EU Assistance Directive
Simplification of tax regime
German tax law will undergo several major changes in 2011. This update outlines the legislative initiatives and details the most important changes.
EU Assistance Directive
On May 4 2011 the Federal Cabinet approved a draft bill on the implementation of the EU Mutual Assistance Directive (2010/24/EC) and other changes to tax law. The draft bill is based on the initial draft version issued by the Ministry of Finance on March 31 2011.
The bill's objective is to transpose the EU directive, which was issued on March 16 2010, into domestic law by December 30 2011.
However, it also proposes several other important changes to German tax law. If passed into law, the bill would:
- amend the regulations for electronic wage tax deductions and cancellation of the transitional rules;
- introduce a tax exemption for pensions received by persons who qualify as persecuted under the Compensation Law;
- introduce an annual minimum contribution of €60 for indirect beneficiaries under the retirement plans of Section 10(a) and Sections 79 to 99 of the Income Tax Act;
- expand the catalogue of voluntary services in the context of tax-based family support, introducing the international youth voluntary service;
- more closely connect the basic tax-free amount and deductions of special expenses for non-resident employment income;
- introduce an automatic withholding tax procedure for the church tax regarding German capital income that is subject to taxation at source;
- abolish the reorganisation clause of the German change of control rule following the European Commission ruling (Section 8(c)(1)(a) of the Corporation Tax Act);
- update the base values for determining fair value according to the asset value method under the Valuation Act;
- allow non-resident taxpayers to opt for resident taxation under the Inheritance and Gift Tax Act;
- align the tax fraud regulations with the European consumption tax system; and
- prevent abuse of the employee savings allowance for some real estate distribution models.
The so-called 'reorganisation clause' of Section 8(c)(1)(a) of the Corporation Tax Act was introduced in July 2009 with retroactive effect from January 1 2008. It contained an exemption from the change of control rule of Section 8(c)(1) for a share transfer involving the financial reorganisation of a corporation. On January 26 2011 the European Commission ruled that the reorganisation clause violated European state aid rules because it distorted competition within the European single market. Germany must reclaim any tax benefits granted under the rule since January 1 2008. Those benefits total approximately €1.8 million for the years 2007 to 2009, according to information that the Ministry of Finance provided on May 3 2011. Because of the commission's inquiry, the reorganisation clause has not been applied since April 30 2010, even in cases in which an advance ruling had been granted. The draft bill seeks to abolish the reorganisation clause, effective from January 1 2011. The government announced on March 9 2011 that for tax years 2008 to 2010, it would appeal the commission's decision before the European Court of Justice (ECJ). If the ECJ rules in favour of Germany, the reorganisation clause would apply for tax years 2008 to 2010, so any share transfers under the reorganisation clause should not be included when determining harmful share transfers under the German change of control rule. It is advisable to keep the assessment notices open.
Automatic withholding tax procedure for church tax
An automatic withholding tax procedure would be introduced for the church tax on capital income subject to withholding tax. Financial institutions - comprising not only banks, but also insurance companies and home loan banks - would be required to withhold church tax on capital income. The purpose of the amendment is to protect church tax revenue. For financial institutions to withhold church tax, they would first have to initiate an inquiry with the Federal Tax Office to determine whether the taxpayer was subject to church tax. If so, the tax office would not inform the financial institution of the taxpayer's religious denomination, but only of the applicable church tax rate. Thus, data protection would be ensured. If the taxpayer were subject to church tax, the financial institution would determine the church tax amount to be withheld and pay it to the local tax office, together with the withholding tax on capital income. The financial institution would also have to inform the tax office of the amount withheld for the taxpayer. The tax office would then inform the local tax office which religious denomination the withheld church tax must be allocated to. The new rule would take effect for capital income received after September 30 2013.
Residence and inheritance and gift tax
German inheritance and gift tax law provides non-resident taxpayers with a tax-free allowance of €2,000 irrespective of the relationship between testator and successor. For resident taxpayers, the allowance ranges from €20,000 to €500,000, depending on the relationship. In its April 22 2010 decision, the ECJ held that this difference restricts the free of movement of capital. The commission on March 14 2011 asked Germany to remove the restriction. The bill would do so.
