable because the contract was fashioned as a commercial agent agreement. There are similar contractual structures available under German law, which do not entail “mandatory international law” such as structures involving authorized dealers or other distribution channels.

– (b) Consequently, regardless of the specific agreement at hand, the entire agreement should be reviewed by German counsel to identify potential aspects that could trigger the application of those German laws that are considered “mandatory international law” pursuant to the standard affirmed by the BGH, in order to explore if it is possible to draft around such issues;

– (c) If such issues cannot be avoided, the parties should contemplate if:




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(i) the parties want to provide for a German venue – as an alternative to their international choice of law and venue – for the event that mandatory international law forces them to use a German forum to ensure that any related dispute would at least be litigated in front of the German court of choice; or

(ii) the economics of the matter justify such choice, arbitration should be selected as the forum of dispute resolution.




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Intercompany loans – A focus on three rules you should keep in mind

Several rules are in force to protect the United States from losing tax revenue due to abusive related party transactions. In this article we are focusing on those rules that may have effect on the realization of intra-group loans between German or other foreign shareholders and their U.S. subsidiaries.

Related party rules of Internal Revenue Code (“IRC”) Section 267IRC Section 267 includes general rules regarding related party transactions such as sales or exchanges of property and the matching of deductions and income. In consequence of the latter, interest expenses to related parties that have been accrued are only deductible when the amount is included in the recipient’s income. Foreign persons are considered to be cash-basis taxpayers for US income tax purposes because they only pay US tax when they receive cash. A borrower may only deduct the interest expense when the payment has actually been made.

Earnings stripping rules of IRC Section 163 (j)If a U.S. company is making interest payments to foreign related parties, but those foreign related parties on the other hand would not be taxed in the U.S. on the interest income received, the interest deductions may be limited by the “earnings stripping rules” of IRC Sec 163(j). A comparable rule in Germany is the “Interest Deduction Ceiling Regulation” (“Zinsschranke”). The U.S. statutory tax rate on interest is 30%. If an income tax treaty, such as the Income Tax Treaty between the United States and Germany, reduces the applicable tax rate on interest payments, the interest payments are classified as partly or wholly exempt.A two-step test needs to be applied to check if a company’s interest payments fall under the deduction limitation. The company first should determine if its debt-to-equity ratio is greater than 1.5:1. If this is the case, the company needs to determine if its total interest expense exceeds 50% of its “adjusted taxable income”, which is generally the EBITDA. If so, the company has “excess interest expense” and the interest payments to related parties are not deductible in this amount.

Let’s have a look at an example:Adjusted taxable income (EBITDA) $1,500Total interest payments $1,200Interest payments to foreign related parties $1,000Excess interest expense 1,200 – (1,500 x 50%) $450

Ellen Hickman, CPA, MBA, MSTSenior Manager, International Tax ServicesT +1 (215) 972 [email protected]

Kathrin Hacklander, SteuerberaterinManager, International Tax ServicesGerman DeskT +1 (646) 375 [email protected]

ParenteBeard LLCThe Empire State Building350 Fifth Avenue, 68th FloorNew York, NY 10118T +1 (212) 736 1900www.parentebeard.com

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As a result the excess interest expense in the amount of $450 is not tax deductible in the current taxable year. In other words, the interest payments to foreign related parties are only deductible up to (1,000 – 450 =) $550. However, the interest payments of $450 are not lost. They can be carried forward indefinitely. Also, highly-profitable years may have no excess interest expense because 50% of the EBITDA may be greater than the total interest payments. Such an excess may also be carried forward, but only for a period of three years and to offset any carried forward interest expenses.

Transfer pricing rules of IRC Section 482Besides the related party rules and the earnings stripping rules, one should bear in mind the transfer pricing rules of IRC Sec 482. Related parties must charge interest at an arm’s-length rate on intercompany loans. Otherwise authorities may make adjustments and use the arm’s-length rate for their tax determination. An arm’s-length rate is an interest rate charged on comparable loans between unrelated parties.

