May 26, 2021
German Parliament advances several tax proposals
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:
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:
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:
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