Announced tax policy measures – what German businesses need to know

On June 3, the German government announced a €130bn fiscal package designed to boost the country’s economic recovery from the Covid-19 crisis. A total of 57 detailed policy measures are included, consisting of tax reliefs, direct financial aids, a reduction of levies, measures to increase investments in new technologies and a cap for social security contributions.

In terms of tax policy, German businesses need to know about the following:

Improved R&D tax credit

With retroactive effect as of 1 January 2020, a R&D tax credit is available for personnel expenses and fees for subcontracting, related to any activity that relies on a technical discipline to improve a product or process (read more here).

The maximum amount of eligible expenses for German R&D tax credit will be increased from €2m to €4m. This will increase the maximum annual cash benefit from €500,000 to €1m per company and fiscal year, taking the credit factor of 25% into account.

This improved R&D tax credit will also apply to foreign-controlled German subsidiaries and German permanent establishments (“PEs”).

Increase of tax loss carry-backwards

Under German tax rules, a certain amount of tax losses may be carried back to the previous fiscal year for income tax and corporate income tax purposes. The amount of these one-year loss carry-backwards will be increased, for individual taxpayers and corporations from €1m to €5m (and from €2m to €10m for individual taxpayers filing jointly).

The increase of tax loss carryback will be applicable for tax losses incurred in 2020 and 2021. It will also be possible to apply such tax loss carryback in income tax returns for 2019 on a preliminary basis. In other words, even before the tax losses have been recognized in the tax notice for 2020. Technically, this will be made possible by recognizing an accrual in the tax balance sheet.

The increase of tax loss carryback will also apply for foreign-controlled German subsidiaries and German PEs.

Improved depreciation of moveable assets

For moveable business assets, an accelerated depreciation method will be introduced for 2020 and 2021. This will be a declining-balance method with a depreciation percentage of 2.5 times the regular straight-line depreciation.

Partnerships may opt for taxation - like corporations

In German tax law, partnerships such as a ‘GmbH & Co. KG’, are disregarded, meaning it is the partners themselves who are liable to (corporate) income tax. This is based on their share of profits generated by the partnership (in other words, transparent taxation). The partnership itself is not subject to income tax, except for trade tax purposes.

The German government has announced the modernization of the current corporate income tax system and the introduction of an option for partnerships to opt for taxation liability, like that to which corporations are subjected.

It is still unclear whether this will also apply for German partnerships with foreign partners and foreign partnerships with German partners.

Reduction of trade taxes

Profits earned by sole proprietors and business partnerships from trading activities are subject to trade tax, in addition to income taxes (up to 45%). Profits earned by corporations are subject to corporate income tax (at 15%) and trade tax. With the aim of narrowing significant differences in tax burden, a trade tax credit mitigates the trade tax burden of sole proprietors and business partnerships.

The trade tax credit is calculated by applying a 3.8 multiplier to the applicable trade tax base amount, increasing it to a multiplier of 4.

What is more, the taxable income calculated for (corporate) income tax purposes represents the starting point for the computation of taxable income for trade tax. However, there are various additions (e.g. 6.25% of expenses for the use of certain intellectual property rights) and subtractions (e.g. profits attributed to foreign PEs) from the taxable income computed for corporate income tax. Some of these gains only apply when they exceed €100,000 in a fiscal year.

The trade tax-free amount of €100,000 for additions will be increased to €200,000. This relief will also apply to foreign-controlled German subsidiaries and German PEs.

Reduction of VAT rates

The general VAT rate of 19% will be temporarily reduced to 16%. On top of this, the alternative reduced VAT rate of 7% will be temporarily lowered to 5%. These changes will apply from 1 July until 31 December 2020. In addition, the due date for paying import VAT is to be extended from the 16th day to the 26th day of the following month.

This may result in lower prices at the till. While consumers could benefit from that, the impact on companies could be mixed, with temporary measures becoming somewhat burdensome resulting in errors for companies in the business-to-business (B2B) sector.

Most importantly, the date of the delivery of goods and services is decisive for applying the correct VAT rate. Any arising questions may be difficult to answer as of July 2020. Particularly for the following:

• correct input VAT
• treatment of advance payments
• construction work
• treatment of partial delivery
• treatment of permanent delivery
• impact on annual bonuses
• treatment of vouchers
• return/replacement of goods
• revenues of agents

Legislative procedure

The German government’s tax policy measures are still to be approved by the country’s parliament. However, it is expected that the legislative procedure will be swift. Businesses are therefore advised to carefully keep an eye on the resulting developments.