ParenteBeard can help you determine an appropriate financing structure and answer specific questions to the interest deductions limitations. Please contact us to discuss the application of these rules to your situation.

Intercompany loans – A focus on three rules you should keep in mindEllen Hickman, CPA, MBA, MSTSenior Manager, International Tax ServicesT +1 (215) 972 [email protected]

Kathrin Hacklander, SteuerberaterinManager, International Tax ServicesGerman DeskT +1 (646) 375 [email protected]

ParenteBeard LLCThe Empire State Building350 Fifth Avenue, 68th FloorNew York, NY 10118T +1 (212) 736 1900www.parentebeard.com

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FATCA: It’s not just for Financial Institutions

In 2010, Congress enacted the Foreign Account Tax Compliance Act, known as FATCA. Much has been said about the requirement under FATCA for Foreign Financial Institutions (FFIs), such as German banks and certain German investment entities, to report information to the IRS about financial accounts held by U.S. taxpayers or be subject to withholding. In fact, on 5/31/13, the U.S. and Germany signed a bilateral agreement (FATCA Agreement)1 which has not entered into force at the time this article went to press, whereby Germany (and vice versa, the U.S.) has to collect the relevant data from the German FFIs and exchange this information on an automatic basis with the U.S. A lesser known fact though is that generally any foreign entity (e.g., a German company doing business in the U.S.) may also have certain reporting obligations under FACTA. FATCA joins an existing documentation and withholding regime that has been in place for many years. Withholding agents have long been required to withhold on U.S. sourced „fixed, determinable and annual periodical income“ (FDAPI – e.g., interest and dividends) and on „income effectively connected with a U.S. trade or business“ (ECI), absent appropriate documentation for reduced or zero withholding. The FATCA regime’s purpose is generally not to impose a withholding tax (although it may). In effect, it functions more like a penalty mechanism, forcing foreign entities to provide information. Ultimately, the FATCA regime is intended to bring otherwise non-compliant U.S. citizens and U.S. tax residents into compliance with U.S. tax law. FATCA requires withholding at a rate of 30% on withholdable payments made after 12/31/13 to certain Nonfinancial Foreign Entities (NFFEs) that do not provide information regarding their substantial U.S. owners (unless an exception applies). An NFFE is generally any foreign entity that is not an FFI. A witholdable payment is essentially FDAP income and any gross proceeds from the sale or other disposition of property (that can produce U.S. source interest or dividends), but not ECI2. Withholding on a payment to an NFFE is not required if all of the following are satisfied:

• The NFFE is the beneficial owner of the payment and provides the withholding agent with a certification that it does not have any substantial U.S. owners (as defined below), or provides the name, address, and TIN of each substantial U.S. owner of the beneficial owner.

• The withholding agent does not know or have reason to know that any information provided about the beneficial owner or the payee is incorrect.

Elisa Fay, CPANational Partner in Charge of Tax

Rödl Langford de Kock LLPCertified Public Accountants1100 South Tower225 Peachtree St., N.E.Atlanta, GA 30303T Direct: +1 (404) 586 [email protected]/us

Dr. Will Dendorfer, CPA, StBPartner

Rödl Langford de Kock LLPCertified Public Accountants747 Third Avenue, 4th Floor New York, NY 10017T Direct: +1 (212) 380 [email protected]/us

1 “To Improve International Tax Compliance and with Respect to the U.S. Information and Repor ting

Provisions Commonly Knows as the Foreign Account Tax Compliance Act ”. 2 Exceptions apply for certain types of payments and to certain types of entities.

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• The withholding agent reports information regarding substantial U.S. owners, payments made to the NFFE, and any other information that may be required by the IRS.

