COVID-19 and German taxPlease note: The following is an updated version, last updated on 24 April 2020. Further updates will follow due to the dynamic developments. This briefing is also available in German here.
COVID-19 and German tax
The current COVID-19 pandemic will have serious negative effects on many individuals, businesses and the real economy as a whole in a number of ways. Government support measures for German companies have already been announced on a larger scale. The German government is working in parallel on a number of initiatives.In the field of tax law, the first step is to take measures to preserve liquidity with regard to tax payments (see below I.). The initial announcement was already made on 13 March 2020 by the German government, in particular through the joint Protective Shield for Employees and Companies Declaration (“Protective Shield Declaration”) of the German Federal Ministers of Finance and Economics, which also included first measures for German taxpayers. Since then, the situation has been very dynamic and further statements have been issued by the federal and state tax authorities. Of particular importance is, for instance, the Decree of the German Federal Ministry of Finance (Bundesministerium der Finanzen (BMF)) on Tax measures to take account of the effects of coronavirus of 19 March 2020 (“BMF Decree”); most recently, the BMF further specified and supplemented the measures taken to date with a FAQ "Corona" (Taxes) which is continuously updated it is to be expected that the guidelines included therein will also be decisive for the respective state tax authorities in the upcoming weeks and months.
Furthermore, since 22 April 2020, a statement from the Advisory Board of the BMF has also been available, which, among other things, calls for the expansion of loss carry-backs and the introduction of a tax-free reserve. However, it remains to be seen whether these measures will be implemented by the BMF in the future.
In the following we summarise the announced relief. In addition, we also provide further information on possible other effects of the COVID-19 crisis and the circumstances caused by it, e.g. with regard to financing (see IV), the implementation of profit and loss transfer agreements (see V), tax effects of other specific laws (see VI) and, if applicable, tax residence (VII).
I. Specific liquidity support on the occasion of COVID-19In order to improve the liquidity of companies, the possibilities for deferral of tax payments (Stundung), reduction of advance payments (Vorauszahlungen) and stop of enforcement (Vollstreckung) shall be improved. Overall, tax deferrals should be made possible "in the billions".Since many taxes are administered by the German federal states (Länder), the BMF has already initiated a coordination with the federal states for those taxes which are administered by the Länder on behalf of the Federal Government (Bund) and which are jointly due to the Federal Government and the Länder as so-called joint taxes (Gemeinschaftsteuern); in particular income tax (Einkommensteuer), corporate income tax (Körperschaftsteuer) and VAT (Umsatzsteuer), to which the following remarks will also refer. It should be noted that the following explanations do not apply to purely federal or state taxes. For taxes administered by the federal states themselves (Landessteuern), the specific guidelines from the respective state tax authorities must be observed. For example, the Bavarian State Ministry of Finance and Home Affairs has announced that, upon application, an interest-free deferral of the real estate transfer tax (Grunderwerbsteuer) will also be possible for acquisitions carried out between 1 January and 30 April 2020 as well as for transactions for which the tax arises during this period until 31 December 2020 at the latest.
1. General information on the application procedure
- According to the BMF, taxpayers have two ways to apply for tax liquidity support in a simplified and fast manner: Firstly, the applications can be submitted directly online via Mein ELSTER to the relevant tax office (according to the BMF the simplest and fastest method). Secondly, the state tax authorities also offer simplified application forms, the use of which is intended to speed up the processing of applications (see below).
- If a taxpayer does not have a Mein ELSTER account, it is also possible to send the application by post or e-mail instead (however the processing time may be longer in this case). Applications by telephone are not possible.
- Accessibility and availability of German tax authorities: The tax authorities ask to avoid personal contact. Inquiries should be made in writing or by telephone; most tax offices are already closed to visitors or have switched to home office. Due to staff shortages (e.g. due to quarantine and higher demand for personal childcare), delays in the processing of inquiries are to be expected in tax authorities throughout Germany.
- The BMF points out that all applications are being processed after the date of receipt in order to ensure a fair and due process. It is not possible to differentiate in the processing sequence, for example to differentiate between possible reimbursement and subsequent payment claims. Taxpayers should therefore submit any application as soon as possible.
