Tax News, 1st edition 2016


1. Income tax

Basically a contractual agreement is relevant regarding the allocation of the purchase price of land and buildings for depreciation calculation

The depreciation calculation is orientated on the original acquisition price of the building. Therefore the parties generally prearrange the purchase price for land and building to increase the value of the building and thus raise the possible depreciation.

According to the decision of the German Federal Tax Court (IX R 12/14) the contractual agreement is still decisive for the allocation of the purchase price regarding land and buildings. However this is not the case if the allocated price was unrelated to market value or an abusive structuring took place. Yet, a significant discrepancy of the agreed price to land value guidelines just indicates and does not deem that the price is unrelated to the market value. Therefore, the tax office has to vet first further circumstances to assume an unrelated market value or an abusive structuring and may only afterwards estimate a different purchase price. German Federal Ministry of Finance had joined the dispute and had argued that reasonable doubts shall arise if the agreed purchase price is set 10 % higher than in the expert’s report or in the guideline of the fiscal authority. In case of a proceeding the tax court has to determine all facts regarding the value of the building and vet whether the allocated price was justified.

Apparently in reaction to the decision of the German Federal Tax Court the German Federal Ministry of Finance has updated the instruction and the guidelines for the proper calculation of the purchase price. Furthermore, the German Federal Ministry of Finance has provided an xls-file where the appropriate purchase price for land and building can be calculated and determined.

Partnership division at book values after preceding exchange of the partners

The German Federal Tax Court had to decide in its judgement as of 16 December 2015, whether the assets of a limited liability partnership can be tax neutrally transferred by way of partnership division under Sec. 16 para. 3 Sent. 2 German Income Tax Act (GITA) in case of a preceding exchange of the partnership’s partners.

The partners of the limited liability partnership (private individuals, participation 50 percent each) had each founded a new limited partnership and transferred their respective partnership shares in the old partnership to their respective new limited partnership. Afterwards the assets of the old partnership were transferred from the old to the new companies at book values. The tax audit found in this process an abusive structuring because of the previous exchange of the partners and did not allow the transfer at book values.

The German Federal Tax Court disagreed with the tax office and has ruled as follows:

The contribution from the old partnership shares in the new companies in close timely and factual context does not prevent a continuation at book values under Sec. 16 para. 3 Sent. 2 German Income Tax Act (GITA). There is no legal principle which summarizes several transactions to one uniform process for their evaluation under tax law. If an abusive structuring is given has to be always reviewed based on the individual circumstances.

Condition for a tax neutral partnership division is that the hidden reserves before and after the partnership division are attributable to the partners participating in the division. For this, it is not harmful if the hidden reserves are transferred from one partner to the other.

2. Legislation

Construction of new rental apartments; Federal government cabinet approves draft law: Up to 35% depreciation within first three years

In order to provide for some relief on the – in some German regions – tight apartment market the construction of new rental apartments shall be subsidized. According to the Federal Finance Minister Schäuble the respective measures shall be selective and temporary.

At the beginning of February 2016 the federal government cabinet has approved the draft law and presented the draft law to the German Federal Parliament on March 2, 2016. In order to actually enter into force the draft needs to pass parliamentary procedures: The following changes are according to the draft law planned:


  • Special depreciation (in addition to the regular depreciation) of 10% in first and second year as well as 9% depreciation in third year after acquisition / construction.
  • Special depreciation is limited to parts of the building which is used for residential purposes.
  • In order to be entitled to the special depreciation the limit for the construction costs is EUR 3.000 per sqm. The maximum amount for which the special depreciation is possible shall be EUR 2.000 per sqm.
  • Only newly constructed or newly acquired buildings shall be subsidized. This means that the building application / construction notification needs to be made in the years 2016, 2017 or 2018. The date of completion of the building shall not be decisive.
  • The subsidized area must be used for residential purposes for at least 10 years. Otherwise the special depreciation will be denied retroactively.
  • Only buildings which are constructed in designated areas in which the apartment market is tight shall be subsidized.

Federal Council of Germany and states have already suggestion for improvement. Recommendation is that the relief shall be independent from the taxpayer's income in order to also support households which do not pay taxes due to low income.

Extended taxation of free float shareholdings

In 2013, the tax exemption on free float dividends was abolished. Since then, the Bundesrat (German Federal Council) has tried several times to introduce the taxation on capital gains of free float shareholdings.

For instance, the discussion draft, dated July 21, 2015 of the German Federal Ministry of Finance on the reformation of the German investment taxation, included a corresponding change (Section 8b para. 4 German Corporate Income Tax Act).

However this change was not adopted by the ministerial draft, dated December 17, 2015. According to the German Federal Minister of Finance, capital gains of free float shareholdings will not be subject to tax for now. Instead, abusive tax structuring shall be tackled in another way, according to the ministerial draft. In the long term however, the taxation on capital gains of free float shareholdings will remain on the agenda.

