Upper House of Parliament passes law to accelerate economic growth
In a draft bill dated 9 November 2009 (“Proposal for a law to accelerate economic growth”), the new German government proposed several business tax reliefs that are intended to apply as from 1 January 2010 (see GTLN Special Edition November 2009). The proposed changes were initially agreed upon among the governing parties in the October 2009 coalition agreement (see GTLN Special Edition October 2009).
The Upper House of Parliament finally passed the bill on 18 December 2009 with a few amendments that were included by the Lower House during the legislative process. The bill is now pending the signature of the President and publication in the Federal Gazette to formally become law. However, no further changes are expected.
The reliefs proposed in the bill as passed by the Upper House are as follows (with changes to the draft bill dated 9 November 2009 highlighted in bold):
Interest deduction limitation rule (30% EBITDA limitation)
- The recently introduced temporary increase in the de minimis threshold to EUR 3 million of net interest expense for 2008 and 2009 will become permanent. Thus, net interest expense of up to EUR 3 million will be deductible irrespective of the 30% EBITDA limitation in future. Assuming an interest rate of 5%, entities having net debt of up to EUR 60 million will thus not be subject to the limited interest deduction.
- The 30% EBITDA limitation currently does not apply if a group company can show that its equity ratio is equal to or at least does not fall below more than 1% of the equity ratio of the entire group of which it is a member. The 1% threshold will be increased to 2%. This increase does not constitute the hoped-for relief in group situations, particularly because the equity ratio test is still subject to the requirement that the German entity demonstrates that there is no harmful shareholder financing in any other group company worldwide.
- An EBITDA carryforward will be introduced retroactively as from 2007. An EBITDA carryforward will be generated if a taxpayer has net interest expense lower than 30% of the EBITDA for tax purposes. The difference between 30% of the EBITDA and the net interest expense (the excess EBITDA) can be carried forward and can be used in the following five years when the net interest expenses exceeded 30% of current EBITDA.
Example
In 2009, X GmbH has an EBITDA of EUR 20 million and can fully deduct its net interest expense of EUR 5 million (i.e. EUR 5 million is less than EUR 6 million which is 30% of EUR 20 million). X GmbH generates an EBITDA carryforward of EUR 1 million in 2009. In 2010, X GmbH only has an EBITDA of EUR 10 million, but the same amount of net interest expense (i.e. EUR 5 million). The deduction of the net interest expense would generally be limited to EUR 3 million (30% of the EBITDA). However, X GmbH may additionally offset net interest expense of EUR 1 million because of the EBITDA carryforward generated in 2009.
- As an important exception, an EBITDA carryforward will not be generated in periods in which one of the three general exceptions to the limited interest deductions applies: (i) the de minimis threshold exemption; (ii) the company does not belong to a group; or (iii) the company is part of a group but proves that the equity ratio is equal to or at least not more than 2% less than that of the group as a whole. Since the EBITDA carryforward will generally be forfeited after five years, EBITDA carryforwards that have been generated first are deemed to be used first (i.e. FIFO method). Net interest expense that is deductible because of using an EBITDA carryforward (deduction of net interest expense in excess of the 30% EBITDA of that particular year) will not create an additional interest carryforward. Irrespective of the five-year period, the EBITDA carryforward will be forfeited in cases where a business is transferred and in certain reorganizations (but will not be subject to the change-in-ownership rules).
- Although the EBITDA carryforward may be computed retroactively as from 2007 (i.e. there will be a deemed applicability of the interest deduction limitation rule for 2007), the first increased interest deduction will technically not be earlier than 2010. Further, this first increased interest deduction in 2010 will only be granted upon request. Under the bill passed by the Upper House, the fictitious EBITDA carryforward must be separately determined for fiscal years beginning after 31 December 2006 and ending before 1 January 2010.
Example
In 2008, X GmbH has an EBITDA of EUR 20 million and may fully deduct its net interest expense of EUR 5 million (i.e. EUR 5 million is less than EUR 6 million which is 30% of EUR 20 million). X GmbH thus generates an EBITDA carryforward of EUR 1 million in 2008. In 2009, X GmbH only has an EBITDA of EUR 10 million, but the same amount of net interest expense (EUR 5 million). The deduction of the net interest expense would be limited to EUR 3 million (30% of the EBITDA). X GmbH cannot use the 2008 EBITDA carryforward of EUR 1 million in 2009, even though it has nondeductible interest expense of EUR 2 million. In 2010, X GmbH has an EBITDA of EUR 10 million and the same amount of net interest expense (EUR 5 million). The deduction of the net interest expense in 2010 would generally be limited to EUR 3 million (30% of the EBITDA). However, starting in 2010, X GmbH can use the EBITDA carryforward of EUR 1 million generated in 2008. Consequently, upon request, X GmbH may additionally offset net interest expense of EUR 1 million. The excess of the nondeductible interest expense in 2010 (EUR 1 million) would increase the interest carryforward of EUR 2 million generated in 2009. Since the new rules are technically applicable as from 2010, the EBITDA carryforward generated in 2008 might still be available up to 2015 (despite the general five-year period).
Change-in-ownership rule
- The recently introduced temporary exemption from the change-in-ownership rule for share transfers in the context of a qualifying financial restructuring, which had been limited to restructurings taking place in 2008 and 2009, will be extended indefinitely beyond 2009.
