The end of the Angela era
Angela Merkel, in office for more than 13 years now, will not run again for chancellor again in the Federal German elections scheduled for late September 2021 (date to be confirmed). The German economy is still doing good. The public’s focus is on issues such as the Brexit debate.
These are the reasons why not much “tax law reform” is happening at the moment in Germany. Tax law is not on top of anybody’s agenda at the moment.
A few thoughts on where we stand at the moment:
- Real estate transactions might get even tighter tax rules. For your information, acquisition of real estate in Germany is not subject to VAT (unless you opt for it, being an entreprenur) but to Real Estate Transfer Tax (RETT) at rates from 3.5 up to 6.5% (read here under 4.). Large investors operate through special entities (special purpose companies) that acquire real estate. In an exit, the investor will not sell the property, but the shares in the company. If the investor sells just 94% of the company’s shares, no RETT is triggered. The remaining 6% are the “RETT blocker” as only an acquisition of 95% or more in a company owning German real estate triggers RETT. Well, initiated through a few Länder, these rules might get further tightened: The threshold may go down to 90% (rather than 95%) and “holding periods” will be further extended.
- Apple/Google/Facebook/Starbuck’s/IKEA royalty structure: Since 2011 an international discussion on minimizing local tax burdens through license structures is going on. Many multinationals make good many in Germany but pay almost no taxes. Profits are offset inter alia against charges for (trademark /franchising) license payments. This is the general perception in Germany. This may be partially true but from a technical perspective it is far more complicated. The reason why this “works” is primarily not an issue of German but of foreign tax regimes. I discuss this in technical seminars, e.g. in mid-February 2019 in Frankfurt. What Germany is doing now is to limit deductions from royalty payments (i) for trade-tax purposes as well (ii) for income tax purpose through the Lizenzschranke rules (license-barrier rules pursuant to § 4j EStG effective as of 1 January 2018. The objective is to come to an international approach on further tackling the problem (on OECD and/OR EU level) by 2021.
- German property tax (annually charged on German real estate you own) needs reform due to constitutional reasons. There are proposals on the table, but nothing has been decided on. Technically and politically it is not easy to change (replace) the existing rules.
- Other technicalities have been changed. The deadline for filing tax returns was extended to 14 months (if you use a tax law advisor). Morover, taxpayers increasingly being asked to file any tax return electronically. And so on.
Let’s wait for the German economy to turn sour and/or a new chanecellor take office (due in late 2021 at the latest) before the next wave of “tax law reforms” hits Germany. For investors and residents, a pause on the tax reform front should be good news. (Of course, tax rates are always too high).
Today, Angela Merkel’s party (Christian Democrats together with Bavaria’s CSU) and her “red” coalition partner (Social Democrats) have published a “letter of intent” of what could be the basis for German politics in the next four years, provided that yet another red&black coalition (and hence another Angela Merkel term) is signed-off by the Social Democrats’ party conference to be held on 21 January 2018.
The 28-pager as published today does touch a few tax issues.
- A “fair taxation” of multinationals, specifically those acting within the digital economy, is to be promoted (four respective multinationals are explictly mentioned).
- A common consolidated tax base within the EU, stipulating minimum corporate tax rates, is to be further promoted.
- A substantial financial transaction tax is to be finalized.
For German tax law-practitioners, these aspects points offer no surprises and remain vague.
More specifically, however:
- R&D specifically for SME’s is to be promoted by taking the respective R&D headcount and research expenses as a starting point. This could mean that a factor is being put on such tax-deductable expenses. Othe countries already do this. This may be good news. But let’s wait for the details.
- The solidarity surcharge is to be abolished in a Step 1 for “90% of the taxpayers” over the next four years. Let’s see whether companies and corporations that pay the solidarity surcharge on top of the German Corporate Income Tax (1.825% on top of 15% CIT) will be relieved. I am afraid they won’t, but let’s wait what happens.
- The flat tax (25% plus solidarity surcharge) on interest income is to be abolished. (Dividend income and other income from capital investments is not mentioned.)
- “Property acquisitions for families” are to be promoted. This is translated by commentators as a potential Real Estate Transfer Tax relief for the acquisition of a first family home. Let’s seen when and how this happens.
- Venture capitalists might also get better tax laws, but nothing precisely has been included.
That is all, basically.
