Tax News, 3rd edition


Tax Accounting

Federal Ministry of Finance („BMF“): Update of the new BMF-circular regarding current value depreciation

By circular dated September 2, 2016 (IV C 6 – S 2171-b/09/10002:002), the tax administration commented on the preconditions of a current value depreciation pursuant to Sec. 6 para. 1 No. 1 and No. 2 German Income Tax Act due to an expected constant reduction in value as well as on the corresponding requirement to reverse write-downs. The circular shall replace the circular dated July 16, 2014 (IV C 6 – S 2171-b/09/10002).

In addition to some formal adjustments the statements were presented more clearly and in more detail when compared to the previous circular. Firstly, comments on listed, exchange-traded securities and on securities based on a share index held as fixed and current assets were revised. A differentiation between fixed and current assets was not made in the new circular anymore. However, compared to the old circular the portfolio of equity-related securities has been extended by subscription warrants and certificates. It is likely that an expected constant reduction in value will occur if the stock exchange price falls below the rate at purchase on the balance sheet date. The minimum limit amounting to 5 % still apply. It is, however, expressively provided in the current letter of the Federal Ministry of Finance (“BMF”) that the minimum limit of 5 % shall not apply for the requirement to reverse write-downs. Thus, reversals of write downs on the balance sheet shall be made irrespective of the minimum limit of 5 %, however, up to the amount of the acquisition costs at a maximum.

In the current circular of the Federal Ministry of Finance (“BMF”) only clarifying statements within the range of fixed-income securities are made. The basic idea remains that fixed-income securities, which securitize a claim in the amount of a nominal value, cannot be subject to a current value depreciation. As a result of a nominal value payout at maturity date the value depreciation is not considered permanent. In this respect, it is expressly stated that the minimum limit of 5 % shall not apply. This information could only be derived from an example presented in the circular of the Federal Ministry of Fi­nance (“BMF”) dated July 16, 2014.

Concerning the accounting treatment of foreign currency liabilities the fiscal administration adheres to the controversial jurisdiction of the BFH presented in the current circular of the Federal Ministry of Finance (“BMF”) according to which current value depreciations shall be considerably restricted. General currency fluctuations on the currency markets do not allow a higher valuation of liabilities as currency fluctuations will usually be compensated. The question concerning the differenti­ation between a stock market price and an exchange rate re­mains unanswered.

In principal, the content modifications made in the current circular of the Federal Ministry of Finance (“BMF”) are relatively limited. However, in practice, the minimum limit of 5 % shall be taken into consideration. Companies that are concerned shall verify the partial value depreciation made on the basis of the current administrative instruction.


Loss carry forwards survive in some cases – Draft Law on the further development of the tax loss carry forwards for corporations

The new law is intended to introduce an additional exception from the change in ownership rules in Sec. 8c German Corporate Tax Act (GCTA). Purpose of the law is a relief for compa­nies in need for financing by new shareholders. Background to this is the wish to improve the tax environment for start-up companies. But other companies can benefit as well.

Based on Sec. 8c GCTA the acquisition of more than 25 % of the shares leads to a pro rata forfeiture of the loss carry forwards. If within a five-year period more than 50 % of the shares in a company are transferred, the losses and loss carry forwards can no longer be set off for tax purposes. There is an exception from the elimination of losses, if and as far as there are built-in gains or for certain intragroup restructuring measures.

According to the Bill of September 14, 2016 the new sec. 8d GCTA should enact another exception from Sec. 8c GCTA. Prerequisite for the preservation of the loss carry forwards would be that the business operations of the corporation after the change in ownership are retained and the loss carry forwards can only be set off against the profits from the already existing business operations being continued.

Income tax

Contribution of the assets against credit entry in the variable capital account of a partnership (e.g. Capital Account II) deem a capital contribution but does not grant a right of participation in the entity.