- Exceptions to the change-in-ownership rule will apply to intragroup restructurings: loss and interest carryforwards will not be forfeited if a single person or entity directly or indirectly owns 100% of the shares in the transferring company (i.e. the company selling shares in the German corporation with loss and interest carryforwards) and the receiving company (i.e. the company acquiring these shares), nor will it be necessary to own 100% of the shares in the company with the loss carryforwards, but minority shareholders at an upper tier company would be harmful. As a consequence, reorganizations within a 100% controlled group of companies should generally no longer be harmful from 1 January 2010.
Example
Company A owns 100% of Company B and Company C, the latter of which owns 60% of the shares in LossCo. If Company A transfers its shares in Company C to Company B or Company C transfers its 60% shareholding in LossCo to Company B, this should not be considered a harmful event under the new rules. A transfer of the shares in LossCo to Company A, however, would seem to be harmful if Company A is not itself wholly owned by a single person or entity.
Amended example
If Company A only holds 95% in Company C (and the remaining 5% is held by a third party), the exception for intragroup restructurings would not be available. This might even be true if Company B had the same shareholder structure as Company C.
- Even if there was a harmful share acquisition (either by a related party or a third party), from 1 January 2010 losses will continue to be available to the extent built-in gains in the loss company are subject to tax in Germany (if necessary on a pro rata basis). To the extent these built-in gains would exceed the unused losses, existing interest carryforwards also will continue to be available. Under the bill passed by the Upper House, the built-in gains at the time of the share transfer will be decisive. The rule includes a specific anti-abuse measure, according to which built-in gains cannot be generated by way of retroactive transactions, e.g. under the German Reorganization Tax Act.
Example
X-Co acquires 100% of the shares in LossCo for EUR 30 million from an unrelated third party. LossCo has unused loss carryforwards of EUR 10 million and interest carryforwards of EUR 15 million. According to the tax balance sheet of LossCo, the equity (inside tax basis) of LossCo is EUR 10 million. Assuming LossCo would only be active in Germany, usable built-in gains would amount to EUR 20 million. Thus, the full amount of unused loss carryforwards (EUR 10 million) would still be available and built-in-gains would exceed the unused loss carryforwards by EUR 10 million. Of the remaining interest carryforwards (EUR 15 million), only EUR 10 million would still be available and EUR 5 million would be forfeited under the change-in-ownership rule.
Real estate transfer tax (RETT)
The following are taxable events under the German RETT Act: (i) the direct transfer of real estate (via sale, merger, etc.); (ii) a transfer of shares (upon a sale, contribution, merger, etc.) that leads to a direct or indirect concentration of at least 95% of the shares in an entity (corporation or partnership) owning German real estate in the hands of a single owner or a group of companies (unification of shares); and (iii) a direct or indirect change of ownership of at least 95% in a real estate-holding partnership within a fiveyear period (change of partners in a partnership rule).
As from 1 January 2010, exceptions to RETT apply for certain intra-group restructurings:
- The transfer of real estate, as well as the unification of shares and a change in partners in a partnership, will be exempt from RETT if they are part of a restructuring measure as specified in the Reorganization Act. These are, in particular, a merger, demerger, spin-off and hive-down. Restructurings under comparable rules of other EU/EEA member states will qualify for the RETT exemption provided the prerequisites, especially with respect to the holding periods (see below), are fulfilled.
- The exemption will apply only to intra-group restructurings where there is one controlling entity and one or several controlled entities or only several entities controlled by a single controlling entity. A controlled entity for these purposes means an entity that has been held with at least 95% of the share capital (directly and/or indirectly) by the controlling entity within five years before the restructuring and that will be held with at least 95% (directly and/or indirectly) by the same entity for five years after the restructuring.
Example
GmbH A owns 100% of the shares in GmbH B and in GmbH C. GmbH B owns 100% of the shares in GmbH D, which owns German real estate, and is a 100% limited partner in partnership E, which also owns German real estate. GmbH B is merged into GmbH C. The unification of shares in GmbH D in the hands of GmbH C and the indirect change of partners in partnership E of at least 95% will be RETT exempt provided GmbH B and GmbH C have been held by GmbH A with at least 95% during the last five years before the merger and GmbH C will be held by GmbH A for five years after the merger. According to the wording of the law, no holding periods will apply for partnership E and GmbH D. Before the law change, the merger would have triggered RETT for the real estate held by partnership E and GmbH D.
- Intra-group restructurings involving a mere transfer, an exchange of shares or a contribution-in-kind will not qualify for the exemption because these transactions are not covered by the Reorganization Act.
Trade tax add-back of rental payments for immovable property
- The current trade tax add-back of 16.25% of rental payments for immovable property will be reduced to 12.5% from FY 2010.
Amortization for low-value assets
- The previous rule according to which the acquisition or production cost of assets with a value of up to EUR 410 could be deducted immediately will effectively be reintroduced.
- As an alternative to an immediate deduction for assets with a value of up to EUR 410, the recently introduced and currently applicable treatment with respect to low-value assets will remain available. Under this rule, only acquisition or production costs of assets with a value of up to EUR 150 can be deducted immediately. However, in case of applying this alternative treatment, the acquisition or production cost of assets with a value between EUR 150 and EUR 1,000 may be amortized under the straight-line method over a period of five years on a pooled basis.
Concluding remarks
The bill as passed by the Upper House contains other relief measures for individuals and businesses. VAT for accommodation provided by hotels will be lowered from 19% to 7%. Amendments to the inheritance and gift tax rules will facilitate the use of tax exemptions for businesses that are continued after a transfer and lower tax rates will apply to certain relatives. The originally announced relaxation of the rules governing a transfer of functions out of Germany was not included in the bill as passed by the Upper House. According to unconfirmed information, the government intends to address the relocation of functions topic at an administrative level.