I. Reform affects several Tax Acts

As the name of the Annual Tax Act 2019 [Jahressteuergesetz – JStG 2019] indicates (“Tax Act on the continued Tax Promotion of Electromobility and the Amendment of further Tax Regulations” [Gesetz zur weiteren steuerlichen Förderung der Elektromobilität und zur Änderung weiterer steuerlicher Vorschriften]”), especially legal regulations to protect the environment and climate were implemented in the Income Tax Act. In addition, the JStG 2019 also contains some important tax law amendments, which are presented below – subdivided according to the tax acts concerned – in an overview and without any claim to completeness. The much discussed reform measures of the Real Estate Transfer Tax Act (cf. h+p newsletter article of June 2019) have again been postponed and are not part of the JStG 2019.

II. Amendments in the field of income tax

In addition to the measures to promote environmentally friendly mobility (including special depreciation for electric vehicles, options for tax exemption and flat-rate taxation of company bicycles), a legislative amendment has been made in connection with shares in corporations held as private assets. In the case of investments with a shareholding of at least 1 percent, after section 17 Income Tax Act [Einkommensteuergesetz – EStG] the sales profit earned is deemed to be commercial revenue and is subject to the so-called partial income procedure [Teilkünfteverfahren], see section 3 no. 40 EStG. To determine the taxable sales profit, the sales price achieved must be reduced by the sales costs and the acquisition costs. So far, however, there has been no legal definition of acquisition costs.
The newly introduced section 17 para. 2a EStG now defines a taxable acquisition cost concept and in particular specifies how subsequent acquisition costs are to be dealt with. Deviating from previous case law and the previous legal situation, it is clarified that, with regard to any subsequent acquisition costs, the former special tax treatment of small investors (participation rate between 1 percent and 9.99 percent) is irrelevant. This means that even shareholders with an interest of less than 10 percent can take subsequent acquisition costs into account when determining sales profits according to section 17 EStG. In addition, the legislator reacted to new jurisdiction of the Federal Court of Finance [Bundesfinanzhof – BFH] regarding subsequent acquisition costs in the event of default on shareholder loans and the utilization of guarantees.
In accordance with section 17 para. 2a EStG, the subsequent acquisition costs include in particular disclosed/concealed deposits, loan losses and defaults on guarantee recourse claims and comparable claims, provided that a so-called company law inducement existed in each case. The reason under company law is that a third party would not have granted the loan or claimed back the security. This means that when determining the taxable capital gain, losses from shareholder loans (crisis loans) can largely be claimed for tax purposes as under the previous principles before the introduction of the German Act to Modernise the Law Governing Private Limited Companies and to Combat Abuses (MoMiG), and for the first time for disposals after 31 July 2019. For periods prior to this, it is possible to submit a corresponding application.
A further amendment to the income tax law was made with regard to the so-called “Abfärbefiktion” (notion of severance pay) in accordance with section 15 para. 3 no. 1 EStG, on the basis of which, for example, a partnership as a whole generates commercial income if it at least partially pursues a commercial activity. Accordingly, the entire income is liable to tax as income from commercial operations regardless of whether a profit or loss is made or whether the commercial income is positive or negative. This is the legislator’s reaction to the ruling of the BFH (cf. ruling of 12 April 2018 – IV R 5/15, BFH/NV 2018, 881) in which the BFH had denied that there was any income from commercial operations in the event of losses. Partnerships engaged in agriculture and forestry, freelance work or asset management are therefore always regarded as commercial enterprises even if they only generate negative commercial income. According to the legislator’s intention, it should be prevented that in case of fluctuating financial results from the commercial activity, a constant change between commercial and asset management occurs. The de minimis limits for commercial infection developed by case law and applied by the tax authorities, according to which commercial net sales revenues may not exceed 3 percent of total net sales revenues and the amount of EUR 24,500 in the assessment period, remain in force. Due to its clarifying character, the adjustment also affects assessment periods prior to 2019.

