Further tax amendment bills passed

In order to be able to implement various changes in tax law in time for the federal elections, these were included in two legislative processes already underway, which have now been completed.

Just in time for the parliamentary summer recess, the Bundestag and Bundesrat passed several tax amendment laws. The Second Bureaucracy Relief Act was already the subject of the last issue. This time, the focus is on the Tax Avoidance Prevention Act ("Gesetz zur Bekämpfung der Steuerumgehung und zur Änderung weiterer steuerlicher Vorschriften") and the License Barriers Act ("Gesetz gegen schädliche Steuerpraktiken im Zusammenhang mit Rechteüberlassungen").

Because of the upcoming federal election, there is no time left this year for another major tax amendment bill. The Bundestag will not hold another session before the election, and the inevitable post-election coalition negotiations mean that new major legislation cannot be initiated before late fall or winter. Therefore, many more short-term proposed or necessary changes have been included in the two laws beyond their original regulatory purpose, making the two laws together serve the function of an annual tax law.

In addition, the laws also contain some minor corrections to tax law resulting from rulings by the European Court of Justice. These are primarily changes to the inheritance tax allowances for persons with limited tax liability. We have summarized the main content of the two laws for you below. Excluded from this are the various measures to combat tax avoidance; these are the subject of a separate article.

• Low-value assets: One of the welcome changes is a significant simplification in asset accounting, as the value limit for immediate depreciation of low-value assets is almost doubled - from the previous 410 euros to 800 euros. An increase is long overdue, because the previous limit - apart from the conversion into euros - has been valid unchanged since 1965. The value limit for the creation of a collective item will also be raised. In future, anyone who makes use of the collective item rule will be able to immediately write off assets up to a value of 250 euros in full instead of 150 euros as before. The new value limits apply to all assets acquired, manufactured or brought into the company after December 31, 2017.

• Remediation gains: A restructuring gain resulting from the waiver of a creditor's claim is generally taxable. However, the tax burden would make it more difficult to restructure the company. Despite this, there has been no legal basis for tax relief on reorganization gains since 1997. Although the Federal Ministry of Finance regulated the waiver of tax on reorganization profits in an administrative instruction, the Federal Fiscal Court recently ruled this to be unconstitutional because only the legislature is authorized to regulate a tax exemption. Therefore, a legal regulation has now been created again for the tax exemption of reorganization profits, at least under certain conditions. One of the prerequisites is that the company must not only be in need of reorganization, but also capable of being reorganized. In addition, the creditors' intention to restructure and the suitability of the debt relief for restructuring must be proven. Debt relief in the context of insolvency proceedings is also tax-exempt, even if the requirements for corporate restructuring are not met. The new rule applies to full or partial debt relief after February 8, 2017, which is the date on which the Federal Fiscal Court's ruling was published.

• License Barrier: Before the License Barriers Act became an omnibus law for many other changes in tax law, it only included provisions on the tax deductibility of license expenses and other expenses for the transfer of rights. The aim is to prevent tax arrangements by multinational corporations that have so far largely avoided taxation of profits in Germany by making royalty payments to affiliated companies based in a low-tax country. As a result, from 2018 payments will only be deductible to a limited extent if the payment is not taxed at all or is taxed at a rate of less than 25 % at the recipient and the recipient has a close tax relationship with the paying company.

  

• Accumulation Benefit: Profits of sole proprietorships or partnerships are taxed at a lower rate on application if they are not withdrawn. However, a later withdrawal then leads to subsequent taxation. There are now two additions to this retention benefit. In the case of a gratuitous transfer of a business or co-entrepreneurial share to a corporation or other organization subject to corporate income tax, there is immediate subsequent taxation because the transfer leads to a change in the taxation rules. In order to mitigate the consequences for the company's liquidity, an interest-free deferral and distribution of the taxes thus triggered over a period of up to 10 years is possible upon request. The amendment applies to transfers after July 5, 2017. In addition, it has been clarified that in the event of a gratuitous transfer to another person, the legal successor must carry forward the annually determined amount subject to subsequent taxation and thus bear any subsequent subsequent taxation.

• Special business expense deduction: The deduction of special business expenses by partnerships for transactions with a foreign connection will be restricted by law from 2017. Expenses may now no longer be deducted as special business expenses if they have already reduced the tax base in another country. Although this was already regulated by law last year, it has now been clarified to avoid misunderstandings.

• INVEST Grant: The tax exemption for the INVEST grant for venture capital has been adapted to the new funding guidelines of the Ministry of Economics. As a result, the maximum grant amount of 100,000 euros, which has been doubled as of 2017, continues to be tax-free. The company whose shares are acquired may now only be a maximum of seven years old instead of ten. There is also a tax exemption for the new EXIT grant, which is intended to partially compensate for taxes on disposal proceeds.

