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German Tax & Corporate Insights Flick Gocke Schaumburg German Tax & Corporate Insights — Issue #08 / December 2015 1 Contents Editorial International Tax Dear readers, Proposed abandonment of the tax exemption regime for Again in this new issue of GTCI we highlight a number of portfolio investments — need for action? .................. 2 German legal developments and court rulings particularly relevant CFC income not subject to trade tax in Germany ......... 3 to international corporations and investors in Germany. Tax & Corporate BEPS & information exchange: Tax court affirms principle of confidentiality and secrecy in tax matters ... 4 We start with summing up a discussion draft regarding a Insights Accounting for tax uncertainties under IAS 12 — reform of the German Investment Tax Act published by the new developments .......................................... 5 Federal Ministry of Finance in July. Then, we take a closer Updates on recent business trends, look at a ruling by the Federal Tax Court according to legislation and case law in Germany Real Estate Transfer Tax which income attributed to German shareholders under German real estate transfer tax provisions — substitute the rules on controlled foreign companies (CFCs) is not tax base unconstitutional .................................. 6 subject to trade tax. Investment Taxation On October 5, the OECD presented the final BEPS package Reform of the German Investment Tax Act ............... 8 of measures for a comprehensive and coordinated reform Corporate Law of international tax rules. We explain what consequences Bonn Hamburg Breaking old habits in German corporate finance: New the package will have in practice. Also, we outline the main Johanna-Kinkel-Straße 2-4 Amelungstraße 8–10 53175 Bonn 20354 Hamburg rules on convertible bonds and preference shares and proposals made in the long-awaited draft “Uncertainty Phone +49 228/95 94-0 Phone +49 40/30 70 85-0 their tax implications ....................................... 9 over Income Tax Treatments” interpretation published for [email protected] [email protected] Transposition of the EU Accounting Directive public comment by the IFRS Interpretations Committee. Frankfurt (2013/34/EU) .............................................. 11 MesseTurm, Friedrich-Ebert-Anlage 49 In addition, we take a closer look at German real estate 60308 Frankfurt/Main Representative offices: Competition Law transfer tax provisions, outline the main changes to be Phone +49 69/717 03-0 expected from the reform of the German Investment Tax [email protected] Vienna Crying over spilt milk: German Federal Cartel Office Am Heumarkt 7 requires organic dairies to demerge following incorrect Act and examine the new rules on convertible bonds and Berlin 1030 Vienna information in merger control notification ............... 12 preference shares and their tax implications. Finally, we Friedrichstraße 69 Austria deal with the transposition of the EU Accounting Directive 10117 Berlin Phone +43 1/713 08 14 News .......................................................... 14 Phone +49 30/21 00 20-20 [email protected] (2013/34/EU) and report on a recent post-merger investi- [email protected] gation initiated by the Federal Cartel Office. Zurich Contact ....................................................... 15 Munich Bahnhofstraße 69a Brienner Straße 29 8001 Zurich We hope our current choice of topics finds your interest. 80333 Munich Switzerland Phone +49 89/80 00 16-0 Phone +41 44/225 70-10 The FGS editorial team [email protected] [email protected] German Tax & Corporate Flick Gocke Schaumburg Insights German Tax & Corporate Insights — Issue #08 / December 2015 2 from less-than-10% shareholdings in subsidiaries was abol- owned foreign subsidiary. The foreign subsidiary should Proposed abandonment of the ished with effect from March 1, 2013. As a result, the be based in a country which does not tax capital gains tax exemption regime for announced amendments should complement the amend- and dividends from portfolio investments in (foreign) ments realized to date. companies — neither under national law nor under the law portfolio investments — need for of double taxation treaties. The portfolio shares should be action? Limitations of loss offsetting transferred before the new provisions of Sec. 8b(4) CITA- According to the discussion draft any losses in connection draft will be set into force. But given the fact that only a In July 2015, German’s Federal Ministry of Finance pub- with portfolio shareholdings, e.g. from a disposal or a discussion draft exists at the moment, corporate share- lished a discussion draft regarding a reform of the Ger- write-down to market value, could be offset only against holders should not be too hasty in transferring their port- man Investment Tax Act. Besides fundamental changes capital gains from portfolio shareholdings. Any remaining folio investments. It is not yet clear whether the govern- to the taxation of income received by German investors balance of losses from portfolio shareholdings could be mental draft will contain the described provisions. A through