Germany: Taxation of Co-operatives (1994)

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    This document has been made available in electronic format
         by the International Co-operative Alliance ICA 
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                         May 1996
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          Taxation of Co-operatives
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                           By

                RUDIGER PHILIPOWSKI [J]


Source : International handbook of Cooperative Organisations, Edited by E. Duelfer in cooperation with J. Laurinkari, Vandehoeck & Ruprecht in Goettingen, 1994, ISBN 3-525-13225-5 


When a co-operative supplies goods or provides services it
must pay turnover tax; when it purchases real estate property
it must pay property acquisition tax, etc. In such situations,
the co-operative itself is not being taxed but rather the
economic transaction in which the co-operative is
participating. In the context of this treatise, only those
types of taxes are of interest which (intend to) encumber the
co-operative as such. This primarily involves corporate income
tax (Korperschaftssteuer).

Discussion has been underway for years in Germany, whether the
taxation of co-operatives is fair at all in the scope of the
tax system ( M Managerial Economics). One school of experts
responds negatively to this question, basing its stance on the
following argument: Corporate income tax is intended to
encumber the income of a corporate body. The object of a
co-operative is, however, not the attainment of (the highest
possible) income but rather the promotion of its members'
enterprises. To achieve this objective, the . co-operative
maintains a common business enterprise comprised of its
members. In as much as a surplus is realized through
transactions with members, this surplus does not belong to the
co-operative, but rather to its members. It consequently
should not also be taxed at the co-operative (M
Reimbursements). At best, it is permissible to calculate the
distribution of the surplus to the individual members and to tax
the partial amounts then and there. If this is too cumbersome for
the tax authority, taxation should not be undertaken.

Despite this argument, German legislators decided in favor of
taxing co-operatives. The following considerations played a
critical role in this decision: If and when a surplus is achieved
through transactions with members and distributed in the form of
reimbursements, it in fact must not be taxed at the co-operative;
each member must rather be taxed in relation to the partial
amount he is due (see below under III.1). If, however, the
co-operative does not distribute the surplus - or else
distributes a part of it as reimbursements - but rather retains
it (or a part of it), the co-operative intends to use the surplus
for its own purposes, e.g. to increase its reserves or to pay a
dividend on accerted paid-up shares. The co-operative's decision
to retain a surplus for its own purposes is justification to tax
this amount as a part of its income.

The extent of the corporate income tax is determined from the
base of assessment (taxable income) and the rate of taxation. In
some international discussions, emphasis is solely placed on the
tax rate level, which is understandable in that percentage rates
can be easily compared with each other. The specialized expert,
on the other hand, knows that much greater attention should be
paid to the respective provisions which determine the taxable
assessment base. Such provisions vary from country to country.
The following article will discuss the legal situation in Germany
and is intended to incite the reader to make appropriate
comparisons with the tax code of his/her own country.

I. Taxable Income
*****************

1.   Calculation of Income:

The amount of taxable income is ascertained using the following
calculation:

Business capital at the conclusion of the 
business year  ........
Minus business capital at the end of the
previous business year                       - ........
Plus non-tax-deductible company expenses     + ........
Plus disguised profit distributions          + ........
Plus 50% of the supervisory board's pay      + ........

The level of business capital results from the tax balance sheet.
The first question to be posed and decided is: which items must
be included in the tax balance sheet and which may be excluded?

2.   Obligations, Prohibitions, and Options to include Certain
     Items in the Balance Sheet:

The co-operative must include all assets and all liabilities in
its tax balance sheet (Law of Complete Reporting; Principle of
Balance Sheet Integrity). This principle also holds true for the
commercial balance sheet (which is published and serves to inform
both members and business partners).

It may occur in everyday practice that a co-operative either
accidentally or intentionally omits an asset in its commercial
balance sheet (thereby showing lower company assets), or that it
omits a liability (thereby indicating higher business capital).
It is furthermore imaginable that this balance sheet mistake is
discovered sometime afterwards, but that the commercial balance
sheet is not accordingly revised. Nevertheless, the state's claim
to tax moneys must not be contingent on whether the co-operative
corrects the faulty commercial balance sheet or not. As a
consequence, the tax balance sheet must always indicate those
items under legal obligation to be either capitalized or carried
as liabilities, even when they were not actually included in the
commercial balance sheet (because the amount of liable taxes is
calculated from the tax balance sheet) ( Financial Accounting
Law). The tax authority makes sure that this principle is
maintained when it audits the co-operative. Large co-operatives
undergo such audits regularly, whereas smaller co-operatives are
only occasionally audited ( M Auditing).

