Germany Proposes Amendments to Tax Regime

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Germany's Ministry of Finance has taken advantage of the need to bring the customs duties sections of the Tax Management Act into line with the revised EU provisions to introduce a number of tax amendments unrelated to customs duties. The published draft bill includes proposals that are purely editorial amendments, while others enact recent CJEU findings against existing German provisions, or react to perceived shortcomings of the present tax legislation. The majority of the proposed amendments would apply from the 2015 tax year.

The draft amendments relate to the following legislation and schemes.

Income Tax Act

The Income Tax Act is to be amended to disallow 60% of the losses (including refinancing costs) from loans granted to entities in which the lender holds more than one-quarter of the ownership rights. This mirrors the corresponding provision of the Corporation Tax Act, the 60% disallowance reflecting the fact that 60% of the income (interest) would be tax-free if the loan were held as a business asset. This also applies to losses from assets placed free-of-charge at a related party debtor's disposal.

Company Pension Schemes

Payments by employers into pension funds to finance changes in company pension schemes from “pay as you go” to an asset-backed fund capital are to be taxable employment income. However, payments to fulfil for the first time the solvability criteria of the insurance rules will be exempt, as will payments to cover extraordinary losses of the fund.

Tax-Free Benefits for Employees

The range of tax-free benefits for employees is to be extended to include payments to social consultants to advise employees on personal or social matters. Employer payments to agencies to provide carers for children or infirm relatives will also be exempt. This also applies to payments for the carers themselves as a short-term measure necessitated by the job, limited to a total outlay of €600 per annum.

The cost of employee outings and functions will be taxable as a benefit in kind. The total cost of the event is to be divided by the number of participants and the cost per head will be taxable in the hands of each employee taking part, the taxable benefit being the total cost falling on the employee and his or her companions. However the benefit is tax-free if the function was open to all employees and the total cost did not exceed €150 for each employee participating. An employer may hold no more than two tax-free employee events each year.

Foreign Tax Credit

The maximum foreign tax credit is to be calculated at the average tax rate applied to the total income after deducting tax-free personal allowances and expense deductions to alleviate hardship. This follows an CJEU ruling (Case 168/11 Beker judgment of February 28, 2013). The change is to be applied to all open cases. A similar amendment has been made to the Corporation Tax Act; thus a company not paying corporation tax in the given year continues to lose its foreign tax credit.

The definition of related-party business transactions open to income adjustment under the Foreign Tax Act is to be redrafted to encompass all transactions that would have had tax consequences for either party, had the transaction been conducted between two unrelated domestic taxpayers. This closes a perceived loophole, rather than being a substantive change in current practice.


The finance ministry is to be given powers to extend the reverse charge on trade sales of specific goods to other goods not listed in the VAT Act if it becomes aware of fraudulent dealing in those goods. The extension requires the approval of the Bundesrat and may not take effect without European Commission approval. European Council (ECOFIN) approval must also be sought and the new reverse charge must cease if ECOFIN approval is not forthcoming within nine months.

Tighter Disclosure Rules for Tax Evaders

Originally, the law granted immunity from prosecution to tax evaders who came forward of their own volition regarding tax affairs, provided that they fully disclosed their misdeeds and paid the tax together with evasion interest of 6% (simple) p.a. These provisions stemmed from the days in which the German authorities had little hope of discovering evasion on deposits abroad, unless the miscreant attempted to repatriate the capital. However, with improved systems of both information exchange and detection, the situation has progressively improved from the point of view of the authorities, resulting in progressive tightening of disclosure rules. The federal finance ministry agreed in the spring with the provincial finance ministries to further tighten these rules and has now published draft legislation to put this agreement into effect. The salient points are:

• The statutory period for raising an assessment on previously unreported investment income from states without an automatic information exchange agreement with Germany is not to run until the end of the year in which the offense becomes known to the authorities or until 10 years following the year of its perpetration. This means that an evader with funds parked in an uncooperative tax haven must live for up to 20 years in uncertainty following the year of his last offense.

• The level of fraud below which immunity from prosecution is assured by full and complete voluntary disclosure by an evader of his wrongdoing is to be reduced from €50 to 25 thousand. On the other hand, an evader of sums higher than €25 thousand will not be prosecuted if he pays an additional penalty within the period set by the authorities for the payment of the tax at issue and the interest thereon. This penalty will be 10% of the tax evaded, up to €100,000. If the evasion amounted to more than €100, thousand, but not more than €1 million, the rate will be 15%. If more than €1 million is at stake, the penalty rate will be 20%. Evasion interest at 6% per annum will continue to apply.

• If an attempt to avoid a criminal prosecution is unsuccessful (this is not infrequently the case, usually as a result of shortcomings in the accuracy or completeness of the disclosure), the penalty payment will not be refunded. However, the courts are at liberty to credit the payment against a fine. It will be for the judiciary to interpret this provision when the time comes, although it presumably means that an offender will not be able to buy himself out of a prison sentence.

• The conditions for voluntary disclosure are to be further tightened, in particular to exclude unwarranted advantages for the offender, arising from an incomplete disclosure or from delaying disclosure until a tax audit has started and the direction of the auditor's investigations is clear to the offender.

The proposal is to take effect from January 1, 2015.

Andrew Miles Email: PwC, Germany 

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