The draft bill for the Annual Tax Act 2010 introduced by the Federal Government on 22 June 2010 (Bulletin of the German Parliament no. 17/2249) as well as the opinion of the German Federal Council (Bundesrat) dated 9 July 2010 commenting the draft provide for a variety of changes to the German tax laws.
Although the Annual Tax Act 2010 will probably not be adopted by the Federal Council before the end of November, we would like to briefly present some important contemplated tax law changes since several commercial decisions will be affected.
Tax-neutral Corporate Actions (Sec. 20 (4a) s. 1 Draft ITA)
According to the current rules, a taxneutral stock swap due to corporate actions is tax-neutral, if shares in nonresident corporations are exchanged. The proposed amendment of Sec. 20 (4a) s. 1 ITA shall extend the tax-neutrality also to swaps of shares in German resident corporations.
Up to now, the swap of shares in German resident corporations due to corporate actions is only deemed to be tax neutral for purposes of the German withholding tax on capital investments, whereas the complex question of tax neutrality needs to be reviewed in the process of the tax assessment. Thus, the amendment would lead to a significant simplification.
Simplification of the Relocation of Electronic Book-keeping Processes Abroad (Sec. 146 (2a) Draft General Tax Act)
According to the explanatory statement of the legislator, the revised version of Sec. 146 (2a) German General Tax Act (GTA, Abgabenordnung) shall lead to a significant simplification for relocating abroad electronic books and documents. Such simplification shall be achieved by (i) allowing a relocation not only to EU/ EEA-countries, but also to third countries and introducing a uniform set of rules for the application procedure in both cases, (ii) waiving the requirement of a preliminary consent of the foreign state to the data access by the German tax authorities and (iii) waiving the requirement of an existing convention regarding mutual administrative assistance with the country the bookkeeping is transferred to.
Consent to a (partial or complete) relocation of the electronic books abroad shall in future be granted upon written application, if (i) the taxpayer notifies the competent tax office of the location of the data processing system, (ii) the taxpayer has properly complied with his duties to cooperate, give information, disclose documents and to maintain accounting and documentation systems in the past, (iii) data is fully accessible by the tax office and (iv) taxation is not impeded by the relocation.
We appreciate the simplifications for a permitted relocation of electronic books provided for in the Draft GTA. However, the contemplated rules provide for one complication: before giving their approval, the tax authorities will have to verify in each case, if taxation is not impeded by the relocation.
Please note that a relocation abroad of the hardcopy books (e.g., saving of invoices as required under Sec. 14 of the German Value Added Tax Act (VATA, Umsatzsteuergesetz) remains prohibited.
Amendments to the Calculation of the Tax Burden for the German CFC rules (Sec. 8 (3) Draft Foreign Tax Act) — End of the Double-Malta-Structures
The German CFC rules apply, if German resident taxpayers hold more than 50 percent of the interest in the nominal capital of a foreign company (so-called intermediary company) and if the intermediary company generates income from so-called passive activities that are subject to a low rate of taxation in the foreign country. A foreign company is subject to a low taxation, if its income is subject to an aggregate burden from income taxes of less than 25 percent.
According to the current rules, the German CFC rules are not applicable, if the German taxpayer (parent) holds a participation in a double-layer structure in a foreign country (e.g., Malta) that levies income tax on the passive income of the second-tier subsidiary at a rate of more than 25 percent, but at the same time grants a tax refund to the direct shareholders of the second-tier subsidiary (subsidiary) for the taxes paid by the second-tier subsidiary (so-called Double- Malta-Structure).
The current German CFC rules do not apply to such Double-Malta-Structures, as the second-tier subsidiary derives passive income but is not subject to a low taxation within the meaning of Sec. 8 (3) FTA due to its income tax burden of 25 percent. The tax refund at the level of the subsidiary is not taken into account for the calculation of the income tax burden. The subsidiary receives the tax refund, but its income (i.e., the dividends paid by the second-tier subsidiary) does not constitute passive income within the meaning of Sec. 7 et seq. FTA. Consequently, the passive income derived by the second-tier subsidiary is not subject to the German CFC rules despite being subject to a low rate of taxation.
