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Reforms in German Tax Legislation – Overview of Pending Legislative Procedures and Legislative Initiatives

posted 3 years ago

On September 26, 2021, Germany will elect a new Bundestag (the national Parliament of the Federal Republic of Germany). According to current polls, some changes in the composition of Germany’s central legislative body are to be expected, which will also have an impact on tax legislation. The Grand Coalition therefore currently appears to be endeavoring to complete as quickly as many reforms in the area of tax law as possible, some of which have been initiated for several years but have never been completed. At the same time, numerous other legislative initiatives are currently being launched, and it is hoped that they will be implemented during the current legislative period. In the following, we would like to give you an overview of the legislative procedures and legislative initiatives currently pending in Germany in the area of tax law.
Reform of the real estate transfer tax

On April 21, 2021, the Bundestag passed the bill to reform the real estate transfer tax. The aim is a significant tightening in the area of so-called share deals. The following changes are planned:

  • Lowering of the participation thresholds from the current 95% to 90% in the future for triggering the real estate transfer tax
  • Introduction of a new supplementary fact to record changes in the shareholder structure of corporations
  • Extension of the retention periods from five to ten years

For example, current tax arrangements are to be made more difficult, according to which 94.9% of the shares in the assets of a (partnership) company are initially transferred and the remaining 5.1% are only transferred after a period of five years. If the retention period were extended, the remaining 5.1% could only be transferred after ten years.

  • Further abuse avoidance provision

The abuse provision of Sec. 6 para. 4 Real Estate Transfer Tax Act (Grunderwerbsteuergesetz, GrEStG) is to be extended. Insofar a change of partners in a real estate-owning partnership has not triggered any real estate transfer tax, Sec. 6 GrEStG may in future only be invoked after a 15-year retention period.

In addition, the Bundestag agreed to defuse the planned amendments at least partially:

  • Introduction of a stock exchange clause

Transfers of shares in corporations admitted to trading on an organized market operated in Germany or in another member state of the European Union (EU) or of the European Economic Area (EEA) are not taken into account if the transfer of the shares takes place as a result of transactions on this market.

  • Furthermore: Introduction of a transitional regulation as well as no limitation of the late payment surcharge.

All changes are scheduled to take effect on July 1, 2021.

The chamber of the German states, the so-called Bundesrat, still has to approve the proposal and is expected to discuss it on May 7, 2021.

It is to be welcomed that transfers of shares in a company made before the effective date (July 1, 2021) are exempt from these new regulations. This means that there will be no retroactive effect of the provisions. Overall, however, the tightening of the rules should be viewed critically, as the reform will make tax structuring much more difficult in the future.

Corporate Income Tax Modernization Act (KöMoG)

On March 24, 2021, the German Federal Cabinet approved the draft law on the modernization of Corporate Income Tax Law (Gesetz zur Modernisierung des Körperschaftsteuerrechts, KöMoG). The Bundestag already discussed the bill in its first reading on April 22, 2021 and passed it on to the Finance Committee.

The following major changes are intended:

  • Introduction of a corporate income tax option that allows partnerships to be taxed like a corporation. The model is known in particular in the US as the so-called Check the Box procedure.
  • Mergers, demergers and changes of legal form of corporations with reference to third countries should be possible in the future in a tax-neutral manner (internationalization of conversion tax law).
  • Losses from exchange rate fluctuations in connection with shareholder loans are to be allowed as deductible operating expenses in the future.
  • Abolition of corporate adjustment items for additional and reduced transfers.

The law is scheduled to take effect on January 1, 2022.

In particular, the corporate income tax option represents a positive development for the competitiveness of many companies in the legal form of a limited partnership or general partnership.

It remains to be seen whether adjustments will be made in the course of the further legislative process.

