Annual Tax Act 2018 gets new name

The Annual Tax Act 2018 provides for changes in sales tax, tax benefits for electric company cars and a new regulation of loss deduction for corporations.

On August 1, 2018, the German government passed the draft of a tax amendment law, which until then was still conceived as the "Annual Tax Act 2018". The intention remains, as another major tax amendment law is hardly to be expected before the end of the year, but the law has been given a new name in its current version and is now called the "Act to Prevent Sales Tax Losses on Trade in Goods on the Internet and to Amend Other Tax Regulations".

Compared with the first draft of the Act, the government bill primarily adds tax benefits for electric company cars. In addition, the law contains changes to VAT for online retailers and a constitutionally compliant regulation of loss deduction following the sale of shares in corporations. The changes to VAT law are the first measures from the package to reform the EU VAT system agreed by EU economics and finance ministers at the end of 2017. All important changes are summarized here.

• Electric company car: In the coalition agreement, the grand coalition had committed to a tax concession for company cars with electric drives. This change was missing from the first draft of the 2018 Annual Tax Act and has now been added. The plan is to halve the assessment basis for the flat-rate determination of the imputed income from the use of a company car. Instead of 1 % of the list price, only 0.5 % of the list price will therefore be taxable each month for private use for electric and hybrid vehicles purchased or leased between January 1, 2019 and December 31, 2021. Accordingly, for journeys between home and work, only 0.015 % per month and distance kilometer will be due instead of 0.03 %.

  

  The preferential treatment is not only financially attractive, but can also make the keeping of logbooks obsolete for electric company cars, because the lump-sum taxation is more favorable. With a logbook, cars with electric drives are also favored, but only as far as depreciation on the purchase price or leasing costs are concerned, not for other expenses for the vehicle. The ecologically oriented Verkehrsclub Deutschland would also like to see the halving of the imputed income also apply to company bicycles, but this has not yet been planned. For company cars that are purchased or leased outside the tax-privileged period, the existing disadvantage compensation for the battery system's share of the purchase price will continue to apply.

• Vouchers: The EU Voucher Directive must be transposed into German law by the end of 2018. This is intended to ensure uniform VAT treatment of vouchers in the European single market. In the case of vouchers, a distinction has so far been made between vouchers of value and goods or non-cash vouchers. Whereas vouchers of value can be exchanged for any goods or services, goods and non-cash vouchers relate to a specific good or service. The issuance of a voucher was previously treated merely as an exchange of means of payment and was therefore not itself a service in the VAT sense. Sales tax only arose when the voucher was redeemed. In the case of goods or non-cash vouchers, on the other hand, the service designated in the voucher is deemed to have already been rendered when the voucher is issued. Therefore, the amount paid upon purchase of a goods voucher is a down payment subject to VAT. As of 2019, a distinction will instead be made between single-purpose vouchers and multi-purpose vouchers. In the case of a single-purpose voucher, all the information needed to determine with certainty the VAT treatment of the sales is already available when it is issued. Accordingly, such vouchers are taxed as soon as they are issued. All other vouchers are multi-purpose vouchers, where only the redemption is subject to VAT. The regulation expressly does not apply to coupons that only entitle the holder to a discount.

• Electronic marketplaces: In the future, operators of electronic marketplaces will be required to record certain data on sellers to enable the tax office to audit sales. Companies from non-EU countries in particular often violate their tax obligations on online marketplaces and do not pay sales tax on their sales. The data that operators must record includes the name, full address and tax number of the seller, shipping and delivery address, and the time and amount of the turnover. The record-keeping requirement will apply to non-EU vendors starting March 1, 2019, and to all other vendors starting Oct. 1, 2019. In addition, operators can be held liable for unpaid VAT from trading via their platform. The operator can exempt itself from liability if it fulfills the record-keeping requirements, submits a certificate of tax registration of the trader or excludes tax-dishonest traders from the trading platform.