Federal Ministry of Finance has reacted to the recent Federal Tax Court decisions with a ruling and commented on the contribution of the assets against credit entry in the so called Cap­ital Account II of a partnership. The contribution of assets by shareholder solely to Capital Account II does not deem a con­tribution against payment and therefore does not grant a further right of participation in the partnership. Thus, such contribution constitutes a capital contribution. Furthermore, the right of the participation is embedded in the Capital Account I. Federal Ministry of Finance outlines that Capital Account I usually displays percentage of profits, of participation and voting rights in a partnership in proportion to the participation of each shareholder.

Capital Account II shall mean a so called capital variable account because it can be seen as a partnership net equity if the losses are being booked on such account. By contrast to the Capital Account I, it states neither amount of profits nor amount of participation and voting rights. Please note, that transfer of assets (e.g. of a business, of a separate part of a business, of a participation in a partnership) to a partnership shall be deemed as tax-neutral if the transferor receives in return participation rights in the partnership. Previously the Federal Ministry of Finance assumed that participation rights in the partnership could be obtained through the contribution in the Capital Account II.

Due to the decision by the Federal Tax Court, this has now changed. The contribution solely or partly in the capital variable account and partly in the joint specific-purpose reserve account do not result in a contribution against payment or grant any participation rights. The fact that the losses according to the shareholder agreement have to be booked in the Capital Account II is of no relevance. Thus, no contribution in the meaning of sec. 24 German Reorganization Tax Act can be assumed in the above mentioned cases and the related tax easements would not be available.

The contribution of assets solely or partly in the Capital Ac-count I and partly in the capital variable account continue to constitute a contribution against payment and therefore grants a right of participation in the partnership. The division and allocation of the transfer in some extent as a partial contribution against and a partial contribution without payment is not possible.

The new opinion according to the ruling should apply in all cases which are still outstanding. Yet, it is possible until December 31, 2016 to follow the previous view of the Federal Ministry of Finance. In order to treat the contribution of assets solely to Capital Account II as a contribution against payment and obtain participation rights in the partnership the transferor and the respective partnership shall request for such treatment.

Real estate transfer tax

The assignment of a contractual claim for the transfer of at least 95 % of the shares of a real estate owning compa-ny and the establishing of a respective obligation are not subject to German Real Estate Transfer Tax.

The same applies to the material transfer of company shares from the existing shareholder straight to the assignee.

In a recent judgement of May 12, 2016 (II R 26/14) of the German Federal Tax Court (BFH) a seller hold originally 100 % of a stock company that in turn hold 100 % of the shares of different incorporated real estate owning companies. The seller agreed on the basis of a contract to transfer all respective shares to the purchaser. The purchaser reserved the right to announce a member of the company group as (replacement) purchaser. Before closing the purchaser announced the plaintiff as purchaser. Therefore, the plaintiff and the parties of the purchase contract conclude an amendment agreement. Hereinafter the purchaser transferred the shares directly to the plaintiff.

It was now disputed if the contractual transaction of the shares pursuant to Sec. 1 para. 3 No. 3 German Real Estate Transfer Tax Act (GRETTA), as well as the material transfer of the shares pursuant to Sec. 1 para. 3 No. 4 GRETTA, are subject to the German Real Estate Transfer Tax. The fiscal authorities followed this assumption and issued corresponding tax notices against the original purchaser as well as the plaintiff.

The German Federal Tax Court held that, in accordance with the clear wording of Sec. 1 para. 3 No. 3 GRETTA, the legal rule only covers the emergence of the claim of transfer of at least 95 % of a real estate owning company and not the assignment of an existing respective claim or the emergence of a corresponding contractual obligation. The latter processes are as interim businesses not subject to the German Real Estate Transfer Tax. Furthermore, the material transfer of company shares from the seller straight to the assignee (plaintiff), is neither subject to the German Real Estate Transfer Tax. A taxable acquisition pursuant to Sec. 1 para. 3 No. 4 GRET­TA is excluded if the material transfer of the shares was preceded by a contractual acquisition in terms of Sec. 1 para. 3 No. 3 GRETTA. Due to the previous contractual transaction the respective real estate was attributed to the purchaser for Real Estate Transfer Tax purposes. Therefore, a second deemed disposal of the same real estate by the seller is excluded.

