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May 26, 2021
2021-1060

German Parliament advances several tax proposals

Executive summary

Over the past several weeks, the German Parliament has moved several tax-related proposals forward. The proposals include: (i) implementation of the European Union (EU) Anti-Tax Avoidance-Directive; (ii) introduction of a check-the-box election for partnerships; (iii) changes to the Real Estate Transfer Tax Act; and (iv) a general overhaul of the withholding tax rules.

The specific actions include:

  • On 21 May 2021, the Federal Parliament agreed on the German “Law implementing the EU Anti-Tax Avoidance-Directive” including anti-hybrid rules. The EU Anti-Tax Avoidance Directives are set forth under Council Directives 2016/1164 of 12 July 2016, and 2017/952 of 29 May 2017, and are referred to respectively as ATAD I and II. Approval of the Federal Council is expected on 25 June 2021.

  • In the same session on 21 May 2021, the Federal Parliament adopted the long-discussed reform of the taxation of corporations, implementing a “check-the-box” system for entity classification for tax purposes of commercial partnerships. Approval of the Federal Council is also expected on 25 June 2021.

  • On 5 May 2021, the Federal Parliament adopted the draft law concerning the revision and modernization of withholding tax (WHT) procedures with respect to income from capital investment and royalties in Germany. Approval of the Federal Council is expected on 28 May 2021.

  • The long-discussed reform of the Real Estate Transfer Tax Act was adopted by the Federal Parliament on 21 April 2021. The Federal Council approved the proposal on 7 May 2021. Hence, the new measures will come into effect on 1 July 2021 in accordance with the new law.

Detailed discussion

ATAD Implementation Law

As noted, the Federal Parliament adopted the proposal on 21 May 2021 and approval of the Federal Council (Bundesrat) is expected on 25 June 2021. In line with the ATAD, the bill provides several changes. The main measures are:

  • Introduction of a far-reaching general anti-hybrid rule (Sec. 4k Income Tax Act), which is broadly based on the OECD1 Action 2 proposal and the ATAD I and II provisions.

  • National implementation of a reverse hybrid mismatch rule (Sec. 49 para. 1 No. 11 Income Tax Act).

  • Taxation of cross-border asset transfers/exit taxation.

  • Material changes on the exit taxation for individuals (Sec. 6 Foreign Tax Act) as well as on the German Controlled Foreign Company (CFC) rules. The CFC rules do not include the hoped-for decrease of the current effective tax rate of 25% required for the so called “high-tax kick-out” nor a tax credit mechanism for Trade Tax purposes.

The initially proposed and debated cross-border intercompany financing rules were eliminated in the government draft of the bill and have not been reincluded by the Federal Parliament.

Apart from selected provisions, the measures shall generally come into effect in principle on 1 January 2022. The anti-hybrid rules are generally applicable retroactively on expenses accruing after 31 December 2019 unless a specific exception is applicable.

Since the legislative process was initiated in 2021 and the law is expected to be enacted in 2021, the application for the tax period 2020 is a retroactive change for an already completed tax assessment period and it remains to be seen to what extent courts will deem this retroactivity to be permitted in light of the ATAD. For details, see the EY Global Tax Alert on the government draft of the proposal, which is essentially identical to the version adopted by the Federal Parliament.

Introducing “check-the-box” elections for partnerships and further changes

The Federal Parliament adopted the long-discussed reform of the taxation of corporations on 21 May 2021. The bill essentially implements a “check-the-box” system for entity classification for tax purposes. According to the proposal, commercial partnerships (in Germany a KG or an OHG, but not de-facto partnership) may elect to be treated as a corporation for income tax purposes.

The bill also includes further measures. The German Reorganization Tax Act would be further globalized. Also, a so-called “contribution solution” will be introduced to reflect tax group book/tax differences. In addition, losses from exchange rate fluctuations in connection with shareholder loans will become deductible expenses. All measures will come into effect on 1 January 2022.

Approval of the Federal Council (Bundesrat) is expected on 25 June 2021. For details, see the EY Global Tax Alert on the government draft of the proposal.

Law on modernization of withholding tax relief and various additional topics

On 5 May 2021, the Federal Parliament agreed on the draft bill of a law proposing a revision and modernization of WHT procedures with respect to income from capital investment (i.e., dividends and interest) and royalties in Germany. The Law is based on the government draft of 20 January 2021 but includes several changes, additions and deletions. Specifically, the law still includes the proposed changes to the German anti-treaty shopping rules (Sec. 50d para. 3 Income Tax Act) and the framework for the administration of WHT and relief thereof. These changes can have significant impact on existing holding structures and their impact should therefore be reviewed carefully.

The initially proposed amendments to transfer pricing provisions (provisions on the legal definition of the arm’s-length principle as well as rules on price adjustment clauses and advance pricing agreements (APAs)) have been detached from the draft bill of the German ATAD implementation law and transferred to the bill concerning the modernization of WHT relief.

Approval of the Federal Council is expected on 28 May 2021. For details, see the EY Global Tax Alert on the government draft of the proposal.

Agreement in the German Bundestag on Share Deals

With the approval by the Federal Council on 7 May 2021, the proposed changes to the German Real Estate Transfer Tax (RETT) Act have been approved. Hence, the new rules will come into effect on 1 July 2021.

The content of the bill as agreed upon in the Bundestag is very similar to the government draft of 19 July 2019. The main measures are:

  • General reduction of the relevant threshold for RETT-triggering share transfers from 95% to 90%, also in the other relevant RETT provisions.

  • Introduction of the new provision Sec. 1 para. 2b RETT-Act, which works similar to Sec. 1 para. 2a RETT-Act for partnerships. According to this new rule, a direct or indirect transfer of 90% or more of the shares in a corporation to new shareholders within a 10-year period triggers RETT on any German real estate owned by the corporation. This rule will generally be applicable for any transfers as of 1 July 2021 (i.e., any transfers after this date are to be taken into account).

  • The relevant period of consideration for partnerships is also extended from 5 to 10 years.

  • A notable change compared to the initial draft is the introduction of a stock exchange clause. For the new rule, certain transfers of shares in corporations are not considered. Specifically, these rules shall not apply to corporations where the shares are admitted to trading on an organized market operated in Germany, in another Member State of the EU or in another Contracting State to the Agreement on the European Economic Area pursuant to Sec. 2 para. 11 of the German Securities Trading Act (Wertpapierhandelsgesetz) or a third-country trading venue that has been declared equivalent by the European Commission pursuant to Article 25(4)(a) of Directive 2014/65/EU.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young GmbH

Ernst & Young LLP (United States), German Tax Desk, New York

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ENDNOTE

  1. Organisation for Economic Co-operation and Development.
 

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