THE ANNUAL TAX ACT 2020
The Annual Tax Act 2020 was adopted on 16 December 2020 and introduces a number of amendments, which include, in particular, necessary adjustments to EU law and the case law of the European Court of Justice. Furthermore, the legislature is responding to (unwelcome) Federal Tax Court case law and implementing other supplementary measures to mitigate the COVID-19 pandemic.
I. Introduction
The so-called Annual Tax Act 2020 provides for a number of changes, especially in the Income Tax Act and the Value Added Tax Act. The aim is to implement adjustments to EU law and the case law of the European Court of Justice. In addition, the legislature is responding to Federal Tax Court case law and is creating other supplementary measures to deal with the COVID-19 pandemic.
We have summarized the most important tax law adjustments below:
II. Important changes in the Income Tax Act
1. Restructuring of investment deductions
Investment deductions under sec. 7g German Income Tax Act (Einkommensteuergesetz, EStG) will be increased from the current 40 percent to 50 percent due to the temporary special situation of the COVID-19 pandemic. In addition, there will be simplifications regarding the claiming of deductions: For example, (long-term) leased economic assets will also be tax-favored in the future, and the size criteria for defining the companies eligible under sec. 7g EStG have been standardized. It is now possible to claim investment deductions for profits of up to EUR 150,000.00, irrespective of the type of income generated. The new regulations will already apply from the 2020 assessment period. According to the explanatory memorandum, liquidity impulses can still be provided in this year.
2. “Clarification” regarding fringe benefits provided by employers
In three rulings from 2019 (rulings dated 1 August 2019, file no. V1 R 32/18, file no. VI R 21/17 and file no. VI R 40/17), the German Federal Fiscal Court (Bundesfinanzhof) had changed its case law on the factual requirement contained in various tax-privileged standards that a certain employer benefit must be provided in addition to the wages owed anyway. This resulted in the fact that, in the cases decided upon, circumstances involving salary waivers or salary conversions could also be exempted from tax or be subject to a lump-sum deduction. After the tax authorities had initially suspended the case law favorable to the taxpayer by non-application decree (Federal Ministry of Finance (BMF) dated 5 February 2020, Federal Tax Gazette (BStBl.), Federal Tax Gazette I, 222), the legislator has now taken action.
According to sec. 8 para. 4 EStG (new version), only genuine fringe benefits provided by the employer are to be tax-privileged. Such benefits exist if the employer’s benefits are not offset against the entitlement to wages, the entitlement to wages is not reduced in favor of the benefit, the benefit tied to a specific use or purpose is not granted in place of a future benefit already agreed upon, and the wages are not increased if the benefit is discontinued. The new regulation is to be applied to benefits granted after 31 December 2019.
3. Lowering the limits for discounted provision of living space
Pursuant to sec. 21 para. 2 sentence 1 EStG in its previously applicable version, the discounted rental is split into a paid and a non-paid part if the rent is less than 66 percent of the usual local rent. The consequence of this division is that only part of the expenses for the rental property may be taken into account as income-related expenses to reduce tax.
The limit is now lowered to 50 percent to take account of the fact that rents are rising in many places. Thus, landlords should not be forced to make rent adjustments in the interest of the continuation of their long-standing tenancies. It should be noted, however, that if the price range is between 50 and 66 percent of the local rent, a total surplus forecast of income generation has to be made. If this turns out to be positive then it would be possible to deduct the full amount of allowable expenses. The new regulation will come into force from the 2021 assessment period.
4. Restriction on the loss deduction regarding capital income
Up to now, sec. 32d para. 2 no. 1 letter b) EStG provides for an exclusion from the scope of application of the flat rate withholding tax (Abgeltungssteuer) for such investment income that is paid by a corporation or cooperative to a shareholder who holds at least 10 percent of shares. Furthermore, sec. 32d para. 2 sentence 2 EStG stipulates that in these cases, i.e. where the standard income tax rate is applied, the loss deduction restrictions of sec. 20 para. 6 EStG and the prohibition on the deduction of income-related expenses of sec. 20 para. 9 EStG do not apply.
