On 29 June 2013, numerous changes to the German tax law were published in the Federal Law Gazette and are applicable as of that date unless indicated otherwise. The changes in the law mainly concern the areas below.
Correspondent taxation extended to dividends
The correspondent taxation will be extended to dividend payments and other payments that are treated similarly to dividends for tax purposes. This mainly concerns hybrid financing instruments. The changes in the law mean that the 95% participation exemption is applicable to the dividend payment only to the extent that the payment has not been deductible at the level of the distributing entity. Any mismatches resulting from different national qualifications of hybrid financing instruments henceforth do not result in a double-non-taxation as far as the instruments give rise to income flow into Germany.
The correspondent taxation will generally apply from the assessment period 2014 forward.
Adoption of Authorised OECD Approach into domestic law
The Authorised OECD Approach is transposed into national law. This entails that the new Article 7 of the OECD Model Tax Convention and its commentary are applicable to dealings between a permanent establishment and the head office as if they were independent enterprises. The new rules on profit allocation at arm’s length are applicable to fiscal years beginning after 31 December 2012.
Changes regarding real estate transfer tax
Real estate transfer tax may be triggered in case of transfer of shares in a real estate owning partnership, if at least 95% of shares are transferred to new owners as well as in case of a transfer of shares in a real estate owning corporation, if at least 95% of shares are united in one shareholder’s hand. Previously, it was possible to avoid the real estate transfer tax within a share deal by interposing blocker companies, with third parties holding a minority stake. For example, indirect holdings in a property owning corporation were solely recognised as partial property ownership if the shareholding in the intermediary was itself at least 95%. Using a third party shareholding of 5.1% could avoid real estate transfer tax and effectively facilitate a transfer of a 99.74% ownership, if the purchaser of the 94.9% shares also acquires 94.9% of the shares in the third party.
However, these structures may not work any more as the law now includes an ‘economic interest’ test, involving all direct and indirect participations in the capital or assets of the real estate company being transferred irrespective whether the indirect shareholdings in intermediary corporations exceed 95%. Henceforth, commonly used so called ‘RETT-Blocker’ structures cannot be used to avoid real estate transfer tax any more, since a direct and effective third party investment of at least 5% is necessary to avoid taxation.
However, the new regulations are solely focused on shareholdings. Structurings using other forms of participation, such as hybrid instruments, may still be used as an appropriate way to avoid tax within a transfer of more than 95% of the shares from an economical point
On the other hand, the group exemption from real estate transfer tax has been extended. Under certain conditions, real estate transfer tax is not applicable to internal reorganisations within a group, such as mergers, divisions, transfers of property as well as contributions (e.g. share for share exchange) and other acquisition transactions according to the articles of association of the receiving entity.
The new real estate transfer taxation rules are applicable to transactions made after 6 June 2013.
Limits of offsetting of losses extended
In the case of reorganisations, the income and assets of the transferring entity and the receiving entity will be treated as legally transferred to the receiving entity at midnight of the date of the reorganisation balance sheet. However, for income tax purposes this can be done with a retroactive effect, so that profits of the transferring entity could be offset with the losses of the receiving entity during the period between the legal effective date and the tax effective date of the transfer in the past. Now, the offset of the losses will be restricted during this retroactive period as long as these concern the losses of periods prior to the reorganisation. The limitation to the offset of losses will not apply if the entities are part of a consolidated group within the meaning of sec. 271 para. 2 German Commercial Code prior to the organisation.
Changes regarding inheritance and gift tax
The German legislator restricted a commonly used loophole in inheritance and gift taxation.
Shares in a German limited liability company ‘GmbH’ are generally privileged for gift and inheritance tax purposes, if the shareholding exceeds 25% and the company does not own more than 50% harmful assets as defined in sec. 13b para. 2 German Inheritance and Gift
Prior to the latest changes, cash or bank accounts were generally not qualified as such harmful assets for inheritance and gift tax purposes. Therefore, inheritance and gift tax could be avoided between private parties by using a so called ‘Cash-GmbH’. The commonly used way to avoid inheritance tax on substantial wealth was to contribute capital to a newly established GmbH and to present the shares to heirs or a third party. The German legislator now minimised the privilege for such assets to a maximum of 20% of the equity value of the company. All funds exceeding 20% of the equity value of the company henceforth are qualified as harmful assets.
Administrative assistance directive transposed to German law
The Council Directive on Administrative Cooperation in the Field of Taxation (2011/16/EU) has been transposed into German law by the EU-Administrative Assistance Law (AAL). The AAL expands the scope of administrative assistance, including automatic exchange of information with other Member States on income such as employment income, directors’ fees, life insurance products, income and ownership of immovable assets and pensions. The automatic exchange of information is applicable as of 1 January 2015 for assessment
According to the VAT law changes, an entrepreneur is considered to be established in another EU Member State for VAT purposes if his/her business (registered office, place of management, permanent establishment) is based there irrespective of whether his/her domicile or habitual residence is in the other State. Previously, it was possible that an entrepreneur was regarded as established in Germany based on his private address, despite the fact that the entrepreneur has his business in another Member State.
Also, some changes are made to the invoicing rules in cases where reverse charge mechanism is applicable. Accordingly, invoicing will be subject to the rules of the Member State where the foreign business is established and some other changes are enacted as regards to issuing invoices in certain situations. The changes reflect the implementation of the Council Directive on the rules on invoicing (2010/45/EU).