Prohibitions against the inclusion or certain items in the
balance sheet are a measure or creditor protection. Expenses
inccured in founding the co-operative and raising equity, for
example, may not be capitalized. Asset items may also not be
reported for self generated goodwill nor for the establishment of
a regular clientele which results from the co-operative's own
efforts. These prohibitions against inclusion in the balance
sheet are in effect for both the commercial and tax balance
sheets.

It is imaginable that asset items of this nature are accidentally
included in the commercial balance sheet and that this mistake is
not rectified due to one of numerous reasons. The respective
items must accordingly be omitted when the tax balance sheet is
drawn up.

In certain situations, an option to include items in the balance
sheet exists, as the following example illustrates: A
co-operative borrows a credit for I million marks. It is agreed
that the lender will retain a disagio of 6% upon disbursing the
loan proceeds and that the credit will be payed back after live
years. In this situation, the co-operative must carry the loan as
a liability on the balance sheet and capitalize the payed out
amount of DM 940,000. With respect the disagio, however, the
co-operative has an option in the commercial balance sheet. It
may capitalize the DM 60,000 (and write off the amount within
five years according to plan), or it can dispense with
capitalizing the DM 60,000; in the latter case, it will indicate
DM 60,000 less in business capital and profit to its members and
business partners. The co-operative must nonetheless indicate the
amount of DM 60,000 in the tax balance sheet as a prepaid item.
It thus cannot reduce its taxable income in the year it borrows
the credit by negotiating a disagio. The following rule is
generally applicable: An item which may be capitalized in the
commercial balance sheet must be capitalized in the tax balance
sheet even when it was not actually included in the commercial
balance sheet.

Working in the other direction, however, an item which may be
carried as a liability (but does not have to be) in the
commercial balance sheet must not be carried as a liability in
the tax balance sheet -even when the item was allocated for in
the commercial balance sheet. The following serves as an example
of this situation: Repairs should have been executed in the
business year which just expired, but they were never undertaken.
These repairs are undertaken in the following business year some
several months subsequent to the balance sheet date. In such a
situation, the co-operative may set aside reserves in the
previous year's commercial balance sheet for such maintenance
expenses yet to be undertaken; it can, however, choose not to
create such reserves. Regardless of the option it chooses, no
reserves for postponed maintenance expenses may be allocated for
in the tax balance sheet.

3.   Capitalizing Assets at Purchase or Production Cost:

Assets purchased by the co-operative are to be reported at their
purchase cost. This includes all expenses necessary in order to
purchase the individual asset and to transform it into an
employable state. The purchase price must be capitalized (minus
deductible prior turnover tax) as well as all incidental costs
which can be allocated to the purchased object. Those assets
produced in and by the co-operative itself (above all buildings
and commercial goods) must be reported at their cost of
production. Such costs include all expenses which arise when
other goods are used or worn out or when services are availed of
in connection with the production of the asset.

4.   Appreciation:

In the course of time, many assets appreciate in value. This is
above all the case for real estate property and occasionally for
participatory investments. Despite their increased value, such
assets are to be reported in the tax balance sheet in the
subsequent years at their historical purchase or production cost.
The increase in value thus does not result in an increase in the
reported value in the balance sheet and does not raise taxable
income. A tax obligation first arises in this situation when the
increase in value is actually realized once the asset is sold.