The aforementioned regulation has now been supplemented. Accordingly, the exclusion from the scope of application of the final withholding tax and thus the unrestricted utilization of losses as well as the deduction of income-related expenses will only occur if the expenses corresponding to the income from capital are business expenses or income-related expenses for the debtor in connection with income that is subject to domestic taxation and is not subject to the prohibition of deduction of income-related expenses under sec. 20 para. 9 sentence 1 EStG. To give an example: Losses from the sale of shareholder loans of a shareholder with a stake of at least 10 percent, can no longer be offset against other income without restriction in the future. Instead, losses are only deductible within the limits of sec. 20 para. 6 sentence 6 EStG, i.e. in the maximum amount of EUR 10,000.00 per year.
The new regulation is generally applicable to income from capital generated after 31 December 2020. If the legal basis for the loan was established before 1 January 2021, losses can still be claimed at 100 percent until the end of 2023. In fact, application in these cases is not envisaged until the 2024 assessment period.
III. Changes in the area of Value Added Tax (VAT)
The second stage of the so-called VAT digital package was implemented in the Value Added Tax Act, which will create a great need for change in the area of e-commerce and online retailers. Furthermore, a number of changes were made based on the case law of the European Court of Justice and the German Federal Fiscal Court. This includes the following points in particular, which are important for all entrepreneurs:
1. Invoice adjustment not a retroactive effect
Pursuant to sec. 14 para. 4 sentence 4 German VAT Act (Umsatzsteuergesetz, UStG), it is clarified that the correction of an invoice for missing or incorrect information does not imply a retroactive effect within the meaning of the German Fiscal Code (Abgabenordnung, AO). There has been no explicit statutory regulation to this effect in the VAT Act. According to of the German Federal Fiscal Court, invoice adjustments could previously only have an effect for the future. However, following the decision of the European Court of Justice in the Senatex case (judgment of 15 September 2016, file no. C-518/14), the German Federal Fiscal Court ruled for the first time in its judgment of 20 October 2016 (file no. V R 26/15, Federal Tax Gazette (BStBl.) 2020 II, 593) that an invoice correction can have retroactive effect to the date of the original invoice.
Due to the legal “clarification”, the correction of an invoice for missing or incorrect information does not constitute an event with retroactive effect and sec. 233a para. 2a of the German General Fiscal Code (interest on late payments and refunds). Accordingly, the input tax deduction due to an invoice correction can only be taken into account in those tax assessments that can still be changed according to the general correction regulations, i.e. in particular if tax assessments are subject to review or in case of an opposition proceedings.
2. Cross-border price reductions within a supply chain
Tax authorities have so far been of the opinion that there is no reduction in the basis of assessment with an effect on VAT if, in the case of price reductions by a trader in a supply chain to a customer not directly downstream in this supply chain, the latter does not provide any services that are taxable in Germany (A 17.2 para. 1 sentence 5 no. 2 German VAT Application Decree (Umsatzsteuer-Anwendungserlass, UStAE)). This concerns cross-border cases in which a domestic supplier grants discounts to a foreign buyer in a supply chain. If the domestic discount provider were entitled to correct the VAT assessment basis, it would result in an input tax surplus. This is because the last domestic entrepreneur in the supply chain, who does not benefit economically from the price reduction, could claim the input tax deduction on the basis of the remuneration paid by him. There is no reduction in input tax for him and the foreign discount recipient does not have to arrange for a refund of the VAT either, since the service provided to him is tax-free.
In order to prevent the domestic discount provider from deviating from the administrative opinion, it is now incorporated into the VAT Act. Thus, the new sentence 6 in sec. 17 para. 1 sentence 10 UStG stipulates that in cases of price discounts and price reductions in service chains, a reduction in the VAT assessment basis is only permissible if the service purchase of the customer to whom the discount is provided is taxable in Germany.
IV. Changes in the Inheritance Tax Act
The amendments to the Inheritance Tax Act are mainly due to the elimination of disagreeable case law of the Federal Fiscal Court. For example, the provision of sec. 10 German Inheritance Tax Act (Erbschaftsteuergesetz, ErbStG), which regulates the scope of the taxable acquisition as well as the deduction of debts, is interfered with.