The current exemption allows the entire refund of withholding tax, also for foreign recipients of German free float dividends: The sale of free float shares from a foreign shareholder to a domestic shareholder in combination with the short buy of the foreign shareholder from the domestic shareholder before the ex-date, result in a complete refund of the withholding tax in Germany (so called cum-cum transactions).

At least for listed shares, these structures shall be avoided by tightening the conditions for the refund of withholding tax on capital gains.

According to the draft, a refund will be only granted, if the taxpayer – inter alia – keeps a minimum vesting period (Section 36 para. 2a German Income Tax Act – Draft). Pursuant to the governmental draft, advised on February 25, 2016, this law shall be retroactively effective from January 1, 2016 onwards. It is reported, that the legislative process will be completed before summer.

3. International

Taking advantage of current-value depreciation of intra-group loans to a foreign subsidiary – Non-application decree

German tax authorities are not entitled to deny the current-value depreciation of intragroup loans to a foreign subsidiary if a German parent company gave a loan at arm’s length interest rate to a foreign subsidiary which was not secured under consideration of arm’s length principles.

By judgements of 17.12.14 and of 24.06.2015 the German Federal Fiscal Court stated supremacy of the arm’s length principle in the meaning of art. 9 sec. 1 OECD Model Convention to the national law acts. Rescission of the current-value depreciation by the tax office is not allowed if the intragroup loan was not secured under arm’s length conditions. The court stated that denying the depreciation based on Sec. 1 para. 1 German Foreign Tax Act is not applicable in the case at hand.

In reaction to the decisions of the German Federal Tax Court the German Federal Ministry of Finance has issued a non-application decree. German Federal Ministry of Finance considers the supremacy of the arm’s length principle pursuant to sec. 1 para. 1 German Foreign Tax Act. Accordingly only secured loans at arm’s length interest could be depreciated.

Therefore it is advisable in similar cases to file an appeal and to make a court proceeding. Tax courts, in principle, should allow the current-value deprecation of unsecured intragroup
loan to the foreign subsidiary based on the mentioned decisions.

4. VAT law

Managing holding company: VAT group and input VAT deduction

By judgments (of 02.12.2015 and of 19.01.2016) two Senates of the Federal Fiscal Court follow the guidelines of ECJ regarding VAT groups – however to a different extent. It´s agreed that capitalistic structured partnerships may qualify as potential controlled company of a VAT group although the wording of para. 2 sec. 2 no. 2 German VAT Act only refers to legal persons. Whereas the V. Senate of the Federal Fiscal Court concluded by judgment of 02.12.2015 that partners of potential controlled companies in the form of partnerships all need to be persons who are financially bound to the business of the controlling company, the IX. Senate of the Federal Fiscal Court avoided this restriction.

Further, the Federal Fiscal Court in his judgment of 19.01.2016 also ruled about the right of input VAT deduction of an entrepreneurial holding company and generally granted the right to fully deduct input VAT regarding general costs. The previous argumentation that input turnovers that are made with regard to the non-entrepreneurial holding of the shares do not enable to input VAT deduction, is abandoned.

However, input VAT deduction is restricted if the holding company does not provide management services to the controlled company, but VAT exempt financial services like loans or interest income with credit institutes. Something else would only apply if these transactions could be qualified as incidental transactions which can be disregarded due to the simplification rule of para. 43 no. 3 German VAT Implementation Code. This was however denied in the case at hand.

The recent two judgements of the Federal Fiscal Court in practice have the following impact:

  • Continuously hybrid holding will have to determine an adequate VAT control key. Clear specifications of the financial offices would be eligible in this regard.
  • The restrictions of input VAT deduction may be avoided by opting for VAT in accordance with para. 9 German VAT Act. The qualification as incidental transaction will generally not be possible.
  • VAT groups may generally also be formed with partnerships as controlled companies. The specifications of Federal Fiscal Court and ECJ have to be observed. Since ECJ rejects the right to directly refer to the VAT-Directive the respective financial authorities should be involved.
  • A clarifying letter of the Federal Ministry of Finance is currently expected. To receive legal certainty the practice often demands that the legislator should provide VAT groups with the right of application as well as a determination procedure. The further legal development will have to be awaited.

Parking space provided to employees for reduced payment is subject to VAT

By judgement of 14 January 2016, the German Federal Fiscal Court has decided that providing parking space to employees against (small) cost sharing has to be qualified as service against remuneration with the consequence that this service is within the scope of VAT and in the absence of a tax exemption rule also subject to VAT. Thus, the employer has to declare the taxable turnover in his (preliminary) VAT return and has to pay the VAT to the tax office.

In case an entrepreneur performs services against remuneration, it does not matter if the services have been performed (predominantly) for business purposes (in the present case: granting of undisturbed business operations) or for nonbusiness purposes. This differentiation is only relevant in case of services which are performed without remuneration. But due to the fact that even in case of small cost sharing a service against remuneration is assumed and such service is within the scope of VAT, the above mentioned differentiation is not relevant is such case.