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.