- Regarding the simplified application forms of the state tax authorities, it should also be noted that the requirements to justify the application differ from state to state. While some states (e.g. Bavaria and North Rhine-Westphalia) do not require a justification of the application, other states (e.g. Berlin and Saxony) expect a detailed justification as to why and to what extent the taxpayer is "directly and not insignificantly" affected by the COVID-19 crisis. In any case, taxpayers should be aware of the possible criminal consequences of incorrect information (see sec. 370 and sec. 378 German Fiscal Code (GFC)).
- Application forms and further information from the state tax authorities: Baden-Wuerttemberg, Bavaria, Berlin, Brandenburg, Bremen, Hamburg, Hesse, Mecklenburg-Vorpommern, Lower Saxony, North Rhine-Westphalia, Rhineland-Palatinate, Saarland, Saxony, Saxony-Anhalt, Schleswig-Holstein, Thuringia
- With regard to the application procedure, please also refer to the FAQ "Corona" (taxes) of the BMF dated 1 April 2020.
2. Deferral of tax payments (Stundung), sec. 222 GFC
- The tax authorities generally may defer due taxes if the collection would be a “considerable hardship” (erhebliche Härte) for the taxpayer and the tax claim does not appear to be endangered by the deferral. The tax authorities were instructed not to impose strict requirements in the current crisis.
- In principle, an application for deferral must be filed after the declaration or assessment of the tax (for details of the application procedure see above). It is not yet foreseeable that there will be any procedural relief in this respect (e.g. in particularly and generally affected sectors).
- By its Decree of 19 March 2020, the BMF has now clarified that eligibility for “easier deferral” of taxes due to the current crisis requires that the taxpayer be “demonstrably directly and not inconsiderably affected”, while for those only “indirectly affected”, the general principles shall apply (i.e. which seems to indicate that the taxpayer needs to demonstrate the “considerable hardship” situation in more detail). However, no guidance has been given so far on where the dividing line lies, in particular between “directly” and “indirectly” affected businesses. For example, does “directly affected” only mean businesses hit by administrative restrictions (e.g. forced closures of businesses) or also those hit by significantly reduced (but still possible) consumer demand? Furthermore, is the “considerable” effect to be determined by absolute or relative figures or only looking at liquidity impact or other figures? Accordingly, this “clarification” does not yet provide sufficient clarity.
- However, the BMF goes further in its FAQ "Corona" (Taxes), there under II.2, and explains that in principle very many sectors and persons are affected by the current crisis and therefore plausible information on "serious negative effects on the economic situation" is sufficient for the tax authorities.
- The above so far only applies to taxes due until 31 December 2020. Applications for deferral of taxes due after 31 December 2020 must be specifically justified.
- The deferral of tax payments is only possible for income tax (Einkommensteuer), corporate income tax (Körperschaftsteuer), church tax (Kirchensteuer), solidarity surcharge (Solidaritätszuschlag) and VAT (Umsatzsteuer). Not included in the deferral option are (up to now) capital gains tax (Kapitalertragsteuer) or wage tax (Lohnsteuer; cf. sec. 222 p. 3 and 4 GFC; except for flat-rate wage tax). The extent to which companies can or should invoke the suspension of enforcement measures in this context must be examined on a case-by-case basis (see 3. below). A deferral of social security contributions is also possible (see below).
- Applications for deferral of trade tax (Gewerbesteuer) must be submitted to the responsible cities and municipalities. In practice, the justification should be based on the requirements described above.
- As a rule, deferrals are granted for an initial period of three months, if the application does not specify the duration any further, according to the BMF. Taxpayers should therefore not only apply for an explicit deferral period in the deferral application, but also provide more detailed information on possible payment modalities (e.g. payment by instalments).
- However, it is not possible to obtain a refund of taxes declared or assessed and already paid, with the reference that a deferral is subsequently requested for the respective taxes. The reason for this is that the tax claim expires upon payment (cf. sec. 47 GFC). In case of doubt, companies should therefore not pay their final payment for (corporate) income tax 2019 before a decision on the deferral request has been made by the authorities.
- For the possibility of reducing advance tax payments, see below 6.
- It is not made clear which level of proof is required by the taxpayers. The Decree only states that applications are not to be rejected solely because the applicants cannot prove the magnitude of the damages incurred in detail. This should imply that applicants are still required to set out to some extent why/how they are affected by the COVID-19 crisis and to a certain extent the magnitude (see also under 1. the different levels of justification required by the federal states).