5.   The Principle of Nominal Value:

In inflationary periods, the principle of nominal value taxes
fictitious profit. The following example should clearly
illustrate this phenomenon:

(historical) purchase or production cost of a good     I00
(present day) replacement cost of this good            120
turnover attained upon sale of this good               130

When the co-operative sells the good and replaces it with all
identical good with the turnover proceeds, its real profit is
(130-120 =) 10. German tax code, however, does not take into
consideration the increases in the sales and replacement prices
which arise due to inflation. The nominal profit of 
(130-100 =) 30 is taxed instead. At a tax rate of 50%, the 
co-operative must pay 15 in taxes. Because it in actuality had
only earned 10, the tax liability can substantially undermine the
foundation of the co-operative enterprise. The dimension of this
risk is contingent on the annual inflation rate. When inflation
remains low it is admissible to keep to the principle of nominal
value. This is in particular the case when special provisions
exist which reduce taxes on fictitious profit. Such provisions
existed and/or still exist in Germany, but only in narrowly
defined situations, namely:

-    when certain capital goods are sold: taxable profits can be
     avoided by shifting revealed quiet reserves to other capital
     goods;

-    when the market price of goods increases by more than 10%   
     annually: reserves which reduce profit can he accrued for   
     inflation;

-    when certain imported raw materials are subject to volatile
     price swings on the world market: a downward valuation
     adjustment of up to 20% call be undertaken which reduces
     profit;

-    when purchasing and selling merchandise: the valuation      
     method of "last in, first out" is used.

All of these provisions do not ultimately prevent fictitious
profits from being taxed but postpone such taxation to a future
point in time.

6.   Depreciation of Commercial Buildings:

In Germany, it was originally assumed that the majority or
buildings could remain standing and be used for 100 years. As a
result of this, the write off for depreciation (DWO) was so
calculated that the building would be completely written off
within a period of 100 years; the DWO rate accordingly was set at
1%.

Lawmakers decided in the mid 1960s to reduce the duration of
utilization to only 50 years when calculating the DWO rate, which
was accordingly raised to 2% . The DWO rate was once again
increased in 1985 this time to 4%. This corresponds with a
typical utilization duration  of only 25 years. Every
co-operative manager knows, however, that a solidly constructed
building can remain standing for at least 25 years (and sometimes
for substantially longer), The utilization duration set by tax
code legislators does not correspond with  reality: The 4% DWO
rate is much higher than the actual extent of wear and tear and
corresponding value depreciation.

The high DWO is intended to provide a tax incentive to undertake
construction investment. The law is, however, formulated in such
a manner that the co-operative must use the 4% rate (not a lower
rate). This situation has consequences for co-operatives which
invest very large amounts of money into buildings but which
subsequently do not achieve the gross profits they had expected
through their undertaken business involvement with goods or
services. It can even happen in such a case that a taxable loss
arises solely due to the 4% DWO rate, a situation which is
sometimes not desired. Such a loss can, nonetheless, be either
retroactively transferred to the past or carried forward to the
future (see under I.12.) The important issue here is that the
co-operative has an option with regard to its commercial balance
sheet: It can either write off the building at a 4% annual
depreciation rate or it can use a lower DWO rate which represents
the actual extent of wear and tear and value depreciation. The
co-operative thus does not need to indicate a loss in the
commercial tax balance.

Instead of choosing the linear DWO method outlined above, it
co-operative can use a digressive DWO method. For commercial
buildings, the rate is calculated as follows:

4 years at 10%                     =    40%
3 years at 5%                      =    15%
18 years at 2.5%                   =    45%
25 years                           =    100%

If the co-operative chooses the degressive DWO method, it must
use it uniformly in both the commercial and tax balance sheets.
The percentages in the degressive DWO method certainly do not
represent the actual extent of wear and tear on a building. The
rates are set as high as they are primarily due to economic
considerations and reasons based on business cycle policy. In the
course of the years and decades to come, these reasons could lose
their importance and have less value placed on them. This is
likewise the situation in Germany. Commercial buildings which are
constructed and finished by 1994 should be subject to new
degressive DWO rates presently under debate in Parliament which
only correspond to:

5 years at 7%                 =    35%
6 years at 5%                 =    30%
14 years at 2.5%              =    35%
25 years                      =    100%

7.   Depreciation on Machines and Motor Vehicles:

The co-operative can choose between the linear and the degressive
DWO method. If it chooses the linear method, the purchase or
production costs are equally distributed over the years of its
useful life expectancy. If, for example, the purchase cost
amounts to 100,000 and the useful life expectancy is 8 years, the
co-operative can write off 12,500 annually, or 12.5% of the
100,000.

