Customs Code Amendment Act: Bundesrat demands numerous changes both positive and negative for companies

The legislative procedure regarding the Customs Code Amendment Act (Zollkodexanpassungsgesetz – ZollkodexAnpG), in which further changes to tax laws are being carried out in the form of a “disguised” annual tax act (see article of 30.09.2014 on the individual changes), is entering its decisive phase. The process is to be completed before the end of the year.

In its statement issued on 07.11.2014, the Bundesrat (upper house of the German parliament) is now proposing additional changes which may have both a positive and a negative impact on companies. It remains to be seen whether the federal government will support the proposals of the Bundesrat. Its reaction is expected on 12.11.2014.

The following proposals are particularly interesting for companies:

“Double non-taxation” and “double dip” structures: prevention of such arrangements
The Bundesrat intends to eradicate the basis for hybrid financing structures which are aimed at achieving double non-taxation or the double deduction of operating expenses (“double dips”). This is to be achieved by expanding the correspondence principle. In future, operating expenses in Germany will only remain tax-deductible provided they do not generate income for the recipient or are subject to a tax exemption.
In addition, operating expenses are to be tax-deductible only if they do not reduce the tax assessment basis in another country. This is particularly levelled at structures used by partnerships with foreign members aimed at double interest deduction in Germany (as special operating expenses) and abroad.

Portfolio investments: tax liability of capital gains in Sec. 8b of the Corporate Income Tax Act
The proposal to make capital gains from portfolio investments liable to tax can have a major impact on companies. To date, only the dividends from portfolio nvestments have been subject to tax, whilst corresponding capital gains have been tax-exempt in accordance with Sec. 8b(2) of the Corporation Tax Act (Körperschaftssteuergesetz – KStG). This could make prompt arrangements necessary to enable at least precautions to be taken for the tax exemption of holding gains that have arisen to date.

Financial accounting: increased number of exceptions for immediate deduction of hidden liabilities
Positive for companies, on the other hand, is the Bundesrat’s proposal for the tax recognition of hidden liabilities. To date, these could only be set off against tax immediately in certain exceptional cases (e.g. during the sale of an entire business enterprise) and only in the event of debt assumption. In future, immediate deduction in the exceptional cases is also to be triggered if the assumption of joint liability for a debt or the obligation to perform has been agreed for which currently only tax recognition spread over a 15-year period is essentially possible (Sec. 4f Income Tax Act (Einkommenssteuergesetz – EstG )).

Contributions: restriction of counter-performance to 10% of share value
The Bundesrat provides for restrictions with respect to contributions made to corporations and partnerships in Sections 20, 21 and 24 of the Transformation Tax Act (Umwandlungssteuergesetz – UmwStG). In future, these are only to be tax-exempt on the basis of the book value if other counter-performance (e.g. loans) granted in addition to the new company or partnership shares does not exceed a maximum of 10% of the book value of the contributed business assets.

Loss limitation rule pursuant to Sec. 8c Corporate Income Tax Act: Wider group exemption clause
Relief is intended with respect to the group exemption clause to preserve losses in the event of a detrimental change of ownership pursuant to Sec. 8c of the Corporate Income Tax Act (Körperschaftssteuergesetz – KStG). This rule is also to apply if the parent company is to be classified as the transferring or assuming entity and the parent company is a one-man business or a commercial partnership. Even under the Federal Ministry of Finance’s draft of Sec. 8c of the Corporate Income Tax Act, the group exemption clause would, to date, not have been applicable in these cases.

Partial income tax exemption rule: restriction of option possibility for shareholders
The Bundesrat also wants to restrict the application of the partial income tax exemption rule instead of the withholding tax rate for shareholders who only hold 1% in a company. Where previously a simple professional activity was sufficient to exercise an option, it has to be ensured in future that the professional activity exerts a decisive entrepreneurial influence on the business activities of the corporation.

Real Property Transfer Tax Law: change in members of partnerships that hold real property
Another change concerns German partnerships that hold real property if at least 95% of the shares in the partnership’s assets are directly or indirectly transferred to new members within five years (Sec. 1 (2a) Real Property Transfer Tax Act (Grunderwerbssteuergesetz – GrEStG). This specifically concerns the reinstatement of the administrative practice rejected by the Federal Fiscal Court (Bundesfinanzhof – BFH), according to which the partnerships and corporations involved were treated differently for the calculation of the 95% threshold.