  

• Electronic services: Since 2015, services provided electronically to non-entrepreneurs must be taxed by the provider where the service recipient is located. For start-ups and small businesses, this means a considerable amount of bureaucracy. This is now changing, as from 2019 this obligation will no longer apply if the net turnover from such services to foreign service recipients did not exceed 10,000 euros in the previous calendar year and will not exceed this amount in the current calendar year. Small businesses with their sole place of business in Germany will therefore once again be able to pay tax on all services provided in Germany, regardless of whether the service recipient is also domiciled in Germany or not. It is possible to waive this sales threshold, but the waiver binds the company for at least two calendar years.

• Investment Tax Reform: The Act contains several consequential amendments to the investment tax reform, which came into force on January 1, 2018. In particular, this is intended to avoid results that are contrary to the system in the case of a tax group. This is because the reform provides for an exemption for the taxation of income from fund units held as business assets depending on the legal form. Since, in the case of a fiscal unity for income tax purposes, natural persons as well as corporations can be the taxable entity, from 2019 the fund income will not be taken into account at the level of the taxable entity, but only at the level of the taxable entity.

• Company pensions: The Company Pension Strengthening Act (Betriebsrentenstärkungsgesetz) made it possible to transfer entitlements from a company pension plan to another provider tax-free from 2018. This change will now be supplemented retroactively from 2018 by a provision stipulating that such a transfer does not constitute a harmful use. Without this addition, the subsidy granted up to that point would otherwise have to be repaid in the event of a transfer.

• Loss deduction: To counteract the corporate tax reform, the deduction of losses after the sale of shares in a corporation was restricted in 2008: If more than 25 % of the shares in a corporation are transferred within five years, the losses accumulated up to that point can no longer be used for tax purposes on a pro rata basis. If more than 50 % of the shares are transferred, the losses are even lost completely. The German Federal Constitutional Court has classified this regulation in part as unconstitutional and ordered the legislature to create a constitutionally compliant regulation by the end of 2018, with retroactive effect from 2008. This will now be implemented by repealing without replacement the rule on the pro rata elimination of the loss deduction in all open cases in which between 25 % and 50 % of the shares were transferred, for share transfers prior to 2016. The amendment to the law on the continuation-linked loss deduction, which has been in force since 2016, eliminates the main points of criticism by the Constitutional Court, so that the regulation will probably no longer be legally contestable from then on. However, the Federal Constitutional Court still has to rule on the second part of the regulation for cases prior to 2016, which provides for a complete loss deduction for transfers of more than 50 %. The chances are not bad that the Constitutional Court will also demand improvements from the legislator here.

• Remediation Clause: The restructuring clause was created as an addendum to the now partially deleted elimination of the loss deduction after a share transfer and was intended to exclude the negative tax consequences of a share transfer in restructuring cases. However, the EU Commission considered the restructuring clause to be inadmissible aid, which is why the restructuring clause was suspended by the legislator. In addition, the tax authorities had to reclaim tax benefits already granted. After years of dispute, the European Court of Justice has now declared the EU Commission's decision null and void because the restructuring clause is not selective in nature and therefore does not constitute illegal aid. As a result of this ruling, the suspension of the restructuring clause will now be lifted again retroactively from 2008 in cases that are still open.

• Pension expenses: Until now, pension expenses may not be deducted as special expenses if they are directly related to tax-exempt income. However, the European Court of Justice has ruled that this rule is in part contrary to European Union law. As a result, pension expenses are now to be tax-deductible even if they are directly related to salary received in an EU or EEA state, this salary is tax-exempt in Germany under a double taxation agreement, and the state of employment does not permit any tax consideration of pension expenses in the context of taxation of this income. Last December, the Federal Ministry of Finance had already ordered a comparable ruling in all cases that were still open, and this amendment now enshrines it in law.

• Child allowance: From 2020, when applying for the child allowance for the Riester pension, it will be mandatory to provide the child's tax ID number in addition to the parents' tax ID numbers. This is intended to simplify data reconciliation between the central allowance office and the family benefits offices.