The degressive DWO rate amounts to a maximum of three times the
linear DWO rate; the highest rate is, however, 30%. This
percentage remains constant throughout the entire write off
period. Starting in the second year, the rate is applied to the
residual value, and so on. Using the numerical example
illustrated above, the degressive DWO method proceeds as follows:

Purchase cost                           100,000
DWO of Year 1: 30% of 100,000           -30,000
Residual value after Year 1              70,000
DWO of Year 2: 30% of 70,000            -21,000
Residual value after Year 2              49,000
DWO of Year 3: 30% of 49,000            -14,700
Residual value after Year 3              34,300
... and so on.

ry the end of the eighth year, the total remaining book value has
been deducted.

8    Retirement Reserves:

Many co-operatives are obligated to pay retirement pensions to
their (board of) directors and, occasionally, to their higher
level staff upon their retirement. A profit minimizing reserve
can be accumulated for these future retirement liabilities under
certain preconditions. When the insured event occurs, the amount
of reserves equals the cash value of the sum of probable future
retirement contributions to be disbursed (using the discounting
process). A 6% discount rate should thereby be used, and the
recognized rules of actuarial theory must be taken into
consideration.

A reserve should be formed in the balance sheet prior to the
occurrence of the insured event; it should start to accrue in the
year in which the retirement commitment has been promised. The
reserve contribution mentioned above is to be accrued through
uniform, annual partial contributions, and a discount rate of 6%
must likewise be taken into consideration. The allocated
contributions to these reserves h theory should be distributed
through the time frame spanning from the beginning of the
employed status (for salaried staff at the earliest upon reaching
age 30) up to the previously determined moment when the pension
payments are to be disbursed.

Retirement reserves play a fairly substantial role in the balance
sheets of German co-operatives.

9.   Non-deductible Company Expenditures:

Expenditures which (objectively) are related to the co-operative
enterprise and (subjectively) serve the co-operative enterprise
are, in principle, tax deductible. Many of these expenses cannot,
however, be deducted because they affect other people's private
lifestyles. Examples of such non-deductible expenses include:
gift expenses for business partners amounting annually to more
than DM 75 per person; 20% of restaurant expenses for business
partners (regardless of whether the meal was held in an expensive
restaurant or in the company cafeteria); fines for offenses
against antitrust regulations or other commercial laws.
Such non-deductible company expenses should be included in the
profit calculated according to the tax balance sheet. This
likewise is the ease for contributions payed for corporate income
tax and net worth tax. To a certain extent, expenses which
promote charitable, religious, church-related, scientific,
cultural and public benefits purposes are tax deductible.
Contributions to political parties are also tax deductible to a
certain degree.

10.  Disguised Profit Distribution:

Contributions distributed among members in a disguised manner
(either alongside or in place of an open distribution) are to be
included in taxable income. Such disguised distribution arises
when the co-operative conducts business with members and
non-members alike but offers the former more favorable conditions
(special advantages) due to their affiliation to the
co-operative.

Contributions which in the course of the business year are payed
to members and, as a result, no longer are found in the company
assets of the co-operative at the end of the business year are to
be included in the profit calculated according to the tax balance
sheet.

When a co-operative hosts its general assembly it is customary
that it invites its members to a meal. By providing food and
drink the co-operative creates a pleasant atmosphere which serves
to fulfill a two-sided purpose. On the one hand, members 
willingness to conduct all possible business with the
co-operative (and not with competing companies) should be
furthered; in order to encourage such willingness, the board
attempts in an appropriate manner to direct attention to the
efficiency of the co-operative during the general assembly. On
the other hand, an incentive is given to the members to
participate in the general assembly the following year so that
the necessary resolutions can be passed.

The German tax administration decided to treat this situation as
follows: food and drink up to DM 25 per participant is occasioned
through the customer relationship (80% of these eating expenses
are tax deductible; 20% are non-deductible business expenses).
Food and drink exceeding 25 DM per participant is occasioned
through the membership relationship; this portion of expenses is
allocated to the disguised profit distribution and is not fully
deductible.