- If the above-mentioned requirements are met, the usual deferral interest (Stundungszinsen, still legally 6 per cent per annum) should “regularly” also be dropped.
- In addition to the deferral of taxes due, a facilitated deferral of social security contributions may also be possible under certain circumstances. However, employers must note that this is explicitly only possible on a subordinate basis, i.e. first the employer must have exhausted all other financial means available (e.g. short-time work benefits and other support and assistance measures, such as subsidies and loans provided under the Protective Shield Declaration). The funds available or released to a company as a result must be used to pay social security contributions, including those deferred until then. For details, see the newsletter of the National Association of Statutory Health Insurance Funds No. 2017/197 of 24 March 2020 concerning measures to assist employers and members affected by the corona virus in paying social security contributions.
3. Enforcement relief (Verzicht auf Vollstreckungsmaßnahmen)
- If it becomes known to the tax office (whether upon application of the tax debtor or not), that the tax debtor is “directly and not only insignificantly affected”, enforcement measures regarding taxes due until 31 December 2020 should be waived. This applies for all taxes in arrears or due by this date which are administered by the federal states on behalf of the federal government; in particular income tax (Einkommensteuer), corporate income tax (Körperschaftsteuer) and VAT (Umsatzsteuer).
- If enforcement measures have already been taken and the taxpayers concerned are directly and not inconsiderably affected by the COVID-19 crisis, they may apply for a suspension of enforcement. In principle, this will be granted by the tax authorities until 31 December 2020 at the latest.
4. No late payment fines (Säumniszuschläge)
- Under the same preconditions as described under 3, late payment fines are to be "waived" until the end of 2020. As these are basically accrued by law (sec. 240 GFC), an equity remission seems to become possible. This can be done by “general order” (Allgemeinverfügung) issued by the individual tax offices, being a real procedural facilitation.
- As a rule, it should make more sense, in the first place, to apply for a deferral in the case of due taxes rather than relying on a later remission of late payment fines.
5. Equity remission of taxes (Billigkeitserlass, sec. 227 GFC)?
- So far there is no special announcement for possible tax remissions. In principle, however, this general procedural option remains applicable in addition to the relief now ordered. For the time being, the tax authorities seem to assume that deferral of tax payments otherwise due and enforcement relief are sufficient (see above).
6. Adjustments of tax advance payments (Vorauszahlungen)
- Under the same preconditions as described under 3, advance payments of taxes can now be adjusted "more easily". If and to the extent it becomes clear that the taxable profit of a company, self-employed person or freelancer is expected to be lower in the current year due to the COVID 19 crisis, an adjustment of advance tax payments for income and corporate income tax (Einkommen- und Körperschaftsteuer) can be made. It is expected that the requirements for proof will be lower compared to the regular adjustment procedure.
- The liquidity situation can be improved for the entire assessment year by submitting a corresponding application to the respective tax office. The advance payments already made in this respect for the first quarter of 2020, i.e. for income or corporate income tax (Einkommen- und Körperschaftsteuer) as of 10 March 2020, can then be refunded. For trade tax (Gewerbesteuer) purposes, a corresponding application for a reduction of the trade tax assessment amount (Gewerbesteuermessbetrag) must be submitted; the reduction of the advance trade tax payments (Gewerbesteuervorauszahlungen) is then made by the responsible cities and municipalities.
- In addition, the reimbursement of special advance payments for value added tax (Umsatzsteuersondervorauszahlungen, UStSVZ) is permitted. Tax offices can reduce the special advance VAT payments (which have been made for the permanent extension in 2020) for entrepreneurs in crisis and refund amounts already paid. The permanent extension remains in force.
- It should also be considered that advance payments on income or corporate income tax (Einkommen- und Körperschaftsteuer) already made in 2019 can be refunded if and to the extent that a loss is incurred in the assessment period 2020, which can be carried back.
- On 23 April 2020, the BMF announced that small businesses and self-employed people in the trade, culture and gastronomy sectors who expect to make a loss this year due to the COVID-19 crisis will now be able to apply for a refund of advance tax payments paid for 2019 in addition to the advance tax payments already made for 2020. Affected taxpayers with profit and rental income can now apply for the subsequent reduction of advance payments for income or corporation tax for 2019 on the basis of a lump-sum loss carryback (sec. 10d para. 1 sentence 1 German Income Tax Act (GITA)). The lump-sum loss carryback from 2020 amounts to 15% of the relevant income on which the advance tax payments for 2019 were based on and is limited to a maximum of EUR 1 million or EUR 2 million in the case of joint assessment. It is regularly assumed to be affected if the advance tax payments for 2020 have already been reduced to zero (for further details see BMF press release). The BMF announced that it will soon publish a Decree on this subject. It remains to be seen whether this specific liquidity support will be extended to larger companies in the future.
