I. The two Corona Tax Assistance Acts

The German government is trying to counter the economic effects of the COVID-19 pandemic with many tax measures. In addition to direct subsidies (government support programs), taxpayers affected by the corona crisis are also supported. This is done through the Acts on the “Implementation of Tax Assistance Measures to overcome the Corona Crisis”, also known as the First and Second Corona Tax Assistance Acts, which the Federal Council of Germany approved on 5 June 2020 (First Corona Tax Assistance Act) and 29 June 2020 (Second Corona Tax Assistance Act).

II. Expansion of loss utilization

In practice, the newly introduced loss utilization options are of particular importance, as they can de facto lead to a tax refund and boost taxpayers’ liquidity:

1. Maximum limits for loss carry-back

The maximum amount limits for loss carry-back (section 10d para. 1 German Income Tax Act (EStG)) will be raised from EUR 1 million to EUR 5 million for losses in the assessment periods 2020 and 2021 for individual assessments and from EUR 2 million to EUR 10 million for joint assessments – from the 2022 assessment period onwards, the previous values will apply again.

2. Adjustments to tax prepayments for 2019

For taxpayers whose tax prepayments for 2020 have been reduced to zero euros, there is the possibility, upon request, of retrospectively reducing the total amount of income used as a basis for the assessment of prepayments for the 2019 assessment period by a flat rate of 30% (new loss carry-back option). If the taxpayer can prove on the basis of detailed documentation that the loss is likely to be higher due to developments in the assessment year 2020, he can also claim a higher loss carry-back than the flat rate of 30% as a deduction from the total amount of income for 2019.
The tax prepayments for 2019 are then based on the reduced total amount of income. This leads to a tax refund. However, income from salaried employment (section 19 EStG) is not to be taken into account in the calculation.

3. Provisional loss carry-back

In addition to the above-mentioned possibility of subsequently reducing advance payments for 2019, the loss carry-back can also be taken into account (upon application) in the final tax assessment for the 2019 assessment period. In accordance with the scheme explained above, the flat-rate deduction of 30 % (or higher – verification required) is considered a so-called provisional loss carry-back for 2020. This will subsequently be deducted from the total amount of income in 2019. The restrictions explained above apply accordingly. As part of the assessment for 2020, the claimed provisional loss carry-back will be reviewed.

III. Changes to retrospective conversions

The German Transformation Act (UmwG) provides that transformation transactions, such as mergers, may only be registered by the register court if the closing balance sheet has been prepared for a cut-off date not more than eight months prior to registration (section 17 para. 2 UmwG). The purpose of this rule is to ensure that the conversion process is based on an up-to-date balance sheet.
Due to the restrictions on assembly possibilities because of the corona pandemic, it has become extremely difficult to meet the eight-month deadline. For this reason, the Act on the Mitigation of the Consequences of the COVID-19 Pandemic in civil, insolvency and criminal proceedings of 27 March 2020 (Federal Law Gazette I 2020, page 569) extended the deadline to twelve months. This means that mergers and de-mergers can still be filed with the commercial register on 31 December 2020 with retroactive effect from 1 January 2020. This amendment is initially limited to the year 2020, although an extension to the end of 2021 is possible by statutory order.
As a rule, conversions only become effective with a (constitutive) entry in the commercial register (section 20 para. 1 no. 1 UmwG). Upon registration, the acquiring legal entity becomes the owner under civil law of the acquired assets. For the sake of simplification, section 2 German Reorganization Tax Act (UmwStG) allows the transfer of assets to be retroactively related for tax purposes to a balance sheet date to which the results of the transferring entity are already determined anyway, thus simplifying the determination and accrual of the results of the legal entities involved in the conversion. Without the provisions of section 2 UmwStG, the income of the transferring legal entity would have to be determined and taxed until registration of the conversion with the latter. Section 2 UmwStG regulates by reference to the cut-off date of the final balance sheet under commercial law according to section 17 para. 2 UmwG, on which effective date the income and assets of the transferring corporation and the receiving legal entity are to be determined. The now legally extended deadline in section 17 UmwG therefore also applies “automatically” for tax purposes, namely in the case of mergers and in the case of splits and spin-offs of corporations into corporations or partnerships.
However, to the extent that the UmwStG contains independent effective date provisions (due to the lack of provisions in the UmwG), i.e. concerning change of legal form into a partnership (section 9 UmwStG) as well as the transfer of parts of a company into a corporation or cooperative and change of legal form into a corporation (section 20 para. 6 UmwStG), the eight-month periods of the UmwStG were also extended to twelve months by the First Corona Tax Assistance Act. In accordance with the amendment of section 17 UmwG, this change of law is only temporarily applicable to register applications for contribution agreements which are made in the current calendar year 2020. However, the amending law also includes the possibility of extending the period of application to the year 2021.
From a practical point of view, the amendments to the UmwG and UmwStG are to be welcomed, as the extended possibilities for retroactive application provide additional preparation time for upcoming restructuring processes.