11.  Remuneration for the Supervisory Board:

The salaries which a co-operative pays the members of its board
of directors can always be deducted from taxes even when these
salaries are quite high. Remuneration the co-operative pays to
the members of its supervisory board, on the other hand, can only
be deducted up to half of their total amount, even when such
compensation is quite modest (M Organizational Structure of
Societies).

This law can only be explained historically. In the proceeding
century, many corporations namely began to pay the members of
their supervisory boards (who were simultaneously the principle
shareholders) disproportionately high compensation for serving on
the supervisory board. This abusive situation was off-set  by tax
laws. Today, the restrictions placed on the deductibility of
supervisory board members' remuneration are not longer justified,
above all by the compensation payed by co-operative.
Nevertheless, the tax code provision continues to be in effect,
and 50% of the pay given to supervisory board members must be
included in the profit calculated according to the tax balance
sheet.

12.  Tax Loss Carrybacks and Carryovers:

If a loss occurs on the tax balance sheet due to the
consideration of the points explained in parts I.9-11 above, it
can be carried back up to all amount of DM 10 million and
deducted from the positive of the two previous years. The tax
authorities will reimburse the co-operative the corporate income
tax it had collected for these two years. A portion of the
remaining loss can be carried forward and deducted from the
positive income in the succeeding years. The law Previously
restricted carryovers to only five years, but this temporal
restriction was lifted in 1990.


II. Tax Rates
*************

1.   Historical Development:

For decades, the co-operative in Germany were treated differently
than stock corporation, but since 1981 both corporate forms have
been subject to the identical tax rates. 

Through the end of World War I (1918), co-operatives were never
accounted for at all with regard to taxes. In the 1920s, they
were accounted for but remained extensively exempted from taxes
related to their member-oriented businesses. Their tax obligation
first materialized in the 1930s, but the tax rates were
reasonable for that time. Furthermore, completely varying
provision were in effect for the different types of co-operative
(credit co-operatives, trading co-operatives, farming
co-operatives) (M Classification).

The development of the credit co-operatives (M Co-operative
Banks) is particularly interesting. Law-makers involved with tax
code became convinced that these co-operatives had become larger
and more competitive over the course of the years, and therefore 
it could be expected of them to contribute more to the financing
of public expenditures. Following the turbulence of World War II
and the post-war years, the tax rate initially was at 15% (1955);
it was then raised to 19% (1958), later to 32% (1968), 41%
(1976), 46% (1977), and finally to the full 56% (from 1981
through 1989).

A critical examination of this development must take into
consideration the fact that the entirety of co-operative income
has no longer been subject to the listed tax rates since 1977.
Special regulations (see under the following, II.2) have been
effective since 1977 for that portion of income which is set
aside for profit distributions.

The tax rate for co-operatives as well as for stock corporations
was reduced from 56% to 50% in 1990. According to a bill
presently under debate in parliament, this rate should be lowered
to 44% by 1994. The current 50% rate is applicable to all
portions of income which should be allocated to reserves or to
the  financing of non-deductible expenses (e.g. in order to pay
net worth tax). This is likewise applicable for the future 44%
rate.

2. Taxing Profit Distribution (Imputation System)
The legal situation can be presented and explained most clearly
using a numerical example:

(1)  A co-operative Sets aside for profit
     distribution                                 1.000.000
(2)  Of this sum, it pays 36% corporate 
     income tax                                    -360.000
(3)  Dividend sum agreed to and passed by 
     the general assembly                           640.000
(4)  Of this, the co-operative pays 25% capital 
     gains tax                                     -160,000
(5)  Remaining distribution amount                  480,000

If one chooses to start with the dividend sum (3), the corporate
income tax to be paid (2) with regard this always amounts to
56.25%. The following procedure is contingent on member
affiliation to a particular group.