A foreign entity is treated as having a substantial U.S. owner if any specified U.S. person owns directly or indirectly more than 10% of a foreign corporation’s stock (by vote or value), a foreign partnership’s profits or capital interests, or a foreign trust’s beneficial interests (or any portion of a trust treated as a grantor trust). In the case of certain investment institutions, a specified U.S. person that owns any interest (i.e., more than 0%) in the corporation, partnership, or trust is treated as a substantial owner. Documentation of some kind will generally be needed to support each U.S. source payment made to a foreign payee. The redesigned W-8 series of forms will identify foreign payees, indicate their FATCA status, disclose substantial U.S. owners, and claim any available exemptions from withholding. More foreign payees will find it necessary to obtain U.S. tax identification numbers in order to complete W-8 series forms or supply other documentation required to avoid withholding. Withholding on NFFEs is only a small piece of the FATCA puzzle and is only briefly described here. Compliance with FATCA can seem overwhelming, but this is also a good opportunity to evaluate and revamp existing withholding and compliance processes. Businesses are well advised to seek guidance from their tax advisors.

FATCA: It’s not just for Financial InstitutionsElisa Fay, CPANational Partner in Charge of Tax

Rödl Langford de Kock LLPCertified Public Accountants1100 South Tower225 Peachtree St., N.E.Atlanta, GA 30303T Direct: +1 (404) 586 [email protected]/us

Dr. Will Dendorfer, CPA, StBPartner

Rödl Langford de Kock LLPCertified Public Accountants747 Third Avenue, 4th Floor New York, NY 10017T Direct: +1 (212) 380 [email protected]/us

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Andreas MaywaldClient Service Executive

Deloitte Tax LLP2 World Financial CenterNew York, NY 10281T +1 (212) 436 7487F +1 (212) 655 6989C +1 (347) 819 [email protected]

U.S. Senate approves online state sales tax legislation

The U.S. Senate on May 6 approved legislation that generally would make it easier for a state to collect sales and use taxes from sales made by out-of-state or “remote” sellers (such as catalogue or online retailers) that do not have an in-state physical presence. The Marketplace Fairness Act of 2013 cleared the chamber by a vote of 69-27 and now heads to the House of Representatives for consideration. Sales and use taxes are imposed on the sale of tangible personal property and certain enumerated services in 45 states and the District of Columbia. A seller is currently required to comply with sales and use tax laws in only those states where the seller has acquired the requisite connection or “nexus.” When an out-of-state seller has not collected tax, a purchaser is generally required to report and remit use tax to the jurisdiction in which the purchaser took title or possession of the tangible personal property or benefited from the provision of a taxable service. This requirement to self-assess is often overlooked by businesses and individuals. Various U.S. Supreme Court decisions in the past preclude a state from asserting the duty to collect sales or use tax upon an out-of-state seller absent proof that the out-of-state seller itself, or through an agent or representative soliciting on the out-of-state seller’s behalf, is physically present in the state. State and local governments have been increasingly concerned that the expansion of e-commerce is gradually eroding their sales and use tax base. Recognizing the parameters imposed by the U.S. Supreme Court decisions, New York became the first state in 2008 to enact what is sometimes called a “click-through” nexus statute in an effort to exploit the relationship between Internet retailers and in-state companies with websites that provide a link to the Internet retailer’s website. “Click-through” nexus statutes create a presumption of nexus for out-of-state sellers who compensate an in-state company based upon a percentage of sales from referrals through the in-state company’s website. The seller may rebut the presumption provided it can document the in-state person is not actively soliciting sales within the state on its behalf. The Marketplace Fairness Act generally provides a state that is a member of the Streamlined Sales and Use Tax Agreement with the authority to enact laws requiring remote sellers to collect and remit sales and use taxes to the state with respect to “remote sales” sourced to that state. If a state is not a member of the Streamlined Sales and Use Tax Agreement, the state may exercise such authority if the state adopts certain “minimum simplification requirements” relating to the administration of the tax, including a single audit for all state and local taxing jurisdictions within the state, a single sales and use tax return, and