The contemplated amendment to Sec. 8 (3) Foreign Tax Act shall allow for an application of the German CFC rules in such cases. Thus, any claims of the subsidiary for tax refund shall be included in the calculation of the tax burden the second-tier subsidiary’s passive income is subject to. The new rules shall be applicable for the first time for passive income derived by the second-tier subsidiary in the fiscal year beginning after 31 December 2010.
Limitation of the Refund of Input VAT With Respect to Buildings Used for Both Business and Private Purposes (Sec. 15 (1b) Draft Value Added Tax Act) — End of the Seeling-Model (ECJ dated 8 May 2003, C-268/00, Wolfgang Seeling)
The limitation of the refund of input VAT contained in Sec. 15 (1b) VATA of the draft Annual Tax Act 2010 transposes a respective amendment to the Council Directive 2006/112/EC on the common system of value added tax into German law. Due to the amendment it will no longer be possible to receive an immediate and total refund of the input VAT with respect to the privately used part of the building when acquiring buildings that shall be used for both business and private purposes. In the past such possibility led to a significant advantage in terms of liquidity, as the refund was compensated by the taxation of the private use over a period of (generally) 10 years.
After implementation of the amendments to the VATA, input VAT will only be refunded with respect to the part of the building that is used for business purposes. The new rules shall be applicable to all assets that are acquired or produced after 31 December 2010.
Tax credit for German Income Generated by Foreign Investment Funds (Sec. 4 (5) Draft Investment Tax Act)
Under the current rules German resident investors in foreign investment funds are at a disadvantage to investors in domestic investment funds with respect to a relief from withholding tax on capital gains derived from a participation of the investment fund in German corporations: As far as domestic investment funds are concerned, the withholding tax on capital gains for dividends can be refunded according to Sec. 11 (2) Investment Tax Act (InvTA, Investmentsteuergesetz). In contrast, in case of foreign investment funds, the withholding tax can only be credited against the German tax on the investor’s income derived from his investment in the foreign investment fund. The problem is that such credit can only reduce the investor’s tax burden to nil, but cannot lead to a refund of the German tax withheld on the dividend income. The disadvantage for investors in foreign investment funds is especially noteworthy when looking at investors who are only subject to tax with 5 % of the investment income due to the domestic participation exemption and therefore only possess a limited amount of tax burden to be credited against the withholding tax.
The contemplated amendment to Sec. 4 (5) InvTA shall be applicable from fiscal years commencing after 31 December 2010 onwards and provide for a tax credit and, more importantly, a refund of withholding tax if the tax credit does not result in a complete relief from German withholding tax.
Opinion of the German Federal Council: Simplification of the Fiscal Authentication of Tax Groups
In its opinion dated 9 July 2010 commenting the draft Annual Tax Act 2010 the German Federal Council proposes an amendment to the requirements for tax groups having German limited liability companies (Gesellschaft mit beschänkter Haftung) as group parent. Instead of requiring that the parent undertakes to assume the losses of its respective subsidiary in accordance with Sec. 302 of the German Stock Corporation Act (SCA, Aktiengesetz), the new rule shall require that there is a (legal) obligation to assume the subsidiary’s losses in accordance with Sec. 302 SCA.
According to the standing case law of the German Federal Court of Justice (Bundesgerichshof) such obligation exists in accordance with Sec. 302 SCA also for limited liability companies as parent companies irrespective of the contractual agreement on such obligation. Therefore, no action would need to be taken in the future in this respect.
With a view to the fact that many tax groups are disregarded due to a wrong or incomplete wording of the parent’s undertaking to assume the subsidiary’s losses, the contemplated amendment would imply an accelerated stability and predictability of the law.