a)   the first group includes all members who receive a dividend
     (3) valued at a maximum of DM 100. If a member has a right
     to a dividend valued at DM 80, for example, initially he is
     only entitled to a pay amount of DM 60 (DM 80 minus 25%
     capital gain tax). The co-operative is the position,
     however, to request a reimbursement from the tax authorities
     for the corporate income tax (56.25% of DM 80 = DM 45) and
     the capital gains tax (25% of DM 80 = DM 20), to be payed in
     one lump amount. It hereby does not need to provide the name
     of the member in question. In the course of preliminary
     financing, it pays the member the DM 60 as well as DM 45 and
     DM 20, or, in other words, DM 125 in total. This payment is
     executed in one single sum.

b)   The second group includes all members who are entitled to a
     dividend (3) valued above DM 100 and who have informed the
     co-operative that they wish to utilize their legal tax
     exemption for interest and dividends for their co-operative
     dividend. (This exemption amounts to DM 6,l00 for singles
     and DM 12,200 for married couples). If such a member has a
     right to a DM 400 dividend, he initially only has
     disposition over a payment amounting to DM 300 (DM 400 minus
     25% capital gains tax). The co-operative can, however,
     request from the tax authorities to receive in one lump sum
     the corporate income tax (56.25% of DM 400 = DM 225) and the
     capital gains tax (25% of DM 400 = DM 100) which arise in
     connection with the dividend. In this case, the co-operative
     must provide the name and address of the member in question
     in order that the tax authorities may still exercise an
     optional control function. In the course of preliminary
     financing, the co-operative simultaneously pays out both the
     DM 225 and the DM 100 on top of the DM 300 to the member, or
     DM 625 in total.

c)   The third group includes all those members who are entitled
     to a dividend (3) exceeding DM 100 but who either cannot or
     do not wish to take advantage of the exemption described
     above under b. When such a member has a claim to a DM 400
     dividend, the co-operative will pay him DM 300 and at the
     same time issue an attestation for DM 225 in payable
     corporate income tax and DM 100 in payable capital gains
     tax. The member must subsequently declare the entire DM 625
     as gross income when he files his income tax. The DM 225 and
     the DM 100 Will be included in his income tax liability
     (just like an income tax prepayment).

Seen formally, the corporate income tax on profit distributions
represents a tax liability and a tax expenditure for the
co-operative. As a result, the tax amount is to be indicated in
the profit and loss account. Seen from the economic point of
view, this does not represent an encumbrance on the co-operative
but rather a prepayment of members' eventual income tax
liability. The corporate income tax on dividends, therefore, has
a similar function as the capital gains tax withheld by the
co-operative for its members' accounts.

The described procedure pursues several purposes. On the one
hand, all dividends should be accounted for with regard to taxes.
In the case of members in group c, the tax authorities even
receive the payable taxes when a member "forgets" to include his
dividend income when filing his income tax statement. On the
other hand, the co-operative dividend should not he encumbered
with the tax rate (presently amounting to 50%)  which is normally
in effect for co-operatives. The dividends should rather be
encumbered with the marginal tax rates the individual members
must bear, which fluctuate between 25% and 40%. If a member has
not exhausted his tax exemption elsewhere, he should receive his
co-operative dividend without any type of encumbrance. 

Ultimately, the situation should be avoided in which one and the
same dividend is first taxed at the co operative and subsequently
again when the member files his taxes (avoidance of a double
taxation burden). This procedure may seem technically
complicated, but with the help of electronic data processing it
can be resolved without any large problems.

The decisive advantages of the imputation system can be
summarized as follows: the dividends are burdened with fewer
taxes than before; the "after-tax profit" therefore increases for
members (although the co-operative s costs for the dividend
remain the same); on account of the higher return, members are
more willing than before to subscribe to additional shares; the
co-operative accordingly call improve its equity basis and
fulfill its promotion mandate better than before.

III. Co-operative Reimbursement
*******************************

1.   Calculating Tax-Deductible Contributions:

When a co-operative determines at the end of the business year
that it has generated a surplus which it does not need in its
entirely to strengthen its equity level, it can make a
distribution among its members which reduces it tax obligation
when:

-    it supplies goods or provides services, thereby collecting
     remuneration from its members; this takes the form of a M
     reimbursement;

-    it purchases goods or services and pays remuneration to its
     members (above all in marketing and production
     co-operatives); this takes the form of a subsequent 
     reimbursement (Nachvergutung).