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uniformity of the tax base. A non-member state must also provide remote sellers with free software for the purposes of calculating sales and use taxes due on each transaction at the time the transaction is completed and for purposes of filing state sales and use tax returns. Small businesses are exempt under the Act if their annual gross receipts from remote sales in the U.S. do not exceed $1 million. The measure now heads to the House of Representatives, where it most likely will be routed to the Judiciary Committee. House leaders have not indicated whether or when they intend to move the Senate-passed bill. For its part, the White House on April 22 released a Statement of Administration Policy (“SAP”) supporting the provisions in the Senate bill. The SAP notes the legislation “would eliminate the unfair advantage currently enjoyed by big out-of-state online companies over local neighborhood-based small businesses.” In the meantime remote sellers and buyers alike may want to consider whether their billing systems, purchasing systems, sales tax policies, and compliance procedures are current and adaptable in the event of a possible federal law that requires remote sellers to collect tax. Such considerations may include review of the taxability of their revenue streams and purchases, potential for automation of sales tax billed or use tax calculated, and potential for outsourcing of sales tax compliance.

U.S. Senate approves online state sales tax legislationAndreas MaywaldClient Service Executive

Deloitte Tax LLP2 World Financial CenterNew York, NY 10281T +1 (212) 436 7487F +1 (212) 655 6989C +1 (347) 819 [email protected]

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Income Tax Nexus is a Tempting Way to Fill State Coffers

According to a recent comprehensive survey, as states continue to seek new sources of tax revenue in an effort to deal with tight budgets, increasing the number of companies with nexus in their jurisdiction is an attractive solution. Nexus is the minimum amount of contact between a taxpayer and a state that permits the state to impose income, sales or other taxes on an entity. The state’s ability to tax an entity arises from local laws and may be limited by federal laws (such as Public Law 86-272). Differing requirements apply to nexus for state sales taxes (physical presence required) and those for nexus for most other state taxes. As state legislatures devise ways to increase their tax base through redefining their taxes as franchise or gross receipts taxes, rather than resorting to unpopular tax rate hikes, taxpayers are increasingly surprised to discover that they are subject to “income-like” taxes in states where they have “economic nexus.” Especially popular is the practice of attributing nexus through “factor presence,” first introduced in 2002. Factor presence is determined by the amount of property, payroll, or sales a business has within a particular state. Generally, any amount of property or payroll in a state gives a business a physical presence, which constitutes a taxable presence for all state taxes. However, with the advent of factor presence comes the notion that a certain level of sales made in a state, even if there is no physical presence through property and payroll, creates nexus. Due to the recent evolvement of factor presence among states, state courts have had little opportunity to arbitrate the legitimacy of these measures. In a recent case, the court determined that the quality and quantity of a company’s presence was the better indicator of whether substantial nexus existed, while limiting the physical presence standard to sales and use tax. In this case, the amount of gross receipts in the state (over $8 million) led the court to determine that the taxpayer had a frequent and systematic presence in the state, which was sufficient to establish nexus. However, no bright-line threshold of receipts or sales that would create such substantial nexus was outlined. It should be noted that the U.S. Supreme Court has yet to address any issues of economic nexus. Bloomberg BNA’s recently released annual Survey of State Tax departments focused on the nexus consequences of Internet servers, alternative work arrangements, and transactions involving non-U.S. entities. The survey discovered that, in the various state tax jurisdictions, the following types of activities in a state or locality could create income or franchise tax nexus:

Christopher MeierSteuerberaterT +1 (646) 225 5942 C +1 (347) 223 [email protected]

Elias MarencoTax Manager T +1 (212) 375 6549 [email protected]

WeiserMazars LLPAudit, Tax and Advisory135 West 50th StreetNew York, NY 10020T +1 (212) 812 7000F +1 (212) 375 6888www.weisermazars.com

Monica Ranniger, CPA, MBATax PartnerHead of German DeskT +1 (212) 375 [email protected]

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• Having a substantial number of customers within the state or earning a substantial amount of revenue from customers in the state

• Soliciting services for six or fewer days

• Attending a trade show for 14 or fewer days, although some states have special exclusions