The best news for German taxpayers is what is not written in the paper: No tax hikes, except for the interest income taxation, are explicitly mentioned. As a tax-practitioner I feel relieved, because any tax increase “for the wealthy” would have hit many thousands of family-owned German companies, organized as tax transparent (such as GmbH& Co. KG). Won’t happen now.
Finally, the French touch: The paper mentions repeatedly “France” as the ally for (i) pushing tax initiatives for “fair taxation” and (ii) fighting tax evasion. Pourquoi pas – but note that Germany’s anti-avoidance rules (and enforcement of tax laws) are quite stringent in international comparison already.
Where is my decanter.
German gift tax and inheritance tax laws have become even more complex recently. The reasons are constitutional law requirements (former inheritance tax laws to be held as unconstitutinal) as well as permanent amendments to the law due to political wish-lists.
Cross-border donations or inheritance scenarios are even more complicated. As a rule of thumb, a non-resident German inheritance taxation is triggered if relevant assets or just one of the involved individuals is based in Germany (or holds a German citizenship).
A tax compliance challenge (for domestic as well as cross-border cases) is to assess whether assets can be qualified as tax-privileged business assets for German tax purposes. The underlying idea is that (i) even though in general inheritance tax and gift tax rates “for the wealthy” have been increased, the transfer of business operations is exempted, provided that existing jobs (measured by the payroll amounts) are being preserved.
Due to international tax-law abuse discussions at OECD level and elsewhere (tackling Base Erosion and Profit Shifting, BEPS) Germany has made a move and introduced legislation according to which (in a nutshell) it is tax detrimental for Germany-based taxpayers to pay license fees to non-resident licensors if such licensor benefits from specific foreign IP tax regime (such as a patent box, license box or innovation box regime) unless such foreign IP tax law provision requires adequate substance to be documented at licensor level in order to qualify for the IP tax incentive.
Precisely: Even if a specific licensor has adequate substance (e.g. employs own R&D staff) the German licensee may not fully deduct its royalty expenses anymore, if the foreign licensor benefits from a reduced tax rate due to a local IP tax privilege which is inconsistent with the OECD nexus approach.
Example: The income tax charge of the received royalty at licensor level (abroad) is effectively 2% due to a black-listed patent box regime (i.e. not sufficiently requiring substance, hence inconsistent with the OECD nexus approach). At German licensee level 92% of the license expenses will not be tax-deductible due to the new tax rules. (The not-deductible portion of the royalty expense is calculated as follows: 25% less the effective tax burden of 2%, divided by 25%).
It is noted that the new provision aims at motivating foreign legislators to supplement (or abolish) its IP tax law incentives even before this will be mandatory due to OECD agreements by 2021.
The German legislator has introduced a Section 4j to its Income Tax Act (§ 4j EStG). The purpose of the new provision is to limit the deductability of royalty payments to non-resident creditors for German individual taxpayers as well as corporations and (tax-transparent) partnerships.
The new provision is a result of anti-abuse discussions on the international level (OECD, EU) triggered through structures used by some multi-nationals. IKEA, Starbucks, Apple, Microsoft and others have become notorious for their deemed “profit-shifting” by means of royalty structures.
Well, the new German “royalty threshold” provision is a toothless tiger. It will hardly have any effect. I will explain in some detail in one of the next posts.
Some people that move to Germany (“expats” or returnees) expect outstanding compensation or severance payment from an earlier employment or activities abroad, outside Germany. Does Germany have a right to tax such payments? The answer is: That depends. (continue reading)
Inheritance taxes can be traced back to ancient Egypt and have been around in Germany since 1873. As in other countries, inheritance (or: estate) taxes are subject to constant political debate and changes. Today, German inheritance and gift taxes rates are as high as 50%, but tax-exemptions for the transfer of business assets have been introduced in order to not strangulate family-owned businesses. On 17 December 2014 the German constitutional court held the German Inheritance and Gift Tax Law (Erbschaftsteuergesetz, ErbStG) to be unconstitutional. According to the ruling, the treatment of specific types of assets by the legislator was not in line with the imperative of equal treatment of taxpayers, pursuant to Article 3 of the German constitution. Hence, in order to remain in force, the ErbStG needs to be amended until the end of 30 June 2016. The latest revision (not the first one!) is already under way.