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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.
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).
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.
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.
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.
Today (31 July 2019) the revised “general deadline” for tax filings in Germany (tax year = calendar year 2018) expires.
The good news:
Example (new “extended deadline”): Taxpayer Andy Thom, originally from Scotland, has worked as a tennis coach in Berlin and Hamburg in 2018 and earned EUR 60,000 from students (business expenses not yet reflected). Andy must file an income tax (Einkommensteuer) return and, due to relevant turnover exceeding the thresholds for “small entrepreneurs”), his VAT (Umsatzsteuer) return for 2018. He might also have to file a trade tax (Gewerbesteuer) return. Andy has engaged the local German tax advisor Tommy Doll to take care of the tax filings. When are Andy’s tax filings due?
As Andy has engaged a tax law professional and assuming that Andy’s tax office is duly informed on the engagement of Tommy Doll, the relevant deadline is not 31 July 2019, but the last day of February 2020. That 29 February 2019 is a February which will further extend the deadline to the Monday thereafter. Hence, Andy’s tax advisor must file not later than on 2 March 2020 electronically Andy’s annual tax returns for 2018.
The bad news:
The ugly news:
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:
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.
Some “highlights”:
For German tax law-practitioners, these aspects points offer no surprises and remain vague.
More specifically, however:
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.
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