III. Regulations on the deduction of wage tax in the case of international employee postings

The JStG 2019 will also result in changes to the deduction of wage tax, which domestic employers are obliged to pay under section 38 EStG. With regard to international employee postings, since 1 January 2020 it must be noted that the company resident in Germany is considered a domestic employer within the meaning of this provision if it is economically responsible for the wages for the work performed or should have been responsible for them under the arm’s length principle (section 38 para. 1 sentence 2 first half sentence, EStG). The latter addition is important to the extent that up to now there has been an obligation to deduct wage tax when the receiving company has “actually borne the wage costs economically”. The criterion of economic liability was fulfilled in particular in the case of an intra-group financial compensation claim for the employee posting. It could therefore be observed in practice that the wage tax deduction obligation was met by waiving this compensation claim. It must now also be examined, with recourse to the arm’s length principle, whether third parties would normally have agreed remuneration for the posting of employees.
This amendment to the law should definitely be taken into account in the case of international employee postings, as there is a risk of liability consequences if the national wage tax deduction obligations are disregarded.

IV. Changes to the Trade Tax Act

In addition to amendments to the addition regulations (concerns the rental and leasing expenses to be added for electric or hybrid electric vehicles and electric bicycles), the amendment to section 9 Trade Tax Act [Gewerbesteuergesetz – GewStG] must be mentioned in particular. This regulation provides for a reduction for certain components of the profit subject to trade tax. For example, profits from shares of foreign corporations must be deducted. The prerequisites for this were defused by the JStG 2019 in view of a ruling of the ECJ (case EV, ruling of 20 September 2018 – C-685/16, NZG 2018, 631), by, inter alia, deleting the so-called activity clause. Since 1 January 2020, the reduction provision in section 9 no. 7 GewStG only requires that the participation in the foreign corporation must amount to at least 15 percent of the nominal capital at the beginning of the assessment period.
At the same time, the previous special regulation for EU companies (section 9 no. 7 sentence 1 last half of the sentence GewStG old version) was abolished. As a result, these amendments mean that the trade tax reduction of dividends from a foreign company can now be claimed for dividends from a foreign company with a shareholding of at least 15 percent, regardless of whether the foreign company is domiciled in another EU country or a third country.

V. Amendments to Value Added Tax (definition of chain transactions)

On 4 December 2018, the EU Council for Economic and Financial Affairs (ECOFIN) formally adopted so-called Quick Fixes. The background is the simplification and reduction of the susceptibility to fraud of the current system. These Quick Fixes were implemented in German law as part of the JStG 2019. By introducing section 3 para. 6a Value Added Tax Act [Umsatzsteuergesetz – UStG] Act, the UStG now contains regulations on the prerequisites and proofs for intra-EU deliveries and on the allocation of goods movements in the case of chain transactions. Furthermore, a simplified rule for consignment stocks was introduced as part of section 6b UStG.
Section 3 para. 6a UStG deals in particular with cases where a so-called intermediary, i.e. neither the first entrepreneur nor the last customer of the chain transaction, is responsible for the transport. The legislative amendments affect all entrepreneurs who export goods to other EU Member States or purchase goods from other EU Member States. These regulations have been in force since 1 January 2020.
The new EU-wide simplified regulation provides that instead of an upstream shipment, a direct delivery to the buyer is accepted when the warehouse is stocked, provided that the relevant conditions are met. Consequently, an intra-Community supply only takes place at the time when the customer collects the goods. The acquirer makes a corresponding intra-EU acquisition in the country of destination in accordance with section 6b para. 2 no. 2 UStG. In this way, the foreign supplier is not required to register in the country of destination. However, if one of the conditions is no longer met, for example because the goods are not supplied within twelve months or are lost, this constitutes an intra-Community transfer at that point in time, with the result that the foreign supplier must nevertheless register in the country of destination.