• Conducting job fairs, hiring events or other recruitment activities

• Rendering services of any kind, performing warranty repairs or hiring others to provide them, or soliciting orders

• Reimbursing sales staff for the costs of maintaining an in-home office

• Hiring of independent contractors to provide set-up or configuration services within the jurisdiction or owning an Internet server in the jurisdiction

• Out-of-state corporation leasing space on a third-party’s Internet server located within the state

• Cloud-based service provider that lacks a physical presence within the jurisdiction, but had a substantial number of customers with billing addresses in the state

• Grant access to software via the Internet to in-state customers

• Out-of-state corporation with employees who telecommute from homes within the jurisdiction

• Individual telecommuting employee performing back-office administrative business functions

As liquidity for states becomes more urgent, multi-state and multinational taxpayers must pay close attention to changes in the laws governing income and franchise tax nexus. Since the definitions may change from year to year as the result of administrative change, legislation or litigation, an entity must be cognizant of these developments, especially in high tax and high volume jurisdictions. Planning ahead and filing appropriately may result in a significantly lower overall tax burden.

The authors may be contacted at [email protected], [email protected] and [email protected].

IRS CIRCULAR 230 DISCLOSURE: TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE IRS, ANY U.S. FEDERAL

TAX ADVICE CONTAINED IN THIS COMMUNICATION (INCLUDING ANY ATTACHMENTS) IS NOT INTENDED OR WRITTEN TO BE

USED, AND CANNOT BE USED, FOR THE PURPOSE OF (I) AVOIDING PENALTIES UNDER THE INTERNAL REVENUE CODE OR (II)

PROMOTING, MARKETING, OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER ADDRESSED HEREIN

Income Tax Nexus is a Tempting Way to Fill State CoffersChristopher MeierSteuerberaterT +1 (646) 225 5942 C +1 (347) 223 [email protected]

Monica Ranniger, CPA, MBATax PartnerT +1 (212) 375 [email protected]

Elias MarencoTax ManagerT +1 (212) 375 6549 [email protected]

WeiserMazars LLPAudit, Tax and Advisory135 West 50th StreetNew York, NY 10020T +1 (212) 812 7000F +1 (212) 375 6888www.weisermazars.com

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Foreign Investment in Real Property Tax Act – Withholding Certificate Applications for Reduced Withholding and New York State Estimated Tax Requirements

While the Foreign Investment in Real Property Tax Act (FIRPTA) imposes an onerous withholding requirement of 10 percent of the gross sales price where nonresident alien sellers of real property are involved, a lesser amount can be paid to the Internal Revenue Service if the transferee or transferor obtains a withholding certificate. Withholding certificates will be issued by the Internal Revenue Service if one of the following scenarios is established:

• That reduced withholding is appropriate because the required withholding would be more than the transferor’s maximum tax liability or the withholding of the reduced amount would not jeopardize the ability of the IRS to collect the tax,

• That all gain realized by the transferor would be tax exempt or

• If the transferee or transferor enters into an agreement with the IRS providing security for the tax liability

The IRS groups the applications for withholding certificates into six basic categories, with each category requiring different information. One category often utilized by nonresident aliens seeking to reduce withholding is based on a calculation of the maximum tax liability that will be imposed. This requires that the gain on the property be calculated and the maximum possible tax rate then applied to get the amount of tax required to be withheld. The transferor or transferee would apply for the certificate using Form 8288-B, “Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests”. This form would also be used for claiming nonrecognition treatment or exemption from tax, and those who are applying based on their use of special installment sales rules; however this discussion will focus on the maximum liability category. The information required by the form includes the transferor’s name and address, the transferee’s name and address, a description of the property being transferred including the contract price and the adjusted basis of the property. An additional requirement is that the taxpayer identification numbers of all parties to the transaction must be provided in the application. This can be problematic in the case of a nonresident alien who owns U.S. real property used as a personal residence since they may never have applied for a taxpayer identification number in the U.S., especially if they utilized a single member LLC to purchase the property. However, despite the strict rules relating to applying for an Individual Taxpayer Identification Number (ITIN) and the