- With regard to adjustments of German Trade Tax (Gewerbesteuer) advance payments, a separate Common Decree of the German States on Trade Tax measures to take account of the effects of coronavirus has been issued on 19 March 2020.
- In addition, the tax authorities are to refrain until 31 December 2020 from imposing any retroactive advance tax payments on taxpayers who are directly and not inconsiderably affected by the Corona crisis.
- Requests for adjustment of advance tax payments relating only to periods after 31 December 2020 must be specifically justified.
- It also appears possible that advance tax payments for 2020 will be (partially) refunded if a corresponding application for reduction of the advance tax payments is successful and the reduced total amount exceeds the amount already paid (see above).
II. General remarks on extensions and failure to observe deadlines
1. Deadline extension (Fristverlängerung, sec. 109 GFC)
- Periods for the submission of tax returns and officially set periods can be extended under the conditions of sec. 109 GFC. The authorities are likely to handle such applications more generously with regard to the above special instructions by the BMF, especially since many companies will now be faced with work difficulties. Without such an extension, the general statutory deadline for the submission of tax returns for 2019 will end on 31 July 2020 in the case of non-advised taxpayers, and on the end of February 2021 for advised taxpayers.
- If the tax consultants were - through no fault of their own - unable to submit tax returns for the 2018 assessment period on time due to the burdens of the COVID-19 crisis, an extension of the deadline can be granted retroactively from 1 March 2020. In these cases, the deadline extensions will initially be granted until 31 May 2020 at the latest. If late payment fines have already been set in these cases, they will be waived to that extent.
- In Bavaria, for example, an extension of 2 months can be granted for the submission of the wage tax registration, which was actually due to be submitted on 10 April 2020. It is conceivable that such measures will be extended.
2. Application for reinstatement (Antrag auf Wiedereinsetzung, sec. 110 GFC)
- If someone was prevented through no fault of his or her own (ohne Verschulden) from complying with a statutory deadline (e.g. filing an objection in due time), he or she must be granted reinstatement to the previous status upon application.
- According to the BMF, reinstatement to the previous status shall be granted in principle if the non-compliance with a statutory deadline is due to the consequences of the COVID 19 crisis. It seems obvious to see a reason for reinstatement in a not insignificant course of disease of COVID-19 or even in ordered quarantine.
- In general, an extension of the deadline should be attempted in the first place, so that an application for reinstatement may not become necessary (also because the interpretation regarding the "non-fault" of the failure to meet the time limit was so far relatively strict). However, if the deadline is missed, this request should be made, and then as soon as possible, making up for the missed action.
III. Practical advice on home office and crisis grants for employees
1. Treatment of home offices / Funding opportunities
- For employers, costs arising from the purchase of additional hardware or other investments are in principle normal operating expenses (Betriebsausgaben).
- If the corresponding expenses are incurred by the employee, they are basically income-related expenses (Werbungskosten).
- Anyone who has no other workplace available for his or her business or professional activities can, under certain conditions, claim expenses for a tax-recognised home office (häusliches Arbeitszimmer) as income-related expenses/business expenses up to a maximum of 1,250 euros in the assessment year. It is currently unclear whether a COVID-19 conditional temporary closure of the employer's premises would be recognised as a temporary "working place not otherwise available". Up to now, the BMF has taken the view that a deduction (as usual) is only permissible if the home office forms the centre of all operational and professional activities. If no further administrative instructions follow, it might be worth considering the possibility of claiming the costs for the home office on a time-specified basis as part of the 2020 tax return.
2. Tax exemption for crisis grants and employee benefits
- According to the BMF-Decree of 9 April 2020, employers can grant their employees aid and support up to an amount of EUR 1,500 tax-free in the form of grants and benefits in kind in accordance with sec. 3 No. 11 GITA in the period from 1 March to 31 December 2020. The prerequisite is that these benefits are paid in addition to the salary that is owed in any case. The conditions specified in R 3.11 para. 2 sentence 2 no. 1 to 3 of the German Wage Tax Guidelines (Lohnsteuerrichtlinien) need not be met in this case.
