Germany tax: Germany Business taxation reliefs proposed

The coalition agreement signed by the new German government on 26 October 2009 contains several reliefs in business taxation that are intended to apply as from 1 January 2010. The short-term measures mentioned in the agreement have been clarified in a draft law ("Proposal for a law to accelerate economic growth"). While the proposed reliefs still may be subject to changes because they must be approved by both the Upper and the Lower Houses of Parliament, final approval of the law is scheduled for 18 December 2009.


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 would become permanent. Thus, net interest expense of up to EUR 3 million would 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 would 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 would be increased to 2%. This increase does not constitute the hoped-for relief in group situations, particularly because the equity ratio test still would be 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 would be introduced retroactively as from 2007. An EBITDA carryforward would 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) would then be carried forward and could be used in the following five years when the net interest expenses exceeded 30% of current EBITDA.

As an important exception, an EBITDA carryforward would 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 would 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 would be deductible because of using an EBITDA carryforward (deduction of net interest expense in excess of the 30% EBITDA of that particular year) would not create an additional interest carryforward. Irrespective of the five-year period, the EBITDA carryforward would be forfeited in cases where a business is transferred and in certain reorganizations (but would not be subject to the change-in-ownership rules).

Although the EBITDA carryforward may be computed retroactively as from 2007 (i.e. there would be a deemed applicability of the interest deduction limitation rule for 2007), the first increased interest deduction would technically not be earlier than 2010. Further, this first increased interest deduction in 2010 would only be granted upon request.


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, would be extended indefinitely beyond 2009.

Exceptions to the change-in-ownership rule would apply to intragroup restructurings: loss and interest carryforwards would 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 would it be necessary to own 100% of the shares in the company with the loss carryforwards – that is, third-party minority shareholdings in the loss entity would not be considered harmful upon a transfer of shares in the loss entity if the parties transferring the shares in the loss entity are both ultimately owned, directly or indirectly, by a single person or entity. Consequently, minority shareholders at an upper tier company could result in a harmful share acquisition on an intragroup restructuring; based on the draft, reorganizations within a 100% controlled group of companies should generally no longer be harmful from 1 January 2010.

Even if there was a harmful share acquisition (either by a related party or a third party), from 1 January 2010 losses would 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 would continue to be available.


Concluding remarks

The draft law contains other relief measures for individuals and businesses. VAT for hotels would be lowered from 19% to 7% and amendments to the inheritance and gift tax rules would facilitate the use of tax exemptions for businesses that are continued after a transfer and would lower tax rates for certain relatives. Although the coalition agreement mentions a relaxation of the rules governing a transfer of functions out of Germany, this is not included in the draft law. It is unclear whether – due to the complexity of this framework – this will be incorporated in another law proposal or whether the government intends to scrap the relaxation as initially announced.