ATAD Implementation Act (ATADUmsG)

Together with the KöMoG, the Bundestag also discussed the Anti-Tax Avoidance Directive Implementation Act (Anti-Steuervermeidungs-Richtlinien-Umsetzungsgesetz, ATADUmsG) in its first reading. This was also approved by the Federal Cabinet on March 24, 2021.

Significant changes that may accompany the ATAD Implementation Act are as follows:

  • Entanglement and exit taxation

The previously regulated interest-free and unlimited deferral of the tax claim incurred when moving to an EU/EEA state is to be completely abolished. Instead, only an interest-free deferral of the tax payment for a period of seven years is envisaged. This deferral rule is to apply both to the expatriation to a EU/EEA country and to the expatriation to a third country. In addition, further tightening is planned.

  • Reform of the taxation of income from foreign subsidiaries

In particular, the previous concept of national control is abandoned and replaced by a control concept. This should always apply taking into account related parties or in the case of “interaction” if more than half of the shares, voting rights, capital or profit entitlement is directly or indirectly attributable.

  • Hybrid designs

The planned amendment to the law denies the deduction of operating expenses for hybrid arrangements under certain conditions for expenses for the use of or in connection with the transfer of capital assets, in so far as a possible double deduction of operating expenses in different countries results or the taxation of the corresponding income is not given.

  • Transfer prices

In particular, the draft no longer provides for a hierarchy of methods and places a strong emphasis on functional and risk analyses as a basis for the comparability of business transactions. The definition of intangible assets will in future be based on the OECD definition. The draft also comments on the arm’s length analysis of financial transactions. In addition, financing centers will be classified as services in the future. Furthermore, the escape rule for transfers of functions has been removed.

It is also planned to amend Sec. 90 para. 3 of the German Fiscal Code (Abgabenordnung, AO), according to which a master file is to be prepared from a threshold value of EUR 50 million instead of EUR 100 million as previously. The master file must be submitted to the tax authorities together with the tax return.

The background to the ATAD implementation act is the ATAD Directive, which obliges all EU member states to adapt their tax regulations with regard to the above-mentioned aspects.

The bill therefore essentially represents a necessity in relation to the need to implement the ATAD Directive. Due to the tightening, taxpayers will have to face an increased audit effort in the future in order to be able to comply with the planned significant tightening.

Withholding Tax Relief Modernization Act – AbzStEntModG

Already on January 20, 2021, the German government passed the Withholding Tax Relief Modernization Act (Abzugsteuerentlastungsmodernisierungsgesetz, AbzStEntModG). Following amendments by the Finance Committee and their resolution, the second and third readings in the Bundestag are now scheduled for May 5, 2021.

The planned changes are comprehensive and affect in particular income tax law, conversion tax law and foreign tax law. Significant planned changes associated with the AbzStEntModG are as follows:

  • New version of the so-called anti-treaty shopping provision of Sec. 50d para. 3 of the German Income Tax Code (Einkommensteuergesetz, EStG) to avoid its illegality under European law – we refer in this context to our news article of January 22, 2021;
  • Relief from tax deduction in certain cases by creating a new relief status;
  • Amendment of the tax deduction for limited taxpayers, so that in future Sec. 50a para. 5 sentence 3 EStG-E will also regulate the obligation to submit tax returns, to which in particular the assessment of a late payment surcharge is linked;
  • Digitization of the relief procedure at the Federal Central Tax Office with regard to registration and certification of capital gains tax, as well as the introduction of additional reporting requirements and increased liability;
  • Prohibition on offsetting losses pursuant to Sec. 2 para. 5 of the Conversion Tax Act (UmwStG-E) for negative income from financial instruments and from shares in corporations that have economically accrued to the transferring legal entity but are generated by the acquiring legal entity due to the retroactive effect of the conversion for tax purposes;
  • Various changes to the transfer pricing principles (e.g. legal definition of arm’s length price, abolition of the transfer pricing method hierarchy, narrowing of the range in the case of limited comparability, adjustment of the relocation of functions regulation, regulation on price adjustment clauses).

