9. TAXES

INCOME TAXES

Earnings before income taxes and minority interest was attributable to the following geographic regions:

Germany

264

192

International

977

857

Total

1,241

1,049

Income tax expenses (benefits) for 2007 and 2006 consisted of the following:

in million €	Germany	International	2007 Total	Germany	International	2006 Total

Current taxes	112	324	436	119	218	337
Deferred taxes	6	6	12	-26	103	77
Income taxes	118	330	448	93	321	414

In 2007 and 2006, Fresenius SE was subject to German federal corporation income tax at a base rate of 25% plus a solidarity surcharge of 5.5% on federal corporation taxes payable.

The German Business Tax Reform Act (Unternehmensteuerreformgesetz 2008) was enacted in the third quarter of 2007 resulting in a reduction of the corporate income tax rate from 25% to 15% for German companies. This reduction together with technical changes to trade tax rules will reduce Fresenius Group’s German entities’ combined corporate income tax rate effective as of January 1, 2008. Deferred tax assets and liabilities for German entities which will be realized in 2008 and beyond were revalued to reflect the new enacted tax rate. The revaluation of deferred tax assets and liabilities resulted in deferred tax expenses of € 5 million which have been included in operations for the year 2007.

A reconciliation between the expected and actual income tax expense is shown on the following page. The expected corporate income tax expense is computed by applying the German corporation tax rate (including the solidarity surcharge) and the effective trade tax rate on income before income taxes and minority interest. The respective combined tax rates were 38.05% for the fiscal year 2007 and 37.36% for the fiscal year 2006.

in million €	2007	2006

Computed “expected” income tax expense	472	392
Increase (reduction) in income taxes resulting from:
Items not recognized for tax purposes	10	18
Foreign tax rate differential	-35	-25
Tax-free income	-41	-26
Taxes for prior years	36	47
Taxes in connection with divestitures	0	23
Changes in valuation allowances on deferred tax assets	4	-9
Change of German tax rate	5	0
Other	-3	-6
Income tax	448	414
Effective tax rate	36.1%	39.5%

DEFERRED TAXES

The tax effects of the temporary differences that gave rise to deferred tax assets and liabilities at December 31 are presented below:

in million €	2007	2006

Deferred tax assets
Accounts receivable	35	36
Inventories	47	39
Other current assets	8	4
Other non-current assets	82	65
Accrued expenses	223	206
Other short-term liabilities	20	17
Other liabilities	11	20
Benefit obligations	16	28
Losses carried forward from prior years	108	127
Deferred tax assets, before valuation allowance	550	542
less valuation allowance	68	73
Deferred tax assets	482	469

Deferred tax liabilities
Accounts receivable	11	10
Inventories	8	12
Other current assets	4	0
Other non-current assets	321	283
Accrued expenses	22	43
Other short-term liabilities	30	33
Other liabilities	7	38
Deferred tax liabilities	403	419
Accumulated deferred taxes	79	50

In the balance sheet, the accumulated amounts of deferred tax assets and liabilities are included as follows:

Deferred tax assets

417

132

431

173

Deferred tax liabilities

338

312

381

352

Accumulated deferred taxes

-180

-179

As of December 31, 2007 Fresenius Medical Care has not recognized a deferred tax liability on approximately € 1.1 billion of undistributed earnings of its foreign subsidiaries, because those earnings are intended to be indefinitely reinvested.

NET OPERATING LOSSES

The expiration of net operating losses is as follows:

for the fiscal years	in million €

2008	13
2009	6
2010	4
2011	9
2012	21
2013	10
2014	11
2015	11
2016	7
2017	9
Thereafter	10
Total	111

The total remaining operating losses of € 288 million can mainly be carried forward for an unlimited period.

In assessing the realizability of deferred tax assets, the Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, the Management of Fresenius Group believes it is more likely than not that the Fresenius Group will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2007.

UNRECOGNIZED TAX BENEFITS

The Fresenius Group adopted FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109, Accounting for Income Taxes (FAS 109) as of January 1, 2007. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS 109. FIN 48 prescribes a two step approach to the recognition and measurement of all tax positions taken or expected to be taken in a tax return. The enterprise must determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. If the threshold is met, the tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement and is recognized in the financial statements. The implementation of this interpretation had no impact on the assets and liabilities of the Fresenius Group.

Fresenius SE and its subsidiaries are subject to tax audits on a regular basis.

In Germany, the tax audit for the years 1998 until 2001 has substantially been finalized and the results of this tax audit are sufficiently recognized in the financial statements as of December 31, 2006. The fiscal years 2002 to 2005 are currently under audit. With respect to HELIOS-Kliniken-Group, the years 2001 to 2004 are currently under audit. For the Group, all further fiscal years are open to tax audits. Fresenius Medical Care filed a lawsuit against the decision of the tax authority regarding the disallowance of certain deductions taken for fiscal year 1997 and has included the related unrecognized tax benefit in the total unrecognized tax benefit noted on the following page.

In the United States, except for refund claims Fresenius Medical Care has filed relative to the disallowance of tax deductions with respect to certain civil settlement payments for 2000 and 2001, the federal tax audit for the years 1999 through 2001 is completed. The tax has been paid and all results are recognized in the consolidated financial statements as of December 31, 2006. The unrecognized tax benefit relating to these deductions is included in the total unrecognized tax benefit noted on the following page. The Federal tax audit for the years 2002 through 2004 has been completed and the Internal Revenue Service has issued its report. The audit report includes disallowance of a material amount of deductions taken during the audit period for interest expense related to intercompany mandatorily redeemable preferred securities. Fresenius Medical Care has filed a protest over the disallowed deductions and will avail itself of all remedies. An adverse determination with respect to any of the disputed disallowances could have a material adverse effect on Fresenius Group’s cash flows, tax expenses, net income and earnings per share. Fiscal years 2005 and 2006 are currently under audit. There are a number of state audits in progress and various years are open to audit in other states. All expected results have been recognized in the consolidated financial statements.

Subsidiaries of Fresenius SE in a number of countries outside of Germany and the United States are also subject to tax audits. The Fresenius Group estimates that the tax effects of such audits are not material to the consolidated financial statements.

Upon adoption of FIN 48, the Fresenius Group had € 250 million of unrecognized tax benefits including the amounts relating to the tax audit items for Germany and the United States noted before.

The following table shows the changes to unrecognized tax benefits during the year 2007:

Balance at January 1, 2007

250

Increase in unrecognized tax benefits prior periods

Decrease in unrecognized tax benefits prior periods

-7

Increase in unrecognized tax benefits current periods

Changes related to settlements with tax authorities

-2

Reduction as a result of a lapse of the statute of limitations

Foreign currency translation

-12

Balance at December 31, 2007

269

The vast majority of these unrecognized tax benefits would reduce the effective tax rate if recognized. The Fresenius Group is currently not in a position to forecast the timing and magnitude of changes in the unrecognized tax benefits.

It is Fresenius Group’s policy to recognize interest and penalties related to its tax positions as income tax expense. During the fiscal year 2007, the Fresenius Group recognized € 15 million in interest and penalties. Fresenius Group had € 53 million for the payment of interest and penalties accrued at December 31, 2007.