Modernization of corporate income tax in progress

In addition to a corporate income tax option for partnerships, the corporate income tax framework for corporate groups and international companies will be improved.

100 years ago, a uniform corporate income tax was introduced in Germany for the first time. Since then, corporate tax law has undergone several systematic and tariff changes, and now the time has come once again: The Bundestag has debated and passed the German government's draft law on the modernization of corporate tax law (KöMoG). The law is to be finally passed before the Bundestag election so that the regulations can come into force on January 1, 2022.

With this bill, the coalition aims to improve the tax framework for medium-sized partnerships and family businesses and to internationalize corporate tax law. The core of the bill is the introduction of a corporate income tax option that allows partnerships and partnership companies to be taxed like a corporation. Here is an overview of the main changes envisaged so far:

• Corporate tax option: From 2022, certain companies will have the option of being taxed like a corporation. The option is open to all commercial partnerships (OHG, KG, GmbH & Co. KG) and partnership companies, but not to sole proprietorships or a GbR. The application required to exercise the option must be made before the beginning of the fiscal year from which taxation under the Corporate Income Tax Act is to take place and is then irrevocable for that fiscal year. A later return to income tax is possible in the same way or is compulsory if the conditions for the option cease to apply (e.g. withdrawal of partners).

  For tax purposes, the exercise of the option is deemed to be a conversion into a corporation, thus triggering the corresponding conversion tax consequences, even if no actual change of legal form takes place. The tax treatment of remuneration paid to shareholders also changes. For example, remuneration for activities paid to a shareholder becomes wages, which are subject to wage tax deduction.

  

• Organizations: In the case of a consolidated tax group, the adjustment items for excess and short transfers are replaced by a simpler system (so-called contribution solution), in which short transfers lead to a contribution by the tax group parent and excess transfers lead to a return of contributions.

• Conversions: With the extension of the personal scope of application, the transformation tax law is further globalized. In the future, in addition to mergers, demergers and changes of legal form of corporations related to third countries will also be possible in a tax-neutral manner in order to carry out operationally sensible restructuring measures in a tax-neutral manner.

• Exchange rate fluctuations: Exchange rate losses on shareholder loans are excluded from the prohibition on deducting exchange rate losses. As a result, gains and losses from exchange rate fluctuations will have the same effect on the determination of taxable income in the future.