- It should merely be noted that employer contributions to short-time work compensation (Kurzarbeitergeld) as well as any other grants paid by the employer in this regard do neither fall under this tax exemption nor under sec. 3 No. 2 GITA. Further details can be found in the BMF-Decree.
- Regarding the additional possibility of tax-free reimbursement by the employer for exceptional care services, we refer to the latest FAQ "Corona" (Taxes).
IV. Tax pitfalls in connection with financing in the context of the COVID-19 crisis
In addition to labour policy and tax policy measures, the joint shield declaration of the Federal Ministers of Finance and Economics (Protective Shield for Employees and Companies) contains a billion-euro aid programme to protect companies with liquidity bottlenecks from insolvency through no fault of their own. Through their house banks, companies shall get access to cheap loans and guarantees from the state-owned KfW banking group.
The following tax pitfalls need to be taken into account in financing, especially in times of crisis:
1. Discounting of interest-free liabilities (sec. 6 para. 1 no. 3 GITA)
- Interest-free liabilities are generally discounted at 5.5 per cent in accordance with sec. 6 para. 1 no. 3 GITA with an effect on taxable income. Liabilities with a term of less than 12 months (on the balance sheet date) and liabilities that are interest-bearing or based on an advance payment are excluded from discounting.
- The discounting rule is to be observed not only for interest-free credits or loans, but also for other liabilities which are made interest-free in the context of the current COVID-19 crisis (e.g. to landlords or suppliers).
- The taxable profit resulting from discounting at the level of the debtor company can be avoided, for example, by a low minimum interest rate or by granting only a short deferral (less than 12 months from the balance sheet date).
- However, it is also conceivable that the positive effect on earnings resulting from discounting is deliberately accepted. In particular this may be the case if the discounting profit does not lead to a tax payment due to a current tax loss of the debtor company in the crisis, whereas the accumulation of the initially discounted liability in the following years (after the crisis has been overcome) leads to deductible tax expenses (without, for example, limitations for loss carry forwards under the so-called “minimum taxation”).
2. Collateral from shareholders or parent companies (sec. 8b, para. 3, sentence 4 German Corporate Tax Act (GCTA))
- Both the state-owned KfW and private banks will generally require appropriate collateral for loans. If these are provided by a shareholder (e.g. a foreign parent company) or a person closely related to the shareholder (including affiliates), sec. 8b para. 3 sentences 4 et seq. GCTA may apply.
- In practice, this can have the consequence that, for example, a (group) parent company cannot deduct losses for tax purposes if the KfW or other banks make use of the collateral previously provided. The same applies if financing is extended to affiliated companies within the group.
- With the Act on the Mitigation of Consequences of the Covid-19 Pandemic in the areas of Civil, Insolvency and Criminal Procedure Law (the Mitigation Act) of 27 March 2020 (Federal Law Gazette I 2020, p.569), the legislator lifted the subordination of shareholder claims under insolvency law in accordance with sec. 39 para. 1 no. 5 German Insolvency Act (GIA) for all shareholder loans granted in connection with the COVID-19 crisis. This applies to all insolvency proceedings initiated until 30 September 2023. It would be desirable if the legislator were also to override the legal consequences for sec. 8b para. 3 sentence 4 GCTA in order not to sanction shareholder financing or the provision of collateral in the group even in times of crisis.
3. Interest barrier (sec. 4h GITA in conjunction with sec. 8a GCTA)
- The so-called interest barrier of sec. 4h GITA (for corporations in conjunction with sec. 8a GCTA) restricts the deduction of operating expenses for interest expenses incurred at the level of the interest-paying entity under certain conditions. In case net interest expenses reach or exceed three million euros, a maximum of 30 per cent of the offsettable tax EBITDA (taxable earnings before interest and certain depreciation and amortization) is deductible as interest expenses.
- If, for example, a company takes out new interest-bearing loans from the state-owned KfW or other banks as part of the COVID-19 crisis, this increases the company's annual interest burden, which can ultimately lead to the 30 per cent EBITDA limit or the safe harbour of three million euros being exceeded. The raising of additional debt capital also means a reduction of the equity ratio, so that the so-called escape clause may no longer be applicable.
