Supplementary Financial Market Stabilisation Act
The German legislator enacted the Supplementary Financial Market Stabilisation Act (“Act”), which includes tools for stabilising the financial markets. As a means for stabilising the financial market, Germany has set up a state owned investment fund for which among others the Act provides specific tax relief. In particular:
- The Act provides tax relief with respect to German real estate transfer tax (“RETT”). Generally, if a shareholder acquires directly or indirectly more than 95% of the shares in a real estate holding company RETT will be triggered at the level of the acquiring investor. In order to avoid a RETT burden, if a state-owned fund acquires directly or indirectly more than 95% of the shares in a company (e.g. to avoid the insolvency of a bank as in the case with respect to Hypo Real Estate AG) the law sets out that exceptionally no German RETT shall be triggered in such cases.
- Similarly, the strict German change-in-ownership rules shall not be triggered if a German state-owned fund invests in a German company. Currently, any direct or indirect transfer of more than 25% of the shares in a loss corporation to a new owner within five years results in an immediate partial forfeiture of tax losses carried forward and any current year accumulated losses. A 100% forfeiture of tax losses carried forward occurs if more than 50% of the shares are transferred to a new owner within five years. Transfers to multiple new shareholders are aggregated, if those shareholders acted on the basis of a common plan.
Transitional change of German interest barrier rules and German change-in-ownership rules due to the enacted Citzen Relief Act (Bürgerentlastungsgesetz)
Further to the Supplementary Financial Market Stabilisation Act the German legislator passed on 19 June 2009 legislation to provide a limited and temporary tax relief for German corporations:
- Interest barrier rules; the interest deduction limitation for taxpayers was increased. In general, a business can only deduct net interest expenses of up to EUR 1 million per year. If the EUR 1 million threshold is exceeded, the deduction is limited to 30% of taxable EBITDA, unless the so-called escape clause rule applies. Under the escape clause rules, the interest deduction is unlimited, if the equity ratio of the German business is equal to or higher than the equity ratio of the worldwide group. According to the newly passed legislation, the EUR 1 million lump sum allowance for deductible net interest expenses is temporarely increased to EUR 3 million. The increase is only granted for tax years 2008—2009 (that is, with retroactive effect also for 2008). The increase of the lump sum allowance is only applicable for fiscal years beginning 25 May 2007 and ending prior to 1 January 2010. Therefore, companies which have a fiscal year ending after 31 December should consider changing their fiscal year to calendar year in order to make use of the increased lump sum allowance.
- Change-in-ownership rules; additional legislation is passed to mitigate the adverse effects of the strict change-in-ownership rules with respect to tax losses carried forward. According to the new legislation, an insolvency restructuring exception shall be implemented. Under this restructuring exception, a change in ownership should not result in a forfeiture of a tax loss carried forward, if: (i) the transfer of shares in a loss corporation is part of a plan to make the loss corporation solvent; and (ii) in addition, the “structural integrity” of the loss corporation’s business is preserved by the plan. A preservation of the structural integrity of a business should be found to exist if:
- there is an agreement with the German worker’s council of the loss corporation concerning the preservation of jobs, and such agreement has been honoured; or
- the company continued to pay a certain amount of gross salaries over a period of five years following the change in ownership; or
- the shareholders made significant contributions to the equity of the loss corporation. Contributions must be made within 12 months after the acquisition of shares. Moreover, substantial contribution is only assumed, if the contributed assets have a book value amounting to at least 25% of the assets on the balance sheet of the acquired company at the end of the fiscal year prior to the acquisition. The 25% threshold is applied respectively to the percentage of shares acquired, e.g. if only 30% of shares are acquired the substantial contribution must have a book value of 7.5% of the assets of the acquired company.
- The insolvency restructuring exception shall not apply, if:
- the loss corporation’s business was already shut down at the time of the share transfer; or
- during a period of five years following the share transfer, the loss corporation discontinues its historic business and engages in a different business sector.
The change-in-ownership rules are also applied to indirect change of ownership. In view of the scope of these rules relieves granted because of insolvency restructuring are also applicable to indirect change of ownership. However, the required structural integrity has to be met at the level of the German entity indirectly purchased. Therefore an envisaged insolvency restructuring at a higher level of a group does not conserve the loss carry forwards of German companies further down the group chain.
The insolvency restructuring exception is retroactively effective for the year 2008 and shall apply to all ownership changes that occurred between 1 January 2008 and 31 December 2009.