As indicated last year by Stefan Ditsch in his article in the December/January 2014 issue, the new German government has kept the pace of the preceding government regarding shaping the tax laws in Germany. In total, 12 law changes (including ordinances) relating to taxes have been enacted by it so far – in many cases only with minor impact on the daily tax practice.
Now, going almost unnoticed, the German government has introduced another set of tax changes – under the guise of the "law for the adaptation of the tax code on the Union's customs code and to amend other tax regulations (ZollkodexAnpG)". The legislative procedure was completed December 30 2014 – with the law being enacted as from January 1 2015. The most important changes are, at a glance:
Income Tax Act – ITA ( Einkommensteuergesetz – EStG )
Foreign tax credit
Foreign taxes on income taxable in Germany are generally creditable subject to a number of limitations. One of the limitations is that the foreign taxes are creditable only to the extent German tax is to be allocated to the foreign income items.
With the amendment of § 34c paragraph 1 of the Income Tax Act (ITA) the maximum credit amount is now determined in a way that foreign taxes are creditable in the amount of the average statutory German tax rate on the foreign income. The proportion of the foreign income and the total amount of income, which used to be one additional decisive factor for the tax credit, has become irrelevant. The background for this change is that the existing rule implies a discrimination of foreign income compared to domestic income; the new rule is supposed to eliminate this discrimination and thereby implement the case law of the European Court of Justice (ECJ) in its judgment of February 28 2013; ( C-168/1, Beker & Beker ). The new regulation shall be applied in all open cases.
Increased exemption for business events
Events which are organised by an employer in which an employee takes part generally lead to a fringe benefit subject to wage tax. However, there is an allowance of €110 for such events.
This new rule is now adjusted and also specifies that all expenses for these grants are general business expenses of the employer – regardless of whether these involve expense items individually attributable to an employee or only forming a part of the overhead costs. The allowance applies for up to two events every year, that is, the allowance is €110 per event and participating employee. Moreover, the allowance includes any expenses related to spouses and attendants. Travel expenses for the employees are also to be included when calculating the value of the grant.
INVEST – grant for venture capital
Under the INVEST programme, business angels or similar investors receive a subsidy for their investments in non-listed corporations amounting to 20% of the invested amount (subsidised investment of at most €50,000). The grant for venture capital of the Federal Office of Economics and Export Control has now become tax-free (with retroactive effect).
Contributions to the retirement savings of employees
Payments of the employer required to comply with the solvency rules under the Insurance Supervision Act generally did not lead to salary/wage of the employees. As the Federal Tax Office noticed regulatory gaps in this area, this treatment which is beneficial for the employees has been limited. Exceptions apply for the initial deployment of capital and the payments of the employer to restore a reasonable capital base after unexpected losses.
Corporate Income Tax Act – CITA ( Körperschaftsteuergesetz – KStG )
For corporate income tax purposes the main change relates to the foreign tax credit: § 26 has been adjusted following the changes of § 34c ITA. Hence, the calculation of tax credits will be widely independent from the calculation for income tax purposes. For corporate tax purposes the existing legislation continues to apply unchanged.
|To further strengthen Germany’s means to cope with tax fraud, any entity “off-the-shelf”, that is, formed and registered in the commercial register, but not active, is now considered re-established once it becomes active|
Foreign Tax Act – FTA ( Aussensteuergesetz – AStG )
Adjustment of business relations definition
Under German rules, transfer pricing adjustments (including the infamous "transfer of function" rules) are applied only to cases where a business relationship is given. The definition of business relationships in § 1, paragraph 4 FTA has now been adjusted to further prevent cross-border transfers of income and avoid final tax losses. The adjustment is necessary, according to the legal explanations, to equally treat economic operations that are otherwise equal – regardless of whether the recipient is domestic or foreign. A "business relationship" is now assumed if an economic operation (transaction) or multiple economic operations of either the taxpayer or the related person lead – if the participants were German residents and the transaction took place within Germany – to income in the meaning of §§ 13, 15, 18, or 21 ITA.