Gabriele Soll, Dipl.-Kff., Dip-IFR, CPA

AugustinPartners LLCINTERNATIONAL ACCOUNTING AND TAX CONSULTING300 East 42nd Street, 17th FloorNew York, NY 10017D +1 (917) 472 5020T +1 (212) 593 9900F +1 (212) 593 [email protected]

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general rule that a tax return must accompany that application, there is an exception that allows a taxpayer to apply for an ITIN at the same time as submitting a properly executed Withholding Certificate application. In addition to the identifying information, a taxpayer seeking a Certificate on these grounds must also submit a calculation of the maximum tax that can be imposed including the amount realized on the sale, the adjusted basis, evidence of any recapture amounts that may be necessary, the maximum capital gain or ordinary tax rate applicable to the transfer, and the tentative tax owed. Evidence to support each component such as signed contracts of sale, purchase closing statements, invoices for improvements, and depreciation schedules should accompany the application. If the transferor is subject to any increase or reduction of tax, including treaty relief, evidence must be submitted to establish this. The application must also include a statement signed by the transferor stating, under penalties of perjury, that “the calculation and all supporting evidence is true and correct to the best of his knowledge”. Even though the Withholding Certificate Application requires detailed calculations and evidence, the savings can be substantial depending on the amount of the gain involved. For those nonresident alien individuals selling property in New York State, there is a requirement that the gain be calculated for many transfers of real property with estimated taxes paid to the state at the time the deed is recorded. The estimated tax to be paid is currently equal to 8.82 percent of the gain. Even though there are taxes withheld both for federal and New York State purposes, federal and state tax returns will need to be filed for the year of the transfer. Refunds can be requested through the tax returns for any excess taxes withheld.

Foreign Investment in Real Property Tax Act – Withholding Certificate Applications for Reduced Withholding and New York State Estimated Tax Requirements

Gabriele Soll, Dipl.-Kff., Dip-IFR, CPA

AugustinPartners LLCINTERNATIONAL ACCOUNTING AND TAX CONSULTING300 East 42nd Street, 17th FloorNew York, NY 10017D +1 (917) 472 5020T +1 (212) 593 9900F +1 (212) 593 [email protected]

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Bethany J. HillsPartnerD +1 (646) 218 7543 [email protected]

Hodgson Russ LLP1540 Broadway, 24th FloorNew York, NY 10036F +1 (212) 751 0928www.hodgsonruss.com

Medical Device Excise Tax Liability of Foreign Manufacturers Selling into the United States

Since January 1 of this year, the first sale or use in the U.S. of a taxable medical device by a manufacturer, producer or importer thereof has been subject to a 2.3 percent federal excise tax. Adopted over vehement opposition by affected industry groups, there is now an increasing consensus that the tax is flawed due to the significant costs of administration and the heavy compliance burdens it imposes on the medical device industry, which is comprised primarily of small businesses. But the tax has a key role in financing the U.S. health care reform, with an expectation of raising $10 billion over 10 years. In other words, optimists who are waiting for the tax to be repealed need to face the reality that the tax is here to stay until the government has secured an alternative way of securing $10 billion in revenue. As this is unlikely to occur anytime soon, companies need to ensure they are complying with the tax and focus their efforts on not overpaying. The initial questions for foreign (non-U.S.) manufacturers selling taxable medical devices into the U.S. are: Who is the importer liable for collecting and remitting the tax to the IRS? The foreign manufacturer? The customs broker? The U.S. subsidiary, distributor or end-user? For purposes of these questions, it is important to note that the IRS definition of “importer” applicable to the medical device excise tax is different from the Food & Drug Administration’s “importer” definition. For FDA purposes, an importer is generally the party in the U.S. with a financial interest in the product or a U.S. agent designated by a foreign manufacturer or supplier through a specific written agreement between the foreign entity and the U.S. agent and filed with the FDA. Under the IRS definition, on the other hand, an importer is the person who is the “inducing and efficient cause” – as principal and not as an agent – of the goods being brought into the U.S. for purposes of sale or use by him. If a person bringing a taxable article into the U.S. does not have a proprietary interest in the article, he is not the importer for purposes of the excise tax. Accordingly, if a foreign manufacturer engages a customs broker to import taxable medical devices into the U.S., the customs broker is only the nominal importer and does not have quarterly excise tax filing and remitting responsibility. Instead, the party bearing the risks of a typical merchant importer (i.e., risks associated with shipments in transit and market fluctuations) and/or engaging in U.S. marketing or promotional activities will be liable for the tax. In the case of a foreign manufacturer that establishes a U.S. subsidiary to market and distribute taxable devices in the U.S., the U.S. subsidiary will be considered “the inducing and efficient cause” of the goods being brought into the U.S. and liable for the tax because the subsidiary is creating a U.S. market for and directly benefitting from the sale of the