The first step in this procedure is to ascertain which partial
amount of the total surplus comes into question for a
reimbursement, which in turn reduces taxes. To achieve this
purpose, taxable income is to be reduced by the profit arising
from non-member business. The balance which results from this is
to be allocated in proportion

-    from the remuneration the co-operative collected from its
     members to the total amount of collected payments, or

-    from the remuneration the co-operative payed to its members
     to the total amount of payed out remuneration.

The resulting partial amount is considered profit from the
business conducted with members and as such defines the upper
limit for the tax-reducing reimbursement. Nonetheless the
following preconditions still play a role for tax deductibility:

-    that it is measured according to the level of turnover
     between   the co-operative and the individual members;

-    that it is actually payed out (that is, deducted from the
     co-operative s assets);

-    that the member has a legal right to the reimbursement is
     irrelevant whether this legal right results from the
     co-operative s by-laws, from a resolution passed by the
     general assembly or from a resolution passed by the board
     and announced to the members.

2. Economic Importance

Co-operative reimbursement held an enormous importance up through
1976, :above all for those co-operatives fully liable in taxes.
If a co-operative at that time had applied a portion of its
income for dividend payments, the following taxes would have been
payable: 49% corporate income tax (for the cooperative) and on
top of that a maximum of 53% income tax (for the member) on the
remaining amount. As a result, less than 25% of the original
amount would "make it" to the member (double encumbrance of the
dividend with an asset eroding effect). In order to avoid this
overtaxation, those co-operatives subject to a full tax liability
dispensed with dividend payments. In their place they distributed
reimbursements.

Although this dividend policy was quite intelligent from the
vantage point of tax policy, it proved to have quite
disadvantageous effects on the capacity of many co-operatives to
accumulate equity. Numerous members namely referred to the fact
that the co-operative reimbursement was fully tax deductible and
demanded the highest possible distribution. This precipitated a
situation in which reserves could not be sufficiently
accumulated. Nevertheless, there were no voluntary payments on
paid-up shares as they were not endowed with dividends. The
consequence: the equity which needed to increase with the growing
dimension of the business activity remained below the necessary
requirements. In order to attain equity despite this situation,
many co-operatives saw themselves forced to introduce mandatory
participation graduated according to the level of members '
turnover. At first, this participation from appeared the ideal
solution; it became problematic, however, as soon as individual
members  turnover level will the co-operative continued to stack
off.

These problems have been extensively resolved since 1977 when the
imputation method was introduced (see above under II.2.). The
question of whether distribution payments or dividends now only
influence the level of trade tax, which is a local tax in Germany
levied in addition to corporate sales tax.

Certain particularities exist for credit co-operatives. Since
1981, when they became fully liable for corporate income tax,
they can also deduct reimbursements (e.g. interest
reimbursements) as company expenses. Less than 20 of the 3,000
odd credit co-operatives in Germany presently distribute an
interest reimbursement.

IV. Tax Exemption for Rural Co-operatives
*****************************************

     Rural co-operatives are tax exempt as long as they limit
     their business enterprise to the following activities-

-    The joint utilization of facilities, tools, and equipment;

-    Services or work orders for the production executed in
     members' enterprises;

-    Working with or processing products grown by members as long
     as such processing still can be categorized under farming.


The tax-exempt status is not effected when ancillary,
non-favoured activities are executed which do not exceed a
maximum level of 10% of total income. This means that if the 10%
income margin is respected, the co-operative remains tax exempt
for the profits resulting from its favoured activities; only the
profits from other activities are taxable (partial tax
liability). If, however, the 10% income margin is not adhered to,
the co-operative and its entire income will be taxable.
The 10% limit allows rural co-operatives a certain amount of
lee-way in determining their corporate policies.


Bibliography
************

Philipowski, Rudiger/Hofkens: Besteyerung von Genossenschaften im
internationalen Vergleich, vol. 14, Vortrage und Aufsatze des
Forschungsinstituts fur Genossenschaftswesen der Universitat
Wien, Wien 1990.

Zulow/Schubert/Rosiny. Die Besteuerung der Genossenschaften, 7.
Ed., Munchen 1985.