The background to the changes is a more resource-efficient design of the procedures and processes at the Federal Central Tax Office that is less susceptible to abuse and fraud.

The legislator is indicating further-reaching reform efforts, which will result in significant tightening in the area of withholding tax relief. Particularly with regard to the amendment to Sec. 50d para. 3 EStG, it remains to be seen whether this will meet the high requirements of EU law.

Initiative to further reduce bureaucracy

On April 13, 2021, the German government published a 22-point plan that deals decidedly with reducing bureaucracy in Germany and making things easier for citizens and companies. These 22 measures include:

  • Timely audit by tax authorities;
  • Accelerated binding information on tax matters;
  • Alignment of the calculation methods for small business turnover thresholds according to AO and the German VAT Act (Umsatzsteuergesetz, UStG);
  • Introduction of a fiscal unity for VAT purposes that is subject to an application (currently, the fiscal unity for VAT purposes arises automatically if the requirements are met, without being subject to an application).

The planned measures are to be welcomed in principle. Nevertheless, it must be emphasized that the majority of the measures have yet to be implemented, as this is currently only a key points paper from the coalition working group on reducing bureaucracy. It remains to be seen whether and when the intended reforms will be implemented.

Act to avert tax avoidance and unfair tax competition and to amend other laws

On March 31, 2021, the German Cabinet approved the draft of the so-called Tax Haven Defense Act. It is now up to the Bundesrat to adopt a position on the law.

The aim of the draft is the national introduction of binding regulations to combat tax evasion, tax avoidance and tax competition. The effort is based on the conclusions of the Council of the EU on the “Black List” as well as the measures that were negotiated by the Group “Code of Conduct (Business Taxation)” and approved by the Council.

The following measures are planned:

  • Deduction of operating expenses and income-related expenses is only permitted for business transactions with business partners from non-“cooperative tax jurisdictions” if the income is subject to limited or unlimited taxation in Germany;
  • Persons with unlimited tax liability who hold a share in a foreign company in a non-“cooperative tax jurisdiction” are subject to more stringent addition taxation;
  • A withholding tax deduction is essentially denied if individuals in a non-“cooperative tax jurisdiction” have a direct or indirect share of more than 10%.
  • Withholding tax liability in the amount of 15% of the total income earned by individuals or legal entities or associations of individuals established in a non-“cooperative tax jurisdiction” from
    • Funding Relationships;
    • Insurance or reinsurance services;
    • the provision of other services;
    • trade in goods or services

and in so far as the remuneration can be taken into account as business expenses or income-related expenses of another taxpayer in the latter’s assessment for limited or unlimited income tax or corporation tax liability;

  • Dividends and capital gains from investments in companies in non-“cooperative tax jurisdictions” are not exempt under Sec. 8b para. 1 sentence 1 or Sec. 8b para. 2 sentence 1 of the Corporate Income Tax Act (Körperschaftsteuergesetz, KStG);
  • Increased obligations to cooperate in the cases concerned (e.g. obligation to prepare detailed records on specific business relationships, assets used, and direct and indirect shareholders in companies in a non-“cooperative tax jurisdiction”).

The draft has already been heavily criticized. The reason for this is that the EU only stipulates the implementation of one of the measures. Germany plans to implement all the measures, which will hit the tourism industry particularly hard. So-called escape regulations are not envisaged.

Third Corona Tax Aid Act

On March 17, 2021, the so-called Third Corona Tax Aid Act was passed. In addition to the continued reduced VAT rate for restaurant and catering services until December 31, 2022, this also provides in particular for an extended loss carryback and further relief options for companies and citizens.

Given the large number of legislative projects and initiatives and the sometimes impressive pace at which reforms are currently being pushed forward, it is difficult to keep up to date, especially for non-expert entrepreneurs.

We will help you to keep track of everything and will be happy to advise you in the various areas of German tax law.

If you have any further questions, please do not hesitate to contact us.

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