In focus – Two especially important profit tax changes that ensue from the 2019 Annual Tax Act
Tainting in the case of partnership companies
An asset managing partnership generally generates no commercial income, i.e. the appreciation in the value of its assets is not generally taxable and the income is not subject to trade tax. However, this changes when a partnership takes up a commercial activity in addition to asset management, or if the partnership takes a stake in another partnership that is engaged in a business activity. Usually, this results in the original activity becoming ‘infected’ and, consequently, all the income has to be classified as being commercial (so-called ‘tainting’ pursuant to Section 15(3) no. 1 of the Income Tax Act (Einkommenssteuergesetz, EStG-E)).
However, the Federal Fiscal Court (Bundesfinanzhof, BFH), in its ruling from 12.4.2018 (case reference: IV R 5/15), rejected this tainting effect if the income that could, in principle, trigger tainting is negative. In the case in question, a loss was generated from a provision for use in the context of a corporate demerger. According to the BFH, in the reasons given for its ruling, in such cases the reclassification of income would not be justified because there is no threat to trade tax revenue.
The legislature provided a response to this ruling as part of the 2019 Annual Tax Act and extended the statutory provisions on tainting such that, in future, it will not be of any relevance for the tainting effect if a loss is generated from the commercial activity that has been additionally taken on, or if negative income has been generated from a business holding (Section 15(3) no. 1 clause 2 EStG-E). These new rules should be applied from the 2019 assessment period already.
Please note: It remains to be seen, however, to what extent these new legal rules will relate to case law according to which, for reasons of proportionality, other income should not become tainted where there is a particularly minimal level of commercial activity.
Loan losses as subsequent acquisition costs when shareholdings in corporations are sold pursuant to Section 17 EStG
BFH case law (ruling from 11.7.2017, case reference: IX R 36/15) was the reason for abandoning the taking into account of losses arising from shareholder loans as subsequent acquisition costs for a shareholding pursuant to Section 17 EStG. The background here was the abolition of the Equity Substitution Law through the Act for the Modernisation of Limited Liability Company Law (Gesetz zur Modernisierung des GmbH-Rechts, MoMiG), which came into force already on 1.11.2008.
For reasons of legitimate expectations, it was possible to still apply the previous guidelines (in accordance with the Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) circular from 21.10.2010) if the financial assistance had been granted before 27.9.2017, or had become equity-substituting by this date.
The uncertainties that have existed since then – in particular, the question of whether or not the default of a shareholder loan that had been granted or, possibly, losses in the case of income from capital assets can be taken into account (according to the BFH in its ruling from 24.10.2017, case reference: VIII R 13/15) – will now be eliminated via the new rules that have been included in the 2019 Annual Tax Act. Accordingly, a new paragraph 2a will be added to Section 17 EStG. This paragraph essentially incorporates the contents of the previous relevant BMF circular from 21.10.2010.
Under the new legal provisions, the acquisition costs of a material interest in a corporation (size of shareholding ≥ 1%) that is held in private assets will also include loan losses if company law determined the reason for granting a loan or upholding a loan in a corporate crisis. A reason under company law would usually be deemed to exist if, under the same circumstances, an outside third party would have demanded repayment of the loan or would not have granted it.
Please note: According to the current status of the draft law, this amendment would apply to disposals of shares that took place already after 31.7.2019.