Deferral on exit taxation
The eligibility for a deferral on exit taxation related to gains built in corporate investments owned by an individual – which used to be applicable only to certain cases in which Germany loses its taxation rights (for example, transfer of residence) – has now been extended so that all such cases related to an investment in a company resident in the EU/EEA are covered. This is to meet the case law of the ECJ regarding different exit tax rules, according to which an immediate collection of tax is not compatible with the fundamental freedoms of the EU. The amendment shall apply in all open cases.
Value Added Tax Act – VATA ( Umsatzsteuergesetz – UStG )
Rapid reaction mechanism
In Germany (along with many other countries) for certain services the VAT needs to be calculated and declared by the recipient as opposed to by the service provider. This reverse-charge procedure is limited to certain types of services, only.
The ZollkodexAnpG includes a legitimation to the legislators to implement an ordinance (subject to the agreement of the German Upper House of Parliament) which extends the cases in which the reverse charge procedure is to be applied to situations of heavy tax fraud.
Pre-registration for shelf-companies
In general, enterprises which are newly-established must file monthly VAT returns. However, in cases where they are shown to have limited activity they may reduce their declarations to quarterly or even yearly returns only.
To further strengthen Germany's means to cope with tax fraud, any entity "off-the-shelf", that is, formed and registered in the commercial register, but not active, is now considered re-established once it becomes active. Accordingly monthly VAT returns will have to be filed for such entity at least for the year in which the entity is considered re-established and the following year. The background of this rule is that shelf-entities used to be exempt from the obligation to file monthly returns and allow greater room to commit fraud with VAT. This loophole was considered to be closed under the new rule.
General Tax Code – GTC ( Abgabenordnung – AO )
Notification requirements to counter money laundering
Under previous law, the German tax authorities were only entitled and obliged to inform other authorities in charge of tackling money laundering about those facts that suggested a misdemeanor against the money laundering law committed by a taxpayer. Now, the tax authorities are obliged to give notice to the other competent authorities already if there are mere indications for potential money laundering offence.
Business identification number
Economically active enterprises are often legally connected with other economically productive companies (for example, in cases of a profit and loss-pooling agreement). This may have immediate effects on the taxation procedure of affiliates. Therefore, the ZollkodexAnpG includes a rule under which the data for those entities and enterprises are to be stored that are affiliated with any given taxpayer in order to be able to follow the enterprise networks and take tax measures appropriate to these networks.
Customs Code ( Zollgesetz )
Finally, coming to the "name provider" of the current proposals there have been some adjustments of the German Customs Code. The background for this is that at the level of the European Union (EU), the current customs regulation 2913/92 was replaced by regulation 952 / 2013 establishing the EU Customs Code. This change requires a number of new references and terms in the German Customs Code.
BEPS related additions
In Germany, the legislative procedure generally comprises lengthy reconciliations between the Lower and the Upper House of Parliament ( Bundestag and Bundesrat ); only if both have approved any proposed changes may they be enacted. The Upper House – consisting of representatives of the 16 federal states – is allowed to take own initiatives and provide ideas as to legislative changes. In light of the recent deliverables by the OECD in the context of tackling base erosion and profit shifting (BEPS) – in particular the deliverable on Action Point 2 (Neutralising the effects of hybrid mismatch arrangements) – the Upper House tried to use the ZollkodexAnpG as a platform to propose additional rules affecting, in particular, the deductibility of expenses. While, given the purely crafted wording of these proposals, that they were abandoned for the ZollkodexAnpG , it is also to be assumed that some of the changes will be brought back to the table during the course of 2015.
This indeed emphasises that also for German taxpayers BEPS has become real, and not always in line with the original intent of the BEPS project as the changes are prone to resulting in double taxation as opposed to merely avoiding double-non taxation.
The main changes as proposed by the Upper House are:
Deductibility of business expenses: corresponding taxation and double-dip structures
Currently, expenses are deductible in Germany at the level of a payer generally independent from the question of whether the respective payment is taxable at recipient level. This may in an international context lead to a situation which the OECD in its deliverable on Action 2 calls a "deduction/no-inclusion" (D/NI) case. Therefore, it is proposed to disallow the deduction of business expenses relating to hybrid mismatch arrangements.
