GERMAN COMPANIES operating in Ireland are not liable for German corporate tax even if their Irish operations are technically run by a skeleton staff, a Munich court has found.

The Federal Fiscal Court ruled in favour of Hannover Re, Germany’s second-largest reinsurer, which has two subsidiaries in Ireland, ending a six-year battle with the German tax authorities.

The company was taken to court in 2004 after an audit a year earlier revealed that its two Irish subsidiaries at the time, Hannover Re (Ireland) and ES Ruck, maintained only management staff in Dublin. Back office staff and other tasks were shared but outsourced to a third, service company, based in the same building.

For the German tax man, this arrangement made the two companies the German equivalent of letterbox operations and their profits liable to German corporate tax. Hannover Re argued that its service company allowed the two insurance companies to share back office operations and control costs.

The federal ruling came after the tax authorities appealed an earlier ruling by the Lower Saxony fiscal court. “We wanted to be taxed in Ireland because, at the time, we would have paid between 10 and 13 per cent tax in Ireland whereas we would have paid between 30 and 40 per cent tax in Germany,” said Karl Steinle, spokesman for Hannover Re. “We will continue to do business from Ireland, which was and remains an attractive place to do business.”

The ruling has no immediate impact on the company’s operations: six years ago it wound up the three-company structure and now operates two companies in Dublin: Hannover Life Reassurance (Ireland), which employs 20 and was established in 1999 with an initial capitalisation of €100 million and Hannover Reinsurance (Ireland), which has 21 employees. Its profits fell by 74.2 per cent in 2007, following a €28 million write-down caused by a restructuring of the firm’s Irish operations.

The ruling, which has yet to be published, allows Hannover Re to release €100 million it had set aside in case the court found against it. That will push up the company’s third-quarter net profit and annual profit, forecast before the ruling to reach €600 million.