Tax Group – need to adjust profit and loss transfer agreements

In order not to endanger existing income tax groups, it may be necessary to adjust existing profit and loss transfer agreements by December 31, 2021.

The reason for this is the amendment to Sec. 302 of the German stock corporation act (AktG), which came into force on January 1, 2021, through Article 15 of the Act on the Further Development of Reorganization and Insolvency Law of December 22, 2020.

For profit and loss transfer agreements concluded before February 27, 2013 or for the last time amended, in which, according to Sec. 17 sentence 2 No. 2 of the German Corporate Tax Act (KStG) old version, the loss is assumed by static reference to the regulation of § 302 AktG in the version of Article 9 of the law of November 10, 2006 or has been agreed by a verbatim reproduction of this regulation, it is imperative that changes are made.

For the further recognition of the tax group according to § 17 KStG it is a prerequisite that the previous agreements on the assumption of losses in the profit transfer agreement are adapted. According to the current legal situation, the assumption of losses must be agreed by referring to the provisions of Section 302 AktG in its currently valid version (dynamic reference) in accordance with Section 17 Paragraph 1 Clause 2 No. 2 KStG.

In a letter dated March 24, 2021, the Federal Ministry of Finance (BMF) announced that the recognition of the tax group for assessment periods from 2021 onwards does not preclude the adaptation of the old contracts to include the dynamic reference according to page 2, section 17, paragraph 1, sentence 2 No. 2 KStG is made by the end of December 31, 2021 at the latest. It depends on the registration of the change for entry in the commercial register.

However, the adjustment can be omitted if the fiscal union relationship is terminated before January 1, 2022.

The adjustment of the profit transfer agreement to include a dynamic reference to Sec. 302 AktG does not constitute a new conclusion of the agreement according to the tax authorities. A new minimum term in accordance with Sec. 14, Paragraph 1, Clause 1, No. 3, Clause 1 of the KStG is not set in motion by the addendum.

Please contact us as your experts for corporate tax law. Please find further information to corporate taxes here on our website. In case of any questions to corporate tax law please do not hesitate to contact us.

Christian Dobner | TLI Steuerberater

Modernization of corporation tax law (KöMoG) – option for partnerships to be taxed like a corporation in the future

On March 24, 2021, the federal government passed a draft law for the modernization of corporate income tax law (KöMoG). The law is expected to come into force on January 1, 2022. It provides for the introduction of a corporation tax option, which enables commercial partnerships and partnerships to be taxed like a corporation upon request.

Currently, the taxation of corporations is strictly separated from the taxation of their shareholders. In contrast, partnerships are subject to the principle of transparent taxation. The partnership is an independent tax subject only for trade tax purposes. For the purposes of income taxation, however, these are exclusively the persons involved.

The law on the modernization of corporate tax law is intended to improve the tax framework, especially for partnerships and family businesses, and internationalize corporate tax law, since the German taxation system for special business assets is largely unknown in international tax law.

The draft law essentially contains the following significant changes:

  • Introduction of a corporation tax option for commercial partnerships and partnerships.
  • Globalization of the parts of the Transformation Tax Act that are relevant for the conversion of corporations.
  • Replacement of the equalization items in the case of excess and reduced transfers by the so-called deposit solution.
  • Deletion of the prohibition on deducting profit reductions from currency fluctuations

The introduction of the corporate income tax option for partnerships is a major change in the taxation system. The transition for partnerships to corporation taxation is, however, a (fictitious) change in legal form to which the provisions of the conversion tax law apply. A return option to transparent taxation is provided, although this can be very disadvantageous according to the principles of the conversion tax law.

Exercising the corporate income tax option also leads to significant changes for the shareholders. Among other things, when exercising the option, payments to the shareholders are generally to be classified as income from capital assets and no longer as commercial income of the co-entrepreneur.

In addition to the introduction of the option to corporation tax for partnerships, the changes to the conversion tax law, the replacement of the compensation items in the case of excess and reduced transfers by the so-called deposit solution and the removal of the prohibition on deductions for profit reductions from exchange rate fluctuations are important innovations.

With a view to advancing globalization, the draft law to amend the conversion tax law also provides for tax neutrality in the event of restructuring with third countries and removes the restriction to the EEA. Split-ups, spin-offs, mergers and asset transfers should also be possible with third-country companies in the future.

The draft law also provides that in future losses from exchange rate fluctuations in connection with shareholder loans can be deducted as business expenses. Exchange rate losses are to be exempted from the previous prohibition on deductions.

Please contact us as your experts for international corporate tax law. Please find further information on our International taxation page. In case of any questions to corporate tax law please do not hesitate to contact us.

Christian Dobner | TLI Steuerberater

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