1. Tax liability of tax refund claims of the testator
According to the case law of the German Federal Fiscal Court (ruling of 16 January 2008, file no. II R 30/06, Federal Tax Gazette II, 626), tax refund claims relating to the year of death of the testator are not included in the taxable acquisition. This is because they do not arise until the end of the year of death and therefore after the time of acquisition. This was previously also explicitly regulated for acquisitions from 1 January 2009 via sec. 10 para. 1 sentence 3 ErbStG. However, after the Federal Fiscal Court (judgment of 4 July 2012, file no. II R 15/11, Federal Tax Gazette II, 790) subsequent tax payments for the year of death can be taken into account as estate liabilities irrespective of how they arose. This resulted in unequal treatment between tax refunds and subsequent tax payments.
This unequal treatment is resolved by the new wording of sec. 10 para. 1 sentence 3 ErbStG, which now stipulates that tax refunds of the decedent are to be taken into account when determining the enrichment of the acquirer even if they do not legally arise until after the death of the testator. This means that tax refunds and tax arrears of the year of death will be treated correspondingly in the future, in which they will be subject to taxation as a claim or deducted from the acquisition as a liability of the estate.
2. Reduction of the debt deduction
Pursuant to sec. 10 para. 6 ErbStG, debts and encumbrances that are economically related to tax-exempt assets are not deductible as estate liabilities when determining the acquirer’s enrichment. Up to now, the tax authorities have derived from this that claims to a compulsory portion, burdens from legacies and claims to equalization of gains under property law (if applicable, on a pro rata basis) cannot be taken into account in a tax-reducing manner if the estate consists (in whole or in part) of tax-exempt assets.
However, the Federal Fiscal Court countered this view in its decision of 22 July 2015 (file no. II R 12/14, Federal Tax Gazette 2006 II, 230). The court considered the economic connection required by sec. 10 para. 6 ErbStG to be given only if debts and encumbrances can be directly allocated to the assets belonging to the estate. This means that compulsory portion claims, legacies and claims for equalization of gains could be deducted in full as estate liabilities even if the estate consisted entirely of tax-privileged assets with the result that, on the one hand, the tax exemption of the assets was claimed and, on the other hand, the debts could be deducted in full.
The new version of sec. 10 para. 6 EStG enshrines the previous view of the tax authorities in law. A general prohibition of deductions now stipulates that debts and encumbrances that are not economically related to individual assets of the acquisition are to be attributed to all assets on a pro rata basis, so that a deduction as a liability of the estate can only be considered in the amount of the ratio of the taxable acquisition to the total estate.
V. Amendment to the Real Estate Transfer Tax Act
Reports on the planned real estate transfer tax reform were already published in 2018 and 2019 (newsletter 2018 | Q3 and 2019 | Q2). However, the bill has been delayed due to the COVID-19 pandemic. This was clearly criticized in the Federal Council’s statement on the Annual Tax Act 2020.
Even though the planned changes for so-called share deals are fortunately still awaited at present, the abolition of the limitation of the surcharge for late payment already announced in our 2019 | Q2 newsletter has now been implemented in sec. 19 para. 6 sentence 2 German Real Estate Transfer Tax Act (Grunderwerbsteuer, GrEStG). Accordingly, the maximum limit of EUR 25,000.00 for the late notification of a transaction subject to real estate transfer tax is no longer relevant for acquisitions taking place after the provision came into force. Furthermore, according to the first sentence of the provision, sec. 152 para. 6 AO does not apply to assessment cases (i.e. in particular acquisition transactions pursuant to sec. 1 para. 2a, 3 and 3a GrEStG). This provision stipulates that the surcharge for late payment in cases in which a separate determination must be made is only EUR 25.00 for each month or part thereof of the delay, irrespective of the subsequent tax assessment. In the past, this meant that the amount of EUR 25,000.00, which is now suspended for real estate transfer tax purposes, could only be reached after more than 83 years of delay.
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