While the German government has given up — or at least delayed — its plans to lower taxes that it had originally agreed in the coalition agreement, the Federal Ministry of Finance is currently working on a new concept to simplify taxation. Although simplification of taxation will most likely not be fully neutral for the public revenue, it seems to be fair to assume that such plans will be more likely to garner the necessary political support then the original plans to lower taxation. The basis for the new plans to simplify taxation is a list of almost 100 proposals submitted as part of the coalition agreement and by the States’ Ministries of Finance and various trade associations.

In addition to many proposals aiming at simplifying tax returns and the tax assessment procedures for individuals there are also several noteworthy proposals relating to business taxation the most important of which may be summarized as follows.  

To avoid a retroactive effect of new tax rules, to limit circulars rendered by the Federal Ministry of Finance to the construction of tax rules rather than constituting the non-applicability of Federal Fiscal Court Rulings, to limit fees for a binding ruling to material and complex cases as well as to have tax audits be completed in a timely manner, are calls for simplification which are already known from the coalition agreement.

There are, however, several new calls:

  • Pursuant to a vote of the Conference of the Ministries of Finance Sec. 15a German income tax act (ITA, Einkommensteuergesetz) limiting loss compensation for limited partners shall be amended on the basis of the so-called tax balance sheet model. Pursuant to such tax balance sheet model the limitations of loss compensation shall only be applicable provided that a negative capital account occurs. Only the tax capital account of the entrepreneur shall be deemed to be a capital account within the meaning of the rules limiting loss compensation. Outstanding capital contributions shall no longer be taken into account. Also the so-called extended loss compensation on the basis of a liability vis-à-vis third parties pursuant to commercial law shall no longer be applicable.
  • In addition, the Conference of Ministries of Finance would like to introduce an irrebuttable presumption pursuant to which a business will be deemed to be carried on until an explicit declaration to give up the business is rendered even if the operations of the business are interrupted. Consequently, the discontinuation of active business operations will no longer result in an immediate release of hidden reserves; rather, the termination of a business for tax purposes will depend on a actual declaration of the tax payer.  
  • The Confederation of German Employers, the Confederation of German Industry and the German Chamber of Commerce and Industry call for an equal treatment of electronic saving of documents and conventional forms of saving as well as the equal treatment of electronic and hardcopy invoices.  
  • The Chamber of Commerce and Industry in Berlin and Brandenburg call for an amendment of the minimum taxation rules. Under current minimum taxation rules, loss carry forwards can only be set off against profits without restrictions up to an amount of € 1 million. Thereafter the possibility to set off losses is limited to an amount equal to 60 percent of the overall profits exceeding € 1 million. In order to mitigate disadvantages for Germany as an investment location and to avoid a breach of the principle of capability the Chamber of Commerce and Industry in Berlin and Brandenburg requests to suspend minimum taxation rules for a period of two years and to eventually even abolish minimum taxation rules and to provide businesses with the possibility to carry back losses without restrictions. In order to limit the exposure of the public revenue the loss carry backs shall be limited to a period of two to three years.
  • Another request of the Chamber of Commerce and Industry in Berlin and Brandenburg is to increase the threshold for certain relief measures as regards documentation on transfer pricing to an annual turnover of € 10 million (currently € 5 million).  
  • Finally, the Chamber of Commerce and Industry in Berlin and Brandenburg would like to even abolish all fees for binding rulings or, alternatively, to mitigate the fee exposure so that the tax authorities could only request a fee in cases where they actually granted a binding tax ruling. In addition, multiple fees shall be avoided in cases of corporate reorganizations.  

If and to what extent any of these proposals will eventually be implemented remains to be seen. Initial clues may be expected by mid of September when the Federal Ministry of Finance will have completed its assessment of the legal and financial feasibility. At that point in time a consolidated proposal is likely to be made public. We will certainly closely monitor the development and will report in one of our next issues of TaxInfo.