Maureen R. MonaghanSenior AssociateD +1 (646) 218 [email protected]

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goods in the U.S. The fact that a U.S. intermediary company is used to facilitate importation and is the importer of record will not change this analysis because the intermediary company will only be considered a nominal importer for purposes of the tax. Where a foreign manufacturer without a U.S. business presence sells taxable medical devices directly to U.S. end-users, such as hospitals purchasing surgical kits for use by physicians in their operating theatres, the U.S. end-user is liable for the tax because it will be considered the “inducing and efficient cause” for the devices being brought into the United States – there exists no other entity or person with a U.S. presence, such as a distributor, that could be considered the direct cause of bringing the goods into the U.S. An importer is taxed on the use of imported taxable devices in the same manner as if they had been the seller. Foreign manufacturers with U.S. subsidiaries or other U.S. presence need to be aware that there are significant exemptions and exceptions to the medical device excise tax (and elaborate constructive sale price rules) that make planning necessary to avoid overpaying the tax. The one-paragraph statute has already produced pages of confusing regulations and “Interim Guidance” on several issues that the IRS has yet to determine. Accordingly, taxpayers are advised to keep abreast of developments that may affect their liability under the tax.

Medical Device Excise Tax Liability of Foreign Manufacturers Selling into the United States

Maureen R. MonaghanSenior AssociateD +1 (646) 218 [email protected]

Bethany J. HillsPartnerD +1 (646) 218 7543 [email protected]

Hodgson Russ LLP1540 Broadway, 24th FloorNew York, NY 10036F +1 (212) 751 0928www.hodgsonruss.com

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Monitoring of Employee Computer & Email Usage under U.S. Law

In contrast to other countries, particularly EU countries like Germany, employee email and computer usage monitoring is a fairly common and accepted practice among U.S. corporations, and U.S. employees generally have very limited privacy rights in data accessed or created through corporate-owned hardware and software. In general, employee computer use monitoring raises few privacy or criminal concerns and is legally acceptable in the U.S.. While the more prudent and defensible practice is to notify the employee of such monitoring in advance (and advise as to the absence of proprietary or privacy rights in data created or transmitted on corporate systems), U.S. courts do not require pre-notification and it is not (with few exceptions) statutorily required. Nonetheless, many U.S. companies that monitor their employees’ computer and email usage advise their employees of this policy, and require acknowledgement of written policies disclosing both this general practice and the employees’ general surrender of proprietary and privacy rights in data they create and/or use on corporate computer systems. Corporations install commercially available computer usage monitoring platforms for various reasons, including to allow for expedited forensic investigation across computer and server systems, to monitor employees’ computer data usage and data creation (including email use) for compliance purposes, to facilitate criminal investigations, and to collect electronic discovery in civil litigation. While the U.S. has laws designed to protect private data (primarily personally identifiable information) from disclosure, it does not have highly restrictive data protection laws like EU Directive 95/46/EC, the German Federal Data Protection Act, or the U.K.’s Data Protection Act of 1998. U.S. law generally permits private sector employers to legally monitor their employees’ use of any computer systems provided and owned by the company, both on notice to the employee and surreptitiously. U.S. law is being interpreted (and modified in some respects) quite rapidly, so it is important to monitor state and federal legislation for any changes. When evaluating the propriety of employee monitoring, U.S. courts balance the employer’s right to protect corporate intellectual property from theft, prevent the release of sensitive or proprietary data, and monitor unauthorized employee activity, against the employee’s general rights to conduct some limited private activities at work. Corporations also argue that they have a legitimate interest in minimizing their vicarious responsibility for their employees’ tortious or criminal conduct. In fact, U.S. courts have held that companies are potentially liable for the clearly unauthorized computer usage of its employees. See Blakely v. Continental Airlines, 751 A.2d 4538 (N.J. 2000); Jane Doe v. XYC Corp., 382 N.J. Super. 122 (App Div. 2006).

