Federal States update guidance on add-back rules for trade tax purposes

The tax authorities of the Federal States have published updated coordinated guidance regarding the add-back rules for trade tax purposes.

Taxable income for trade tax purposes is determined based on the taxable income for (corporate) income tax purposes with certain adjustments. One of the major adjustments is the add-back of a portion of the interest element of certain payments, so that these payments are not fully deductible for trade tax purposes (even though they are deductible for corporate income tax purposes). The following must be added back:

• 25 % of interest expense (not caught by the interest deduction limitation rules); 
• 12.5 % of rent and lease payments for immovable property; 
• 5 % of rent and lease payments on movable assets; and 
• 6.25 % of payments for license fees and royalties (except flow-through royalty payments).

The updated guidance clarifies some open questions regarding these add-back items:

Pass-through loans: The guidance confirms previous practice, according to which the 25 % add-back of interest expense applies to interest on loans routed through a taxpayer, e.g. in back-to-back loans. For example, where a taxpayer is financed with a 5 % interest-bearing loan and uses the proceeds to fund its subsidiaries and receives 6 % on the on-loaned funds, the income and expense related to the loan may not be netted before the add-back is applied, i.e. 25 % of the interest incurred on the loan taken out at 5 % must be added back to the trade tax base. It is irrelevant whether the net interest result is negative or positive.

Interest on (late payment of) taxes: Late payment interest levied in respect of tax liabilities falls within the scope of the add-back rules, provided the interest expense was tax deductible.

Rent and lease payments: Similar to the rule relating to pass-through loans, income from the sub- or re-letting of assets may not be set off against corresponding rent and lease expenses before the add-back is applied. In these situations, the gross rent or lease expense is subject to the add-back rules, irrespective of the related rental income earned. This also applies to expenses incurred in connection with short-term lease and rental agreements, e.g. the lease of a special tool for a single project, even if the tool is used only for a couple of hours. The updated guidance provides that, for simplification purposes, an add-back is not required for rent payments made for hotel rooms and rental cars.

Clarifications relevant to infrastructure sector: The guidance clarifies that payments made by a network operator to an owner for the lease of an infrastructure sector system (e.g. payments for telecommunications, water, gas and energy grids) is subject to the add-back. However, according to the guidance, this does not apply to the railway sector (in particular, payments made by a railway operator to a railway grid owner) and to particular situations in the telecommunications infrastructure sector. The lease of the “last mile” (i.e. the cable from the distribution junction to a customer’s household) in an unbundled transmission system (e.g. where the telecommunications system is operated by an unbundled transmission system operator and the grid is owned by a third party) is not subject to the add-back. The guidance contains similar clarifications for other supply grids (e.g. electricity and gas), i.e. payments for the use of the system by the operator are not subject to the add-back.

Unprotected intangibles: Payments for intangible assets, such as a customer base, know-how, goodwill and other unprotected intellectual property, are not considered royalty payments within the meaning of the add-back rules. Only payments for protected intellectual property are subject to the add-back of 6.25 %.   
 
If you have any questions, please contact the authors of this article at gtln@deloitte.de or your regular Deloitte contact.