Non-resident taxpayers that are tax resident in and citizens of an EU/European Economic Area country would be able to apply to be taxed as residents. Thus, non-residents would have access to a higher tax-free amount. However, their total worldwide assets would be subject to German inheritance and gift tax (non-resident taxation usually comprises only assets with a qualified relationship to Germany (eg, immovable property located in Germany)). As for every person subject to resident taxation, the tax rate would be determined based on the total assets, even if portions of the assets were not subject to German inheritance and gift tax because of a tax treaty, and foreign inheritance and gift tax would be credited against the German tax (six German tax treaties are in force concerning inheritance and gift taxation). Thus, applying for resident taxation would be beneficial if the higher tax-free amount compensated for the taxation of worldwide assets. To prevent abuse from repeated gifts between the same persons, transfers within a period of 10 years would be totalled and an overall tax amount calculated.
Resident taxation could be applied for if the tax arose the day after the law's enactment (the tax arises for German inheritance and gift tax purposes with the death of the testator and the granting of the gift). Resident taxation could apply for all open tax assessments if the taxpayer filed a declaration.
Electronic wage tax deduction
The wage tax deduction based on electronic wage tax attributes was introduced by the 2008 annual tax bill. Previously, every taxpayer receiving employment income received a paper wage tax card containing the relevant information. That wage tax card was distributed for the 2010 tax year and continues to apply for the 2011 tax year. Starting on January 1 2012, the new electronic procedure will apply.
The schedule for implementation of the EU Mutual Assistance Directive and the other tax law changes is as follows:
- On July 6 2011 the first consultation in the Finance Committee of Parliament will take place;
- On September 26 2011 a hearing will take place at the Finance Committee;
- On October 19 2011 the final consultation of the Finance Committee will take place;
- On October 20 2011 the second and third lectures will be held in Parliament; and
- On November 25 2011 the second consultation in the Federal Council will take place.
Simplification of tax regime
On June 9 2011 Parliament's Finance Committee published its report on the 2011 draft bill on the simplification of German tax regime.
The bill would reduce taxpayers' (individual persons as well as companies) tax declaration duties and seek to reduce the tax burden of families and recipients of employment income. The proposed amendments would reduce the tax burden by approximately €585 million annually. The bill contains more than 40 items that are not part of an overall tax reform, but single modifications to German tax law. The amendments would generally take effect on January 1 2012; some proposals would take effect retroactively from January 1 2011.
The draft bill contains significant changes to German tax law. The draft bill:
- increases the annual flat sum for employees from €920 to €1,000;
- creates the option to file personal income tax declarations simultaneously for two subsequent tax years;
- simplifies the computation of the commuter's tax allowance;
- eliminates personal requirements for parents regarding the deduction of childcare expenses;
- reduces the number of assessment options for spouses;
- simplifies the assessment procedure because capital income taxed at source will not be considered in the calculation of several deductions;
- revises the withholding tax procedure regarding dividend distributions of a cooperative;
- introduces a free advance ruling for an object valued at up to €10,000;
- simplifies the documentation requirements for donations made after catastrophic events; and
- creates the option to transmit electronically those notifications which are required under German real estate transfer tax law.
Increased annual lump sum for employment expenses
Under the existing income tax law, taxpayers receiving employment income are granted an annual lump sum of €920 as income-related expenses. That amount would be increased to €1,000 retroactively from January 1 2011. The increase would be implemented in December 2011 by an adjustment item. The increase would help employees with low income-related expenses or when the expenses were borne by the employer. If the individual income-related expenses did not exceed the €1,000 limit, no verification would be needed for the increased lump sum.
Option to file two-year declarations
Individual taxpayers could file their income tax declaration every second year instead of every calendar year. The due date for filing a two-year tax declaration would generally be May 31 following the second calendar year. The option could be exercised by individuals who receive no profit income. The tax assessment period would remain the calendar year. Thus, the income tax would still arise with the expiration of the calendar year. To avoid negative effects from the beginning of the interest period (which usually starts 15 months after the tax arises) for the first year filed, the interest period of the first year would not start before the interest period of the second year started.
The bill is scheduled for approval by the Federal Council on July 8 2011.
For further information on this topic please contact Pia Dorfmueller or Sabine Demel at P+P Pöllath + Partners Attorneys - Tax Advisors by telephone (+49 69 247 047 24), fax (+49 69 247 047 30) or email ([email protected] or [email protected]).