Mark S. SidotiChair, E-Discovery Task Force and Director, Products Liability and Business & Commercial Litigation Departments

Gibbons P.C.One Pennsylvania Plaza,37th FloorNew York, NY 10119D +1 (212) 613 2007F +1 (212) 554 [email protected]

Jennifer Marino ThibodauxAssociate, Business & Commercial Litigation

Gibbons P.C.One Gateway CenterNewark, NJ 07102D +1 (973) 596 4839T +1 (973) 596 4825F +1 (973) 639 [email protected]

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Mark S. SidotiChair, E-Discovery Task Forceand Director, Products Liabilityand Business & CommercialLitigation Departments

Gibbons P.C.One Pennsylvania Plaza,37th FloorNew York, NY 10119D +1 (212) 613 2007F +1 (212) 554 [email protected]

Jennifer Marino ThibodauxAssociate, Business & Commercial Litigation

Gibbons P.C.One Gateway CenterNewark, NJ 07102D +1 (973) 596 4839T +1 (973) 596 4825F +1 (973) 639 [email protected]

Currently, employee manuals and written policy documents concerning employee monitoring, privacy rights, and data access/ownership are the primary source of guidance regarding employee privacy rights, so they are the primary focus of U.S. courts in evaluating the appropriateness of employee monitoring. Many electronic communications policies, electronic systems policies, computer usage policies, employment agreements, and similar documents include provisions describing limited employee privacy rights. These provisions typically explain that all data created, received and sent by employees using company systems, whether for business or personal use, is the employer’s property and is subject to company monitoring. Many policies expressly state that employees should not have any expectation of privacy in data created on or transmitted through company systems, including personal emails accounts. Companies commonly require their employees to acknowledge receipt, review, and understanding of the policy. While a few U.S. courts have supported employee claims of a reasonable expectation of privacy in information created on or sent through company systems, particularly where the company’s policy was poorly worded, ineffectively disseminated, or otherwise not effectively enforced (see, e.g., Curto v. Medical World Comms., 2006 WL 1318387 (E.D.N.Y. 2006) and Stengart v. Loving Care Agency, Inc., 201 N.J. 300 (2010)), these decisions are currently the exception. Overall, German and other foreign corporations doing business in the U.S., as well as their U.S. subsidiaries, should be aware of and account for the significantly different view of U.S. employee privacy rights and understand the extent to which U.S. laws and courts permit monitoring of employee computer usage and limitations on employee privacy rights.

Mark S. Sidoti is Chair of the E-Discovery Task Force and Director in the Gibbons Products Liability and Business & Commercial Litigation Departments.Jennifer Marino Thibodaux is an Associate in the Business & Commercial Litigation Department.

Monitoring of Employee Computer & Email Usage under U.S. Law

German American Chamber of Commerce, Inc.

Susanne Gellert, LL.M.Rechtsanwältin | Attorney at LawHead of Legal Department

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www.gaccny.com

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