4. Special tax considerations in the event of a subsequent restructuring
- In view of the far-reaching economic effects of the COVID-19 crisis, there will be an increasing number of reorganisation and restructuring measures despite the recently enacted suspension of the obligation to file for insolvency for companies (see below).
- In the context of restructurings, the problem regularly arises that debt remissions (e.g. waivers of loans) are tax-exempt only under the strict conditions of sec. 3a GITA and sec. 7b German Trade Tax Act (Gewerbesteuergesetz (GTTA)).
- Particularly in the case of intra-group financing during a crisis, it should therefore be examined in advance whether equity financing or financing via an equity-like instrument may be preferable.
V. Implementation of profit and loss transfer agreements (Ergebnisabführungsverträge) during the crisis
- Numerous companies are part of an income tax group (Organschaft) through profit and loss transfer agreements. The proper execution of the profit and loss transfer agreement is mandatory for the recognition of an income tax group (sec. 14 para. 1 sentence 1, no. 3 GCTA).
- Especially in times of crisis, the problem often arises that a considerable loss is incurred at the level of the controlled company, which has to be compensated under the profit and loss transfer agreement. The common practice in groups of offsetting the parent company's obligation to compensate for losses in the context of a novation by means of a receivable of the controlled company to be placed in the cash pool is only recognised for tax purposes if the parent company would have been financially able to actually compensate the claim. This may be particularly critical in times of crisis and must be thoroughly examined.
VI. Tax effects of other legislative proposals
The Federal Government is working on various, in some cases very far-reaching, legislative projects, some of which may also have tax implications. Reference is made below to a number of legislative changes that have already come into force. Our current briefing in German and English provides a more detailed overview.
1. Changes in German Reorganisation Law
- The Act on the Mitigation of Consequences of the Covid-19 Pandemic in the areas of Civil, Insolvency and Criminal Procedure Law of 27 March 2020 (see above) provides, among other things, for very far-reaching changes in civil, insolvency and criminal procedure law. It represents probably the most extensive direct state intervention in private law contracts in post-war history, namely the suspension of main performance obligations in the case of corona-related impediments to contract performance for consumers and very small enterprises and in tenancy law (including commercial tenancy law in particular). In addition, a delay/suspension of the obligation to file for insolvency as well as measures relating to the virtual general meeting are introduced and the longer interruption of main criminal proceedings is made possible.
- Among other things, deadlines for reorganisations under the German Reorganisation Act (Umwandlungsgesetz (GRA)) were also extended. Such reorganisations must be filed to the commercial register, together with a balance sheet of the transferring company in accordance with sec. 17 para. 2 GRA; under previous law this balance sheet must have been no more than eight months old (i.e. drawn up to a balance sheet date which was no more than eight months in the past when the application was filed). This period has now been extended to 12 months.
- This period also has tax implications, namely for the retroactive effect of reorganisation measures under the German Reorganisation Tax Act (Umwandlungssteuergesetz (GRTA)). This is because sec. 2 para. 1 GRTA is linked to the balance sheet date within the meaning of sec. 17 para. 2 GRA. Corresponding reorganisations would therefore also be possible retroactively for tax purposes for up to 12 months. However, sec. 2, para. 1 GRTA only applies to reorganisations within the meaning of sec. 3 – 19 GRTA (in particular mergers and splits between corporations). It does not apply to contributions (Einbringungen) within the meaning of sec. 20 et seq. GRTA; without further amendments, the change in the GRA does not affect them, as the wording of sec. 20, para. 6 GRTA contains its own explicit limitation to a maximum of eight months. The same applies to the change of legal form of a corporation into a partnership (cf. sec. 9 sentence 3 GRTA). It remains to be seen whether there will be an adjustment in this respect.
2. Economic Stabilisation Fund Act (Wirtschaftsstabilisierungsfondsgesetz (ESFA))
- The Economic Stabilisation Fund Act of 27 March 2020 provides for the establishment of a federal Economic Stabilization Fund - ESF (Wirtschaftsstabilisierungsfonds – WSF) to support the real economy. For this purpose, the Financial Market Stabilisation Act (Finanzmarktstabilisierungsgesetz), which was generally enacted in the global financial crisis of 2008, was renamed Act on the Establishment of a Stabilisation Fund (Gesetz zur Errichtung eines Stabilisierungsfonds) and extended to include regulations for the ESF. As a result, the state, among other things, can acquire equity interests in companies as a shareholder or in the form of a debt obligation in addition to e.g. loans or guarantees in order to support threatened companies.
