German Tax Amendment Act

On 6 November 2015, the German Tax Amendment Act dated 2 November 2015 was published in the Federal General Tax Gazette (2014 I S. 1834). As a consequence, in 2016 various important tax regulations will be changed. We now highlight two changes which could be relevant in relation to an acquisition of shares in a company.

Corporate income tax (“CIT”) loss limitation – extension of the group exception rule

According to the CIT loss limitation rules, tax loss carry forwards of a company will generally be forfeited if more than 50% of the company’s shares have been transferred directly or indirectly to a purchaser, a group of purchasers with the same interests or affiliated persons within a five year period. A pro-rata loss limitation will occur if between 25% and 50% of the shares or voting rights have been transferred directly or indirectly to a purchaser, a group of purchasers with the same interests or affiliated persons within a period of five years.

An important exception to the CIT loss limitation rules is the group exception rule. The current group exception rule avoids loss forfeiture in cases where the same “single” person or entity directly or indirectly holds 100% of the shares in the transferor and in the transferee of the relevant loss entity (side stream transfers).

Under the new law, the group exception rule also applies to transfers from a parent to its direct or indirect subsidiary (downstream transfers) and visa versa (upstream transfers), provided that the parent:

  • directly or indirectly holds 100% of the shares in the subsidiary; and
  • is an individual person, a partnership or a company.

The extended group exception rule applies with retroactive effect for all share transfers which occurred after 31 December 2009 and can, therefore, be applied to past qualifying transactions, provided that the relevant taxable year of the German loss company is still open to amendment.

Increased real estate transfer tax (“RETT”) assessment basis due to indirect real estate acquisitions

In Germany, RETT may be triggered by an indirect acquisition of real estate located in Germany (for example, by an acquisition of a participation in a partnership or shares in a corporation owning German real estate). According to current law, the assessment basis for an indirect real estate acquisition (demand values, Bedarfswerte) will generally be below the assessment basis for a direct acquisition of German real estate (purchase price).

Under the new law, the assessment basis will be adjusted in a way that, in the case of an indirect real estate acquisition, will reflect the fair market value of the real estate. Therefore, there will be an increase in the RETT which will be due in respect of indirect real estate acquisitions.

The new rules will generally have retroactive effect for all indirect real estate acquisitions which occurred from 1 January 2009 onwards. However, for reasons of legal certainty, the new law will only apply to past acquisitions where:

  • a RETT assessment notice has not yet been issued by the tax authorities; or
  • there are legal proceedings (such as an objection or lawsuit) in place against an existingRETT assessment notice.

Our recommendation

German tax advice should be sought before any group restructuring or reorganisation is undertaken to assess the consequences of these changes. Please contact a member of the team if you would like more information on how the changes affect you or your business.