Germany

Les comités représentant les Landers auprès du parlement allemand viennent de publier des recommandations conjointes visant notamment à supprimer la déduction des dépenses également déductibles dans un autre Etat et à clarifier le sort des pertes reportables et des droits de mutation en cas de changement d'actionnaire.

The relevant committees of the German Bundesrat (the states council of the German parliament) have issued a joint recommendation to include certain tax provisions in a draft bill that would amend the General Tax Code as it pertains to the European Union (EU) Customs Codex and other tax provisions (ZollkodexAnpG). The proposed amendments are summarized in the following.

Deductibility of business expenses: corresponding taxation and double-dip structures

The suggested disallowance provision regarding the deduction of business expenses relates to the current BEPS discussion paper on hybrid mismatch arrangements.

According to the proposal, business expenses would not be deductible in Germany to the extent the corresponding income is not included in the tax base of the direct or indirect beneficiary or is subject to a tax exemption due to a hybrid classification of the underlying debt instrument. The inclusion of both direct and indirect beneficiaries is designed to extend the scope of the rule to certain back-to-back arrangements in which a shareholder or entity is interposed.

The provision also includes an anti-double-dip rule. Under this rule a business expense would not be deductible in Germany to the extent the expense already reduces the tax base in another tax jurisdiction. According to the proposal’s explanatory notes, this rule is aimed, in particular, at German partnership structures with foreign partners in which expenses of foreign partners in relation to the German partnership may be allocated to the German tax base under the German partnership tax regime but also may be deducted at the partner level for foreign tax purposes. These structures may already fall within the scope of the existing German dual consolidated loss rules if the German partnership is part of a German tax group.

The rule is supposed to become effective for the respective financial year during which it will officially be published.

Observation: From an administrative perspective it is unclear whether the burden of proof regarding these rules will be placed on the tax authorities or the German taxpayers.

Capital gains on portfolio shareholding

During the 2013 implementation of the portfolio exception (for less-than-10% interests) to the participation exemption for dividends — resulting in full taxation — the Bundesrat already noted that maintaining the capital gains exemption for portfolio shareholdings may create tax planning opportunities. The Bundesrat previously proposed last year a provision to fully tax capital gains realized on portfolio shareholdings. The proposal by its committees now reemphasizes that the government should exclude the participation exemption on capital gains on portfolio shareholdings.

Loss forfeiture rules: clarification of the intra-group exception

The German loss forfeiture rules limit the utilization of losses of a German corporation in case of a ‘harmful’ direct or indirect change in ownership. Under the current intra-group exception, losses are not forfeited if the transferor and the transferee of shares or voting rights are both 100% direct or indirect subsidiaries of the same single shareholder.

According to the current interpretation of this exception strictly based on the wording, which is expected to be confirmed in a decree currently in draft status, the exception would not apply if a group’s top-tier entity is involved in a share transfer as a transferor or a transferee because it is owned by more than one shareholder (e.g., publicly listed groups). After the proposed amendment the intra-group exception would also apply when either the transferee is owned by the transferor or the transferor is 100% owned by the transferee directly or indirectly. The amendment would be effective retroactive to January 1, 2010.

RETT: Indirect change in ownership of a partnership owning German real estate

In general, RETT may be triggered if at least 95% of the interest in a partnership owning or deemed to own German-located real estate is directly or indirectly transferred to new partners within a five-year period. The combined percentages of each single transfer during a given five-year period are taken into account.

A recent Federal Tax Court decision on the attribution rules on indirect transfers to determine the 95% threshold differed from the German tax authorities’ position. The court effectively treated an indirect partnership transfer as triggering RETT if, economically, all indirect shareholders of the German real estate-owning partnership have changed, i.e., have been acquired by new shareholders.

The proposed amendment would reinstate the German tax authorities’ position. For a corporate partner owning a partnership interest, an indirect transfer of that interest would be deemed to occur if at least 95% of the shares in the corporation are directly or indirectly transferred to a new shareholder. A partnership interest held via another partnership would be deemed transferred based on the pro rata indirect interest in the real estate-owning partnership. This rule effectively would ‘look through’ the interposed partnership. The amendment would be effective retroactive to January 1, 2002.

Reorganization Tax Act: limitation of permissible boot

Under the current German Reorganization Tax Act, an in-kind contribution (including share-for-share exchanges) may be treated tax-free although the transferor receives additional consideration besides shares/interest of the recipient entity (e.g., cash or loan receivables, commonly known as ‘boot’) up to the net tax basis of the contributed assets and liabilities. The Bundesrat committees believe this rule has been used to structure asset transfers that should be considered regular sales transactions as effectively tax free. The proposed wording would limit the allowable boot in a tax-free in-kind contribution to 10% of the net tax basis of the contributed assets and liabilities. The rule would apply to transactions carried out beginning with the first day of the taxpayer’s 2015 tax year.

Conclusion

Among the above proposals, the BEPS-related hybrid mismatch rule would have a broad scope with potentially far-reaching effects on multinational companies invested in Germany. Because the draft bill is in the early stages of the legislative process and may likely be subject to further changes, taxpayers do not need to consider immediate action. However those that could be affected should monitor the bill’s progress closely in light of its potentially significant consequences for many German related financing structures.

The draft bill is at a very early stage and the proposed rules have not been introduced in the legislative process. The committees’ recommendations must first be approved by the Bundesrat during its November 7 session and subsequently presented to the government. The government would then comment on the suggested changes on November 12. The final vote on the bill would then take place on December 19, 2014. Whether and to what extent the bill will make it to a final vote this year or go through a mediation process with further adjustments that would also push it to 2015 is currently uncertain.

In any event, the committees’ proposal has started the political process, that will likely end in some form of compromise which may not be projected at this stage.