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Convertible Loan Agreements (CLA, Wandeldarlehen) – SAFE or not?

February 6, 2022 / admln / 0 Comments

Venture capital is (still) booming in Germany. Not as in the US or in the UK, but nonetheless remarkable.

Here are a few comments from a German tax law perspective, if you intend to act as business angel for a German start-up (in Berlin, Cologne, Munich, Hamburg, Bremen or whereever across this country). Or if your business is looking for seed financing from VC funds or business angels.

An interest rate of nil might cause German tax issues. Not SAFE (SAFE being a common US standard for CLA’s). German tax inspectors might take the view that the loan was granted for free. The use of funds free of charge could trigger a deemed taxable advantage of 5.5% p.a. of the loan amount under German gift tax laws. Each party to such agreement can be held liable to such tax charge.
Upon conversion of the loan receivable into equity, the investor may be able to profit from a tax privilege. Hence, if strcuctured correctly the “profit” from converting into equity at a discount to the shares’ fair market value (e.g. 20%) should not trigger German (capital gains) taxes. (And no corporate income tax, if the investment is made through a personal holding vehicle.)
If investing from abroad, please check you local tax laws. As a principle under international tax laws, the country of your (primary) residence has the right of taxation. Tax treaty to be analysed.
Be aware of the “dry income” trap for any interest amounts, even if not actually paid. If the CLA wording gives the investor a claim to request (annual) payment of interest amounts prior to conversion, this can be deemed taxable interest income in Germany. Non-residents may be lucky, as such interest may not be taxable for non-residents in Germany (depending on the CLA structure however, especially on granted collaterals).
Finally, from a legal perspective: To notarize or not to notarize? In practicality, most CLA’s are not signed in front of a German notary. But a German public notary will tell the investor that there are good reasons to collect a notarization in order to be able to enforce a conversion right into equity in a German GmbH. Hence, a choice to be made.

31 July – Tax Day in Germany

July 27, 2020 / admln / 0 Comments

Tax payers in Germany must file the respective annual (e.g. income) tax returns for the previous tax year (calendar year 2019) not later than 31 July 2020 unless (!) a German tax law professional is instructed to file that return on behalf of the tax payer – in that case the deadline is extended from seven to 14 months (i.e. ending on 28 February 2021).

Obviously, the German legislator believes that it is time-consuming to involve an external tax expert and therefore grants twice as much time (14 instead of 7 months) when involving such certifed tax professional. Good news for our professions..

With a proper justification being provided, it is possible to apply for a deadline extension. But the underlying statutory rules have become stricter and tax offices are quick now to assess a penalty for late payment (Verpätungszuschlag) based on Sec. 152 German Fiscal Code (Abgabenordnung).

(Partial) Abolition of the “Soli”: Late Roman Tax Legislation in Germany?

August 19, 2019 / admln / 0 Comments

On 6 August 2019, the German Ministry of Finance, currently headed by a Social Democrat (Olaf Scholz from Hamburg), has published on its website a draft bill on the partial (!) abolition of the German solidarity surcharge (Solidaritätszuschlag, commonly also referred to as Soli). As a background information, the solidarity surcharge is levied as an additional tax charge to either (i) your income tax or (ii) (for entities and other taxable structures) corporate income tax charge, normally at a rate of 5.5% times the tax charge.

Example: Mat “Lewa” Lewandowski, unmarried and working in Berlin, shall have a taxable income (after deduction of expenses) in 2019 of EUR 60,000. His income tax charge in Germany, pursuant to the progressive tax rate system, shall be EUR 16,419 (corresponding to an effective tax rate of 27.37%). On top, for FY 2019 he has to pay a solidarity surcharge of EUR 903.04 (5.5%x27.37%=1.51%). Hence, his overall tax burden is 28.88%.
Under the draft new tax law bill, in FY 2021 Lewa will not pay the “Soli” anymore. His taxable income is just below the threshold of EUR 16,956 (as provided for in the current draft). Hence, he saves EUR 903.04, or 1.51% percentage points of his income.

The partial abolition is supposed to take effect in 2021. You have guessed correctly – 2021 is the scheduled election year in Germany.

According to the draft bill, people earning significantly more than EUR 60,000 – for singles – or EUR 120,000 – for married couples – taxable income (after deductions) per year will not be exempted from the “Soli.” The tax break is reserved for German income tax payers with an annual income tax charge not exceeding EUR 16,956 (or EUR 33,912 for married couples filing a joint income tax return). (You can calculate here whether your taxable income is moderare enough to benefit from the contemplated abolition of the Soli.)

In other words, in order to be exempted from the Soli, the draft bill provides for a sharp threshold (Freigrenze) instead of a free amount (Freibetrag) for each income taxpayer. “The rich” as well as corporations (corporate income tax payers) are excluded from the contemplated new privilege.

Question 1: Is it constitutional to exclude the “upper 10%” of income taxpayers from the abolition of the Soli?
Question 2: Is it a good idea to exclude businesses and entrepreneurs (except for very small businesses) from the contemplated tax break?

My response, to both questions, is clearly “no.” The current draft bill appears like a late move of Merkel’s Grand Coalition (specifically of the Social Democrat part thereof), due to end in 2021 anyway.

BERLIN tax & legal