Recently, Germany has elected a new government which has published proposed changes on German tax laws for the forthcoming legislative period which will come into force at the beginning of next year. The changes are a reaction to the current financial crises which are still not overcome. The aim of these changes is to give new incentives for a stable and dynamic upturn. One of the goals is a reduction of the overall tax burden and further tax reliefs. The amendments cover changes of the change-in-ownership rules, the interest barrier rule and other restructuring measures.
Change in ownership rules
As of January 2009, new rules concerning the use of German tax loss carry-forwards came into force. The rules concern the change of ownership of a German corporation and related consequences with respect to loss carry-forwards available in that company. For share transfers of less than 25%, no loss carry-forwards are lost. However, if a transfer of more than 25% but not more than 50% of shares occurs within a five year period to a single acquirer or a group of acquirers with common interests, then any loss carry-forwards will be forfeited on a pro rata basis. For example, if a 40% interest in shares is transferred, 40% of the loss carry-forwards will be forfeited. If more than 50% of shares are transferred within a five year period, the entire loss carry-forward will be lost.
Moreover, no intra-group reorganisation privilege is available under the current change in ownership rules. Share acquisitions within an intra-group reorganisation, even if performed outside of Germany above the German loss entity, could eliminate the availability of German tax loss carry-forwards. For example, the change of ownership rules can be triggered if a group's shareholdings are reduced via the elimination of one group company which holds an interest in the German loss entity (e.g. by way of upstream mergers into its parent), construing this as an indirect transfer of shares in the German loss entity.
Due to the financial crises, an exception to the forfeiture of loss carry-forwards described above has now been introduced. This exception concerns the restructuring of companies whose shares are acquired in order to perform restructuring and to avoid insolvency of the company. The restructuring must be necessary in order to avoid a current or expected illiquidity or over-indebtedness of the acquired company. This means that the company must be in a crisis in terms of German insolvency laws and that the restructuring aims at retaining material parts of the business organisation. However, investors should document that the company acquired is actually in crisis. Otherwise loss carry-forwards might be reduced by tax inspectors after a tax field audit due to the denial of a crisis. The new restructuring exception was originally limited until 31 December 2009. According to the Draft Coalition Agreement, this time period is to be extended. Given the disadvantage that there is no privilege for intra-group reorganisations under the current rules, the new rules propose the preservation of loss carry-forwards after an intra-group reorganisation, if the companies involved are affiliated companies who have one direct or indirect ultimate shareholder holding all shares in the subsidiaries involved. Finally, one of the new reform proposals is that loss carry-forwards which have not been used can be transferred in a transfer of shareholding, but only to the amount of the unrealised build in gains (according to the ratio of shareholding transferred).
Interest barrier rules
German tax laws provide for a limitation on the deductibility of interest expenses for resident and non-resident German taxpayers (the interest barrier rules). Under these rules the deduction of interest expenses exceeding the interest balance amount is restricted to 30% of the taxable EBITDA; however certain exceptions to the rules provide that the borrowing entity may deduct its overall interest expense.
The interest barrier rules do not apply if the amount of interest expenses exceeding the interest income of the relevant year is less than EUR 3 million, or the relevant business is not fully consolidated in a group of companies, or the business' equity ratio (equity compared to the balance sheet total) is at least as high as the equity ratio of the consolidated group (the so-called escape clause). The escape clause is applicable if the "equity ratio" of the tested borrower is not less than the "equity ratio" of the consolidated group (1% tolerance) and provided that none of the entities in the consolidated group is "debt financed harmfully" within the meaning of the interest barrier rules.
The envisaged tax law changes propose that the tax exempt threshold, which was raised to EUR 3 million based on the current financial crises, should remain in place also in future fiscal years. Here, the temporary increase of the threshold up to EUR 3 million is replaced by a perpetual increase. Moreover, the tolerance threshold of the equity ratio should be raised from 1% to 2%.
Real estate transfer tax
Currently any intra-group reorganisation concerning companies with real estate property can lead to real estate transfer tax (RETT) if at least 95% of the interest in a partnership is transferred to a sole acquirer within a five year period or 95% of the interest in a company is transferred to a single acquirer. The downside to this tax regime is that even an indirect transfer of at least 95% of the interest in shares in the company will trigger RETT. As there is currently no intra-group privilege, it is envisaged introducing such privilege in order to simplify reorganisations within a group.
However, this group privilege will be restricted to real estate transfers where the real estate was acquired at least five years prior to the reorganisation, and if for the next five years the acquiring entry holds the real estate and also if the shareholding of the acquiring entity is not changed.
Trade Tax Rules
Currently 65% of lease and rent payments of immovable assets are added back to the trade tax assessment base. As a relief, it is proposed that the add-back of payments of immovable assets be reduced to 50%.