According to the proposal, business expenses would not be deductible in Germany to the extent the corresponding income is not included in the tax base of the direct or indirect beneficiary or is subject to a tax exemption due to a hybrid classification of the underlying debt instrument. The inclusion of both direct and indirect beneficiaries is designed to extend the scope of the rule to certain back-to-back arrangements in which a shareholder or entity is interposed.
The provision also includes an anti-double-dip rule. Under this rule a business expense would not be deductible in Germany to the extent the expense already reduces the tax base in another tax jurisdiction. According to the proposal's explanatory notes, this rule is aimed, in particular, at German partnership structures with foreign partners in which expenses of foreign partners in relation to the German partnership may be allocated to the German tax base under the German partnership tax regime but also may be deducted at the partner level for foreign tax purposes. These structures may already fall within the scope of the existing German dual consolidated loss rules if the German partnership is part of a German tax group.
Capital gains on portfolio shareholding
During the 2013 implementation of the portfolio exception (for less-than-10% interests) to the participation exemption for dividends – resulting in full taxation – the Upper House already noted that maintaining the capital gains exemption for portfolio shareholdings may create tax planning opportunities. The Upper House last year proposed a provision to fully tax capital gains realised on portfolio shareholdings. The proposal by its committees now reemphasises that the government should exclude the participation exemption on capital gains on portfolio shareholdings.
RETT: Indirect change in ownership of a partnership owning German real estate
In general, real estate transfer tax (RETT) may be triggered if at least 95% of the interest in a partnership owning or deemed to own German-located real estate is directly or indirectly transferred to new partners within a five-year period. The combined percentages of each single transfer during a given five-year period are taken into account.
A recent Federal Tax Court decision on the attribution rules on indirect transfers to determine the 95% threshold differed from the German tax authorities' position. The court effectively treated an indirect partnership transfer as triggering RETT if, economically, all indirect shareholders of the German real estate-owning partnership have changed, (acquired by new shareholders).
The proposed amendment would reinstate the German tax authorities' position. For a corporate partner owning a partnership interest, an indirect transfer of that interest would be deemed to occur if at least 95% of the shares in the corporation are directly or indirectly transferred to a new shareholder. A partnership interest held via another partnership would be deemed transferred based on the pro rata indirect interest in the real estate-owning partnership. This rule effectively would 'look through' the interposed partnership.
Reorganisation Tax Act: Limitation of permissible boot
Under the existing German Reorganisation Tax Act, an in-kind contribution (including share-for-share exchanges) may be treated tax-free although the transferor receives additional consideration besides shares or interest of the recipient entity (for example, cash or loan receivables, commonly known as 'boot') up to the net tax basis of the contributed assets and liabilities. The Upper House believes this rule has been used to structure asset transfers that should be considered regular sales transactions as effectively tax free. The proposed wording would limit the allowable boot in a tax-free in-kind contribution to 10% of the net tax basis of the contributed assets and liabilities.
For a conclusion one can almost draw on the concluding remarks of last year's article. The above confirms that German tax laws will remain complex. Moreover, the adjustments of the VATA and the GTC as well as, in particular, the initiative by the Upper House both indicate that the German legislators will continue to strive to close loopholes and prohibit tax fraud. The latter will, inevitably, lead to situations where the rules overshoot their mark – and taxpayers will have to deal with double-taxation more often in the future. In line with this one should closely monitor the further developments in Germany as the BEPS project and its implementation in national laws evolve.
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Claus Jochimsen is a tax partner and leader of the international tax services group of PwC Germany.
He has a broad experience in international tax projects, in particular in planning and implementation of cross-border reorganisations. He advises large international clients (both German and foreign headquartered) mainly as lead tax partner.
Claus studied economics at the Freie Universität in Berlin and was on a tour of duty in the US from 2004 to 2005, based in New York. He is a frequent author and speaker on various matters related to German and international taxation.
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