- If the ESF acquires an equity share or interest in a company, the company’s loss carry forwards do not forfeit given that sec. 8c GCTA and sec. 10a GTTA do not apply (same as under the Financial Market Stabilisation Act). Spin-offs in preparation for stabilisation measures will also not result in a pro-rata loss.
- The ESF itself is exempt from Trade Tax and Corporate Income Tax and is not subject to VAT. Payments to the ESF or from the ESF are not subject to withholding tax (WHT) without the need for a WHT exemption certificate. The ESF is entitled to benefits under Double Taxation Agreements.
- The above is achieved by a reference to sec. 14, para. 1, 2, 3, sentences 1 and 4 Financial Market Stabilisation Act.
VII. Impact of the travel restriction on the tax residence of companies?
- The tax domicile of companies depends (at least generally in the case of Double Taxation Agreements) on the actual place of management. In the case of companies where the managing directors do not reside in the country of the desired domicile (e.g. holding companies or other companies with none of the minor day-to-day management activities), this generally requires regular travel, e.g. to board meetings. Due to the current border closures, this is not easily possible; a general curfew would exacerbate the problem. This would be even more so if such restrictions would last for a longer term. Caution should be exercised when conducting business outside the country of tax residence. Further (international) information can be found in this briefing.
VIII. Do employees set up permanent establishments (PE) in their home office?
- The existing travel restrictions may also raise questions as to whether employees (cross-border commuters or employees who now work from their "home country" because of the travel restrictions) establish permanent establishments in their home jurisdictions for companies if they conduct business activities from their home office and the home office is located outside the company's tax domicile. The question of whether and to what extent an activity from a home office can establish permanent establishments must be examined in accordance with the relevant tax laws of the jurisdiction involved and any relevant double taxation agreements.
- In general, a permanent establishment must have certain degree of permanency and be at the disposal of an enterprise in order for that place to be considered a fixed place of business through which the business of that enterprise is wholly or partly carried on.
- Therefore, considering the extraordinary nature of the COVID-19 crisis, and the fact that an employee's private home is subject only to his or her sole disposal - and not to the employer's disposal - the creation of a new permanent establishment by employees in their home office should, in principle, be out of question (whether the criterion of permanency or continuity is relevant at all in view of the employer's lack of control is also questionable). Moreover, in the case of "normal" employees who are not part of the management, it would normally seem rather far-fetched to regard an employee in the home office as a "permanent representative" of the company (cf. sec. 13 GFC) - but this must be examined on the basis of specific competences and actual activities. Where a double taxation agreement as a rule exists, it is important whether the employee has authority to conclude and exercise contracts; Germany has not implemented the extension of the concept of the permanent representative to essential activities during contract negotiations by the so-called Multilateral Instrument.
- For further details (including the possible effects of the current travel restrictions on the tax residence of companies), see the OECD publication of 3 April 2020, which essentially confirms the position as outlined above.
- Depending on the duration of travel restrictions, employees (cross-border commuters, cross-border commuters) may also have questions regarding their personal income tax, e.g. whether their income is no longer taxed in the country of residence of the employer (e.g. Luxembourg) but in their country of residence (e.g. Germany). Appropriate consultation agreements have already been signed with Luxembourg, the Netherlands and Austria (see here for further details).
IX. Accounting and revaluation of deferred taxes
- On 4 March 2020, the Institute of Public Auditors in Germany (IDW) published a first technical note outlining the effects of the COVID-19 crisis on selected aspects of HGB and IFRS accounting regarding financial statements and management reports for reporting periods until 31 December 2019 as well as the audit of such: corona-fachlicher-hinweis-idw-dok1-data.pdf.
- With the publication of 25 March 2020, the IDW supplemented the technical note of 4 March with the effects on financial statements and management reports for reporting periods ending after 31 December 2019 and with guidance on the audit process: corona-fachlicher-hinweis-dok2-data.pdf.
- The COVID-19 crisis will also have an impact on the planning figures of many companies and thus on deferred tax assets. Under certain circumstances, this could lead to or even increase the impact on equity.