New year, new luck – important German tax changes for companies at the turn of the year
The year 2020 is history and was a year with many unexpected challenges for the vast majority of the population and businesses. However, the wheel of tax legislation and tax jurisprudence continues to turn, even though many of the legislator’s plans were significantly influenced by the Covid-19-pandemic and are likely to be significantly influenced by the further course of the pandemic in 2021 as well.
In the following, we present some most important changes in the area of tax legislation and tax case law that will be of significance in the area of corporate income tax, trade tax and international tax from 2021:
- Relevant changes in tax accounting and corporate tax law
Extension of the reinvestment period for the reserve according to Sec. 6b EStG
In the case of the disposal of certain fixed assets within the meaning of Sec. 6b para. 1, sentence 1 German Income Tax Code (Einkommensteuergesetz, EStG), an amount may be deducted up to the amount of the capital gain from assets newly acquired or produced in the business year of the disposal or in the preceding business year within the meaning of Sec. 6b para. 1, sentence 2 EStG (transfer of hidden reserves). According to Sec. 6b para. 3, sentence 1 EStG, a profit-reducing reserve may be formed if no direct deduction has been made (“§6b-reserve”). Sec. 6b EStG provides for various reinvestment periods in this case.
With the Second Corona Tax Relief Act of June 29, 2020, the reinvestment periods of Sec. 6b para. 3 sentences 2, 3 and 5, para. 3 sentence 1 no. 1 and para. 10 sentences 1 and 8 EStG were temporarily extended by one year to mitigate the financial burdens of the pandemic. However, this only applies if the reinvestment reserve still exists at the end of the financial year ending after February 29, 2020 and before January 1, 2021 and would have to be released. Pursuant to Sec. 52 para. 14, sentence 4 EStG, the reinvestment period in this case only ends at the end of the following financial year.
The Federal Ministry of Finance (Bundesfinanzministerium, BMF) is authorised under Sec. 52 para. 15, sentences 5 and 6 EStG to extend the deadlines again if the pandemic continues.
Changes in connection with § 7g EStG
Sec. 7g EStG (“investment deduction amount”) allows depreciation potential to be brought forward to a financial year prior to the acquisition or production of the assets benefiting from the deduction.
The investment period was extended by one year by the Second Corona Tax Assistance Act of June 29, 2020 (Sec. 52 para.16 EStG).
In addition, the investment deduction will be made more flexible with the Annual Tax Act 2020. For example, leased assets will also fall within the scope of Sec. 7g EStG. Furthermore, the preferential investment costs will be raised from 40 % to 50 %. In addition, the business size criteria will be standardised as a basic requirement (uniform profit limit of EUR 200,000 for all types of income). The changes are to take effect for the first time for financial years ending after December 31, 2019. Furthermore, according to a new Sec. 52 para. 16, sentence 3 EStG-E, the extension of the investment periods adopted under the Second Corona Tax Assistance Act will be maintained.
Questions on the application of Sec. 8d KStG
Sec. 8d KStG is intended to avoid the loss expiry under Sec. 8c KStG under certain conditions. In August 2020, the BMF presented a draft bill on questions of interpretation and application in connection with Sec. 8d KStG.
Sec. 8d KStG is to be applied accordingly to trade tax losses. Therefore, for the unrestricted implementation of the BMF letter, identical decrees of the supreme tax authorities of the federal states are to be issued shortly, which contain a corresponding transfer of the principles of the BMF draft.
Furthermore, with effect from the 2020 assessment period, the Annual Tax Act 2020 is to include a separate trade tax application right for cases in which there is a lack of unused corporation tax losses (Sec. 10a sentence 12 GewStG-E).
- Relevant changes in trade tax law
Trade tax intercompany privilege for foreign dividends
As of the 2020 assessment period, the trade tax intercompany privilege applies uniformly to profits from participations in a corporation with management and registered office abroad, provided that the capital share at the beginning of the assessment period amounts to at least 15 % of the nominal capital (Sec. 9 no. 7 Trade Tax Act (Gewerbesteuergesetz, GewStG)).
The income from corresponding participations is therefore reduced for trade tax purposes. This was previously only possible for participations in domestic corporations (Sec. 9 No. 2a GewStG).
