German Annual Tax Act 2024

After a first unofficial draft bill had already been published in April this year, the German government published the government bill of the Annual Tax Act 2024 on 5 June 2024. In addition to numerous adjustments to income tax, VAT, real estate transfer tax and other areas of tax law, the bill also contains a number of adjustments and new regulations relevant to tax restructuring, some of which the government considered necessary because of previous judgements made by the Federal Constitutional Court and the Federal Fiscal Court.

In detail, the following changes are envisaged:

• In response to the Federal Constitutional Court’s judgment of 28 November 2023 (file reference: 2 BvL 8/13), the bill for the Annual Tax Act 2024 stipulates, contrary to the current view taken by the tax authorities, that a transfer of individual assets under Section 6(5) of the German Income Tax Act [EStG] between partnerships with an identical participation should be permissible at book value in a tax-neutral way. According to this judgment, this new rule should also be applied to all open cases.  
  
  
• The tightening up of the “corporate income tax clause” under Section 6(5) sentence 6 of the German Income Tax Act [EStG], originally envisaged in the first draft of the Annual Tax Act as a response to the Federal Fiscal Court’s judgment of 15 July 2021 (file reference: IV R 36/18), is no longer included in the government bill. In line with the Federal Fiscal Court’s judgment and contrary to the view currently taken by the tax authorities, it does not infringe the blocked period if, when individual assets are transferred, the transfer only results in a change in them being attributed from one corporate income taxpayer to another.
  
  
• The closing tax balance sheet required when companies merge under Section 3f. and Sections 11f. of the German Reorganisation Tax Act [UmwStG] is in future to be filed electronically and no later than 14 months from the end of the fiscal year in which the merger occurred.

• When companies merge under Sections 11f. of the Reorganisation Tax Act [UmwStG], a transfer at tax book value should in future be considered as the status quo for the capitalisation of issued participation in the transferring entity at the shareholder level. The current regulation, according to which the fair market value is principally applied and capitalisation at tax book value or intermediate value is only applied if the shareholder explicitly applies for it separately, will therefore be reversed.
  
  
• To the extent that the transferred business assets are negative, making a contribution at tax book value is generally not allowed under the Reorganisation Tax Act [UmwStG; in such cases a taxable step-up in book value is considered mandatory. In response to the Federal Fiscal Court’s judgment of 7 March 2018 (file reference: I R 12/16), the Annual Tax Act 2024 aims to clarify that any withdrawals and contributions which were made in the retroactive period must be taken into account when determining the value of the contributed assets. As a result of this planned new rule, contributions at tax book value would not be allowed to the extent that withdrawals would cause negative acquisition costs during the retroactive period.
  
  
• In the case of a qualified share-by-share exchange under the Reorganisation Tax Act [UmwStG], if the transferor has sold all or part of the shares in the acquiring company received as compensation, the blocked period will not be infringed and there will not be any retroactive taxation on gains from contributions. The current draft of the Annual Tax Act 2024, however, provides clarification in this respect by stating that the sale of shares received must have led to a disclosure of hidden reserves. Hence, any tax-neutral transfer at book value of the shares received in the acquiring company is no longer to be subject to the exemption mentioned above, even though tax-neutral reorganisations under the Reorganisation Tax Act [UmwStG], such as mergers or contributions of shares, are classified in principle as being comparable to an ordinary sale of shares.
  
  
• If participation in an acquiring partnership is given up or sold by an individual shareholder (natural person) within five years of the tax-neutral reorganisation, any gains resulting from this will be subject to German Trade Tax under Section 18(3) of the Reorganisation Tax Act [UmwStG], even to the extent of the gains being attributable to the assets which already existed at the partnership level prior to the reorganisation. In order to avoid structures being created that abuse this, the bill for the Annual Tax Act 2024 stipulates that the capital gains should also be subject to Trade Tax in the event of an indirect sale or transfer of interests in the acquiring partnership. This change in the law will thus affect transfers or transactions of two-tier partnerships.

A statement from the Bundesrat, the German upper house, on the governmental draft of the Annual Tax Act 2024 is expected on 27 September 2024. We will discuss further details of the planned changes and potential case studies in our webinar on 17 September 2024.