• Tax bracket for spouses: Until now, the rule has been that an employee receives tax class III after marriage if the other spouse does not receive a salary. However, the tax class combination "III/-" has proven to be technically unfeasible for the tax authorities. The transitional arrangement set up specifically for this reason, under which newly married couples both receive tax class IV, would expire at the end of the year. Therefore, the unworkable regulation has now simply been permanently replaced by the previous practice. Married couples will thus in principle receive the tax class combination "IV/IV". The "III/V" combination, on the other hand, is now only available upon joint application by both spouses. In contrast, the change from the combination "III/V" to "IV/IV" is also possible from 2018 onwards at the request of only one spouse.

• Two-year factor procedure: In order to adapt the wage tax factor procedure in tax class IV to the two-year validity of allowances, an applied-for factor is also to be valid for up to two calendar years. The necessary change in the law already took place in 2015 with the First Bureaucracy Relief Act. However, the start of the two-year factor procedure was made dependent at the time on the completion of the necessary programming work in the tax administration. Because the end of this is now in sight, the two-year factor procedure is now to be launched with binding effect in 2019.

• Permanent payroll tax annual adjustment: The permanent annual wage tax equalization allows a short-term high wage to be spread over a longer period, resulting in a lower wage tax deduction. Until now, the permanent wage tax annual adjustment has only applied on the basis of an annually extended administrative regulation. Without this regulation, earnings from a temporary job that are taxable according to tax class VI would be extrapolated to the entire year, resulting in a correspondingly high tax burden. Compensation for the excess taxes withheld would only be possible with the tax return in the following year. The permanent annual wage tax equalization has now been enshrined in law and will apply in this form from 2018. The prerequisite is that the employee has unlimited tax liability, is only occasionally employed by the employer, has not had an allowance for tax class VI entered and the employment lasts a maximum of 24 consecutive working days. For the application of the permanent annual wage tax equalization, the written consent of the employee and an application to the company tax office are also required.

• Change of notice: With the modernization of the taxation procedure, the possibility was created to use the data reported by third parties to the tax administration as part of the tax return. Because taxpayers are informed about the data transmitted to the tax office anyway, they no longer have to transfer the data to the tax return if they believe the data to be correct. If it later turns out that the data is incorrect to the taxpayer's disadvantage, the tax assessment must be changed. However, this subsequent amendment is now partially restricted. Subsequently transmitted data do not lead to a subsequent amendment if they are based solely on a change in case law, legislation or administrative opinion that occurred after the tax assessment was issued.

• Back child support: In the future, there will be a six-month limit on the retroactive effect of a child benefit application in order to limit abusive applications. This change affects all applications filed as of 2018 and is not limited to cases where the child lives abroad. In addition, the law still contains the legal basis for the transmission of registration data by the Federal Central Tax Office to the family benefits offices if a child has moved abroad or has been officially deregistered by the registration office. This data transmission is scheduled to start on November 1, 2019.

  

• Tax rate: Last year, the legislator made a mistake when increasing the basic personal income tax allowance in 2018. According to the previous wording of the law, the tax relief would only have applied to 2018. The oversight has now been rectified and the changes will thus also apply to subsequent years.

• Settlement for waiver of inheritance: If potential heirs dispute the validity of a will or bequest, the dispute is sometimes settled by payment of a settlement. In return, the recipient of the settlement waives further assertion of his or her potential inheritance claim. The German Federal Fiscal Court had ruled that such settlement payments are deductible as an estate liability for inheritance tax purposes, but are not themselves subject to inheritance tax. The legislator has now closed this taxation loophole. As a result, severance payments continue to be deductible as an estate liability for the heir, but the recipient of the payment must then pay tax on them.

• Inheritance tax allowances: If the assets are located in Germany, but the donor/decedent and recipient/heir reside abroad, there was previously only an allowance of 2,000 euros - regardless of the degree of kinship. It is true that the recipient or heir could apply for taxation according to the general rules with correspondingly higher allowances of up to 500,000 euros, but in return the entire estate would then be subject to inheritance tax and not just the part located in Germany. However, this application option did not satisfy the European Court of Justice. Therefore, limited taxpayers now also receive the general allowances. However, these are reduced proportionately if not all of the inherited or received assets are taxed, but only the domestic assets contained therein.

• Utility allowance: The so-called "special pension allowance" for inheritance tax was previously only available to the surviving spouse or civil partner and children in the case of unlimited tax liability. Here, too, the European Court of Justice has raised objections, which is why all heirs are now entitled to the pension allowance, even if they have only limited tax liability. However, this is subject to the condition that the country of residence provides administrative assistance in determining the pension income there. This change applies retroactively in all cases that are not yet final.

• Investment Tax Reform: A year ago, a comprehensive reform of the taxation of investment funds was adopted, which will essentially come into force on January 1, 2018. However, it became apparent that there was still a need for improvements in various areas. For the transition to the new taxation, the law provides for a fictitious sale of units at the turn of the year. A correction in the determination of the gain from this fictitious sale is intended to ensure correct taxation of the income. A further amendment specifies the inflow date for income that arose before the new law came into force. This is intended to avoid the old law having to be applied in parallel with the new law for a longer period of time. Finally, there is an amendment to prevent tax avoidance via funds of special investment funds.