Increase of the tax-free amount for additions under Sec. 8 no. 1 GewStG
With the Second Corona Tax Assistance Act of June 29, 2020, the tax-free amount for additions within the meaning of Sec. 8 no. 1 GewStG (financing fees) was increased from the previous EUR 100,000 to EUR 200,000.
The increase applies with effect from the 2020 levy period and was introduced in particular against the background of the liquidity burdens on small and medium-sized enterprises in the wake of the Corona pandemic.
- Relevant changes in conversion tax law
Extension of the retroactivity period for conversions
Amendments to the Conversion Tax Act (Umwandlungsgesetz, UmwG) in connection with the retroactive effect of conversions also led, via Sec. 2 UmwStG, to the retroactive period being extended in some cases from the previous eight months to twelve months for a limited period. This concerned mergers, split-ups and spin-offs of corporations. The Corona Tax Assistance Act of June 19, 2020 also extended the other retroactive fictions in Sec. 9 sentence 3 UmwStG and Sec. 20 para. 6, sentences 1 and 3 UmwStG (spin-offs and changes of legal form of corporations, conversions of partnerships and other contribution cases) accordingly (Sec. 27 para. 15 UmwStG).
The extension was initially limited to 2020 but has now been extended to 2021 for the cases of mergers, split-ups and spin-offs of corporations (ordinance of October 20, 2020 by the Federal Justice Ministry (Bundesjustizministerium, BMJV). The extension is also to be applicable to the other above-mentioned transactions in 2021 (government draft of an ordinance on Sec. 27 para. 15 UmwStG of November 4, 2020).
- Relevant changes in international tax law
Unlawfulness of Sec. 50d para. 3 EStG under European Union Law
In its ruling of June 30, 2020 (Ref. 2 K 140/18), the Cologne Tax Court declared Sec. 50d para. 3 EStG in its current version to be contrary to European Union Law (infringement of both primary law (freedom of establishment) and secondary law (Parent-Subsidiary Directive)). However, the provision is not null and void, but is to be interpreted in the context of fundamental freedoms in a manner that preserves its validity.
Notification of shareholdings according to Sec. 138 AO
Pursuant to Sec. 138 AO, acquisitions and disposals of shareholdings in foreign corporations must be reported to the tax authorities if, after the transaction, the shareholding amounts to at least 10 % of the share capital of the foreign company or the acquisition costs of all shareholdings exceed EUR 150,000.
The Annual Tax Act 2020 provides that in future the acquisition and disposal of foreign shareholdings of less than 1 % no longer have to be reported if the main class of shares is regularly traded on an EU/EEA stock exchange or on another stock exchange authorised by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin).
- Outlook on selected topics
- Partial abolition of the solidarity surcharge: With effect from January 1, 2021, the solidarity surcharge will be partially abolished, in particular by raising the exemption thresholds, related to the standard income tax. For corporations and for capital gains, the solidarity surcharge will continue to apply.
- Reform of the real estate transfer tax: The coalition parties have still not been able to reach a compromise on the reform of the Real Estate Transfer Tax Act (Grunderwerbsteuergesetz, GrEStG). In particular, the lowering of the participation limits from currently 95 % to 90 % and an extension of the holding periods from currently five years to ten years are under discussion. At present, it cannot be said with certainty from which point in time the new regulations are to be applied; however, a retroactive application is apparently not being sought.
- ATAD implementation and reform of Foreign Tax Act (Außensteuergesetz, AStG): The ATAD Implementation Act is also currently still at the draft stage. The extent to which the originally agreed initial application (January 1, 2020) will be adhered to cannot be said with certainty.
- Amendments to double taxation agreements (DTAs): Due to the so-called Multilateral Instrument (MLI), which contains various measures to prevent the reduction of profits by shifting income to elsewhere, Germany will amend some of the existing DTAs. Currently, a total of 14 DTAs have been selected for application of the MLI. Others are to follow. In addition, various amendment protocols have been signed and implemented with DTA states such as Denmark, Finland and Singapore, which will be applicable from 2021.
As usual, we will continue to inform you about new developments in the field of tax law. We will be happy to support you with your questions.