investment funds, the draft proposes a signifi- carried forward and offset against future profits from premature transfer of shares would result in a — probably cant amendment to the participation exemption rules in portfolio shareholdings, with no time limitations. The loss unnecessary — tax burden. Also, according to current law Sec. 8b of the German Corporate Income Tax Act carryforward would be subject to the general change-in- capital gains would be tax-exempt up to 95%, 5% would (CITA), namely that the 95% tax exemption for capital ownership rules and, therefore, could be forfeited upon a still be taxable. gains derived by corporate shareholders from portfolio relevant shareholder change. investments would be abandoned. According to the Contact draft law (Sec. 8b(4) CITA), such gains would be fully Reduced tax rate for venture capital investments Dr. Arne von Freeden taxable. If the draft is adopted and enacted, the new The discussion draft also proposes that capital gains from Phone +49 228/95 94-266 [email protected] rules will take effect on January 1, 2018. Capital gains certain venture capital (e.g. start-up) investments would (Bonn office) realized after December 31, 2017 would then be taxed. benefit from a reduced tax on capital gains during the period 2018–2027. The tax on eligible capital gains would Dr. Dietmar Lange be reduced to 30% of the acquisition costs of the shares Phone +49 228/95 94-0 Current law and proposed new rules [email protected] Under the current law, capital gains realized from sales of sold, but would be limited to the amount of corporation (Bonn office) shareholdings by German corporate shareholders are (in tax paid on the capital gains derived from the shares. To most cases) effectively 95% exempt from tax, with no benefit from the reduced tax rate, the shares would have minimum shareholding requirement. The discussion draft to be newly issued shares bearing voting rights, not be proposes abolishing the participation exemption for capi- listed on a stock exchange, and have been held for at least tal gains in cases where a German corporate shareholder three years. directly holds less than 10% of the share capital of the cor- poration whose shares are being sold. Until 2013, the 95% Practical consequences tax exemption also applied to dividends received by Ger- To avoid tax liability for capital gains on shareholdings of man corporate shareholders, with no minimum sharehold- less than 10% in Germany, German corporate shareholders ing requirement. The 95% exemption for dividends derived could transfer their portfolio investments to a wholly German Tax & Corporate Flick Gocke Schaumburg Insights German Tax & Corporate Insights — Issue #08 / December 2015 3 the German shareholder at the end of the CFC’s fiscal year. income as a matter of course. On top of 15% of corpora- CFC income not subject to trade At the level of the German shareholder, it is treated as tion tax and an effective 0.875% of solidarity surcharge, a tax in Germany capital income in the case of a natural person. If the share- German corporation owes an additional 7–18% of trade holder holds the shares in the CFC as business assets for tax on CFC income, depending on the municipality in The German Federal Tax Court in Munich ruled in March tax purposes, the income is treated as business income. which it maintains domestic permanent establishments. that income attributed to German shareholders under the No credit for foreign taxes is available for trade tax pur- German rules on controlled foreign companies (CFCs) is The usual exemptions or methods of mitigating double poses. What’s more, the trade tax itself does not consti- not subject to trade tax. The decision aligns the tax treat- taxation available under German tax law, such as Germa- tute a deductible business expense, so no mitigation ment of CFCs with the treatment of income from foreign ny’s participation exemption (Sec. 8b of the Corporate whatsoever is available for the trade tax on a corpora- permanent establishments. Now, the response of the Ger- Income Tax Act (Körperschaftsteuergesetz), the partial tion’s CFC income. man legislature and tax authorities remains to be seen. income system (Teileinkünfteverfahren) or the final with- holding tax (Abgeltungsteuer), do not apply to CFC To complement the CFC rules, Sec. 20(2) of the Foreign German CFC legislation has long been a bone of conten- income. For income tax purposes, the CFC income is Tax Act stipulates a switch-over from the exemption tion between taxpayers and the German tax authorities. therefore subject to full taxation at the level of the share- method applicable under a double tax treaty to the credit First introduced in 1972, its main provisions are contained holder, either (progressive) personal income tax or (flat) method. The switch-over applies to income of a foreign in Secs. 7–14 of the German Foreign Tax Act (Außensteu- corporate income tax. A credit for foreign taxes borne by permanent establishment if that income were subject to ergesetz). Under these rules, German resident taxpayers the CFC is available upon application.
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