119. Interposed Corporation As Abuse Of Law

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German tax law contains a general anti-abuse provision in sec. 42 AO (tax procedure act). This section reads as follows:

The tax laws may not be circumvented by abuse of legal structuring possibilities. In case of [such] abuse, the tax claim [of the tax authorities] is the same as that arising under a structure appropriate to the economic transaction.

The vagueness of the statute makes it difficult for taxpayers and tax authorities alike to know when it will apply. Obviously, a structure cannot be "abusive" in the sense of the law just because it was preferred over another structure which would have resulted in greater tax liability. Over the years, the courts have tended to regard structures as abusive if they are unusual (artificial, contrived) and serve no sound business reason.