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The 2020 Annual Tax Act – Important changes to German income tax law

In September, the lower house of the German parliament [Bundestag, BT] had already passed the Draft of the 2020 Annual Tax Act (BT printed matter 19/22850). Yet, even at the end of November, the Act was not able to pass through the upper house of the German parliament [Bundesrat, BR]. The subjects of contention are, in particular, the extension of the carry back rules for losses, inheritance tax issues as well as the revision of the laws that regulate non-profit organisations. In the sections below we present only the revisions to the income tax law that are almost certain to be adopted. We will then follow this up in the January issue of our newsletter with a discussion of the new rules relating to the other types of tax.

Investment allowances and special depreciation under Section 7g of the German Income Tax Act

Investment allowances [Investitionsabzugsbeträge, IAB] under Section 7g of the Income Tax Act [Einkommenssteuergesetz, EStG] grant liquidity relief by bringing forward the depreciation potential to a financial year prior to the acquisition of assets that are eligible for tax deductions. The aim of the extensive revamp of Section 7g EStG is “more carefully targeted” planning and an enhancement of the recognition of IAB as well as a legislative and administrative simplification.

(1) In the future, assets that have been rented out would be eligible for tax deductions in the year when the investment was made and in the subsequent year. This would apply regardless of the respective rental period and even if the taxpayer rents out the asset to another own business. If the rents were not consistent with the arm’s length principle then the offset would be carried out independently of Section 7g EStG via the existing regulations (e.g. deemed dividends).

(2) The share of investment costs that qualify for tax deductions under Section 7g EStG will be raised from 40% to 50%. The enhanced investment support would mean that the liquidity gain for eligible companies would be increased further and this would make the regulations more attractive.

(3) In future, for all types of income there will be a standard profit limit in the amount of € 150,000 as a condition for claiming IAB. The provision replaces the following criteria: € 235,000 (operating assets as recorded in the accounts), € 125,000 (economic asset in the case of land farmers and forest managers) and € 100,000 (profit from cash basis accounting systems).

(4) Up to now, it has been possible to apply for IAB even after a tax assessment has been issued, for example, in the course of an external tax audit. The aim is to prevent this, as the purpose of Section 7g EStG is to make future investments simpler and does not consist in providing tax deductions retrospectively for investments that have already been made and apparently adequately financed. In the future, retroactive recognition of IAB would be possible solely for investments in movable assets that had not yet been acquired at the time when the allowance was claimed.

Please note: Currently, these revisions would put a strain on businesses that are struggling with the economic consequences of the COVID-19 pandemic. Freeing up liquidity by means of retroactively claiming IAB would certainly be desirable, particularly in 2020 and 2021, when dealing with the economic consequences of the pandemic. The German Federal Chamber of Tax Consultants [Bundessteuerberaterkammer, BStBK] has therefore called for the postponement of the date of first application of the new regulations.

(5) An addendum to Section 7g(7) EStG clarifies that, by way of derogation from the case-law of the Federal Fiscal Court [Bundesfinanzhof, BFH], the adding back of IAB is only permitted within the asset sphere where deduction of the allowance was claimed. For example, if an IAB was claimed within the sphere of the special business assets held by a co-partner in a partnership then the investment allowance may likewise only be used for the investments made by that co-partner in his/her special business assets. This will ensure that the tax relief is granted solely to those who actually make the investments.

Please note: This planned new regulation is a response to the BFH ruling, from 15.11.2017 (German Federal Tax Gazette [Bundessteuerblatt, BStBl] 2019 II p. 466), according to which an investment that qualifies for a tax deduction within the meaning of Section 7g EStG would also be deemed to be such if the IAB had been deducted from profits generated by jointly owned assets but where, however, the subsequent investment was made in the special assets of one of the partners.

(6) Rented-out assets would be eligible not only for an IAB but likewise for special depreciation under Section 7g(5) EStG. The standard profit limit would also apply when claiming such special depreciation.

(7) The intention is for the increase in the IAB to 50%, the changes to the utilisation requirements as well as the standard profit limits to apply for the first time to IAB and special depreciation that are claimed for financial years ending after 31.12.2019. In the case of deviating financial years that ended before 17.7.2020 the old company size criteria could potentially be taken into account. This option can only be uniformly exercised for IAB and special deprecation.

(8) The restrictive regulations on the use of retroactively claimed allowances and in the area of partnerships would only be applied for IAB that are claimed in financial years ending after 31.12.2020.

Additionality requirement for benefits provided by employers

Section 8 EStG would include a legal definition of the conditions under which benefits provided by employers would be “in addition to remuneration due in any case”. The background to this is that a number of EStG rules related to tax concessions tie the respective tax relief to the precondition that a specific benefit provided by an employer is “in addition to remuneration due in any case”. The aim is to explicitly exclude tax concessions for situations that involve salary waiver or salary conversion.

The German government has thus responded to the current contradictory rulings by the BFH (from 1.8.2019, case references: VI R 32/18, VI R 21/17 and VI R 40/17). In future, only genuine additional benefits provided by employers may be tax-privileged. The benefits may not, among other things, count towards the entitlement to remuneration and this may not be reduced in favour of the benefit.

Expenses when renting out residential property below the commercial level

To avoid tax disadvantages for landlords who refrain from periodically increasing rents by the permitted amounts in the interest of continuing long-term rental relationships the aim is to provide greater leeway so that it will still be possible to deduct allowable expenses from rental income despite moderate rental arrangements.

When making housing available at a reduced price of less than 66% of the average market rent for the local area, the provision for use of the housing has to be divided up into remunerated and non-remunerated portions; it is only possible to deduct the allowable expenses, on a pro rata basis, from the remunerated portion. The draft law provides for the limit at which dividing up into portions is required to be reduced to 50% of the average market rent for the local area. At an agreed rent of at least 66% of the average market rent for the local area there will be no change in the assumption – for which no detailed documentation will be required – that there is an intention to generate income.

In the case of a remuneration of between 50% and 66% of the average market rent for the local area, in the future, a total surplus forecast check would have to be made. If the total surplus forecast turns out to be positive then it would be possible to deduct the full amount of allowable expenses for making the housing available at a reduced price. Otherwise, an intention to generate income should only be assumed for the remunerated portion with the consequence that allowable expenses may (only) be deducted on a pro rata basis.

Tax exemption for payments by employers to top-up the short-time working allowance

Section 3 no. 28a EStG, which was introduced via the Coronavirus Tax-Related Assistance Act of 19.6.2020 (BGBl 2020 I p.1385), in its latest version, provides for a limited and temporary tax exemption for payments by employers to top-up the short-time working allowance and the seasonal short-time allowance. The aim is to extend the time limit by one year. The tax exemption would thus apply to remuneration periods that begin after 29.2.2020 and end before 1.1.2022.

Automated exchange of data on premiums for private health insurance and for private mandatory long-term care insurance

Since 2009, payroll tax deductions for employees have been automatically regulated on the basis of payroll tax deduction criteria. These criteria include, e.g., income tax class or any child allowance. The 2020 Annual Tax Act will provide for the introduction of a further payroll tax criterion, namely, the amount of the monthly premiums for private health insurance and private long-term care insurance; this would apply to cases where there are tax free subsidies that have to be granted by the employer and such cases where the premiums are deductible as special expenses.

The aim of the provision is to reduce administrative red tape. It has been designed as a pilot process for the future exchange of comprehensive data between private health and long-term care insurance companies. Within the framework of this pilot project the aim is to test the process with selected insurance companies and employers using real data in order to obtain reliable results for subsequent normal operation. The application of this process would be mandatory from 1.1.2024.

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