VAT law

Amendment of Invoices with retroactive effect for deduction of input-VAT

By the judgment of September 15, 2016 (C-518/14, Senatex) the ECJ based on a request for a preliminary ruling from the German tax court of Lower Saxony (dated July 3, 2014, 5 K 40/14) held that the correction of an invoice in relation to a detail which must be mentioned has a retroactive effect with regard to the deduction of input-VAT.

The German tax authorities accept according to Sec. 15.11 pa­ra. 3 VAT Application Decree the ex post amendment of missing invoice details. Nevertheless, they deny the retroactive ef­fect of the corresponding amendment. Consequently, the input-VAT deduction could be saved by the amendment in gen­eral but not with effect for the respective preliminary VAT return period in which the initially deficient invoice was issued but only in the period in which the missing invoice detail was added. This opinion was shared by the German Federal Tax Court (ref. judgment of August 19, 2013, XI R 41/10). This lead frequently to the assessment of late payment interest subse­quent to Sec. 233a German General Tax Code (GGTC). This could lead to significant interest payments as the mistake was detected frequently after years during a general tax audit or a special VAT audit.

Now the ECJ had to decide a case where a German tax office denied Senatex during a tax audit the deduction of input- VAT for the years 2008 to 2011 in respect of commission statements issued by Senatex to its commercial agents and the invoices of an advertising designer, since they did not constitute regular invoices as the according to Sec. 14 para. 4 sent. 1 No. 2 German Value Added Tax Act required tax number or VAT registration number were not displayed. These invoice details were added for the years 2009 to 2011 already during the tax audit in May 2013 and for the year 2008 in February 2014 during the objection proceedings. The tax office holds that the input-VAT could be deducted only in 2013 (for the years 2009 to 2011) resp. 2014 (for 2008).

However, the ECJ comes to the conclusion that the view of the tax authorities is not compliant with Art. 167, Art. 178 lit. A, Art. 179 and Art. 226 No. 3 Directive 2006/112. In fact, the ECJ accepted the retroactivity of the amendment of the invoices. The court pointed out that

  • the deduction of input-VAT is one of the fundamental principles of the common VAT system,
  • the right to deduct input-VAT arises at the time when the deductible tax becomes chargeable,
  • as regards the formal conditions for the right of deduction the excise of that right is subject to holding a correct invoice,
  • the directive provides for the possibility of correcting an invoice,
  • the right to deduct input-VAT must be exercised in respect of the period during which, first, the right has arisen and, secondly, the taxable person is in possession of an invoice,
  • the fundamental principle of the neutrality of VAT requires deduction of input-VAT to be allowed if the substantive requirements are satisfied, even if the taxable persons have failed to comply with some formal conditions,
  • the denial of the input-VAT deduction is to be considered a disproportionate penalty for non-compliance with just formal conditions,
  • the assessment of late payment interest occurs in any event without account being taken of the circumstances necessi­tating the correction of the invoice originally drawn up, which goes further than is necessary.

Consequently, formal conditions to be fulfilled by the invoices can be amended with retroactive effect for the deduction of input-VAT subsequent to this judgment of the ECJ. Therefore, the assessment of late payment interest according to Sec. 233a GGTC can be prevented by the correction of the invoice.

In pending cases, especially pending tax audits or VAT audits, in which the deduction of input-VAT is contested by the tax authorities due to incomplete formal invoice details it is recommendable to provide amended invoices or commission statements referring to this judgment of the ECJ.

If the tax office denies the deduction of input-VAT during a general tax audit or a special VAT audit on the grounds that there are formal invoice details missing, the tax payer has the opportunity to amend the details. In this case in contrary to the handling of the tax authorities the input-VAT can be deducted in the very period in which the supply or service was performed and the (initially) incomplete invoice was available. Consequently, there is no late payment interest subsequent to Sec. 233a GGTC incurred. In this regard a correction of the invoice during the objection proceedings or even court proceedings should be sufficient.