IV. International Tax Law

With regard to the notification requirements for cross-border tax structuring as required by EU law and implemented in national law (sections 138d to 183k German Fiscal Code (AO)) (Act on the Introduction of an Obligation to Notify Cross-Border Tax Structures (Gesetz zur Einführung einer Pflicht zur Mitteilung grenzüberschreitender Steuergestaltungen), dated 21 December 2019, Federal Law Gazette I 2019, page 2875, cf. our honert newsletter article of 21 September 2018), it is intended to postpone the deadline.
The EU Commission has published a proposal for a directive (COM (2020) 197 final) and proposed postponing the start of the obligation to report cross-border tax arrangements from 1 July 2020 to 1 October 2020. Furthermore, according to the proposal of the EU Commission, a notification by 30 November 2020 (instead of by 31 August 2020) should be sufficient for cross-border tax structures whose first steps were already implemented after 24 June 2018 and before 1 July 2020.
The First Corona Tax Assistance Act now empowers the Federal Ministry of Finance (BMF) to lay down deviating provisions and extending the deadlines in compliance with EU law (Section 33 (5) Introductory Act to the Fiscal Code (EGAO)). The BMF is expected to make use of this authorization in the near future. In one of the next honert newsletters, we will inform you in detail about the obligations to report and the deadlines to be met.

V. Further tax support measures

The following further support measures are planned:

• Already in the First Corona Tax Assistance Act, the value-added tax (VAT) rates for restaurant and catering services (excluded beverages) provided after 30 June 2020 and before 1 July 2021, were reduced from 19 % to 7 %. Now (cf. the draft of an accompanying BMF letter of 23 June 2020), domestic consumption will be additionally strengthened by a temporary reduction in VAT by generally reducing the general VAT rate from 19 % to 16 % and the reduced rate from 7 % to 5 % for goods and services in the period from 1 July 2020 to 31 December 2020 (sections 12 para. 1 and 2, 28 para. 1 and 2 UStG).
• For moveable assets acquired or manufactured in 2020 and 2021, instead of straight-line depreciation (equal annual amounts) a declining balance method of depreciation (declining annual amounts) up to 25 % of the respective book value may be used, but not exceeding 2.5 times the straight-line depreciation.
• In the case of trade tax, the tax additions according to section 8 no. 1 German Trade Tax Act (GewStG) (concerns, among other things, payments for debts, rent and lease payments) is increased to EUR 200,000.
• For individuals with income from business operations, the factor for tax reduction under section 35 EStG is raised from 3.8 to 4.0.
• The deadlines for the use of investment deductions claimed in 2017 (decisive: end of the fiscal year) in accordance with section 7b EStG are extended by one year.
• The reinvestment period under section 6b EStG is temporarily extended by one year if the reserve would have to be released in a financial year ending after 28 February 2020 and before 1 January 2021.