Germany: Grand coalition reloaded - German Tax Reform Outlook 2018-2021

Dr Benjamin S. Cortez, LL.M.

On 7 February 2018, the leadership of both the German Christian Democratic Parties and the Social Democratic Party agreed to form a new government, with Ms. Merkel as the Chancellor, for the legislative period 2018–2021. This article summarizes the potential tax agenda of the new government.

 

I. BACKGROUND 

Following the federal elections in Germany that took place on 24 September 2017 and the unsuccessful first round of coalition talks between the Christian-Democrats, the Green Party and the Liberals, the new government will be established by the Christian-Democrats and the Social-Democrats, the same parties that have governed Germany for the last four years. After tough negotiations, the “grand” coalition between Germany’s Christian-Democrats and Social-Democrats - 136 days after the election - successfully finalized its coalition agreement on 7 February 2018. The 177-page strong coalition agreement includes a description of the future government’s policy goals and what measures the new government wants to take. Although the coalition agreement includes few details on concrete tax measures, it does offer some insight into what can be expected. The agreement does not specifically mention any major tax reform projects or changes in tax rates. The focus will be on combatting tax evasion, harmful tax practices and unfair tax competition. The most important are briefly outlined below. It has to be taken into account that subsequent changes or additions to other points can not be ruled out.

 

II. TAX POLICY MEASURES

  1. Corporate taxes
  • A commitment to support a common, consolidated tax base (CCCTB) and minimum corporate tax rates.
  • The newly established government will seek close cooperation with France to implement initiatives to create a joint German-French economic area and to provide answers to international changes, in particular the US tax reform.
  • Combating tax evasion, tax avoidance and unfair tax competition, as well as money laundering in national, European and international contexts. Implementation of the EU Anti-Tax Avoidance Directive (ATAD and ATAD2), which includes in particular an adaption of the German controlled foreign company legislation, added rules governing hybrid structures, and amendments to the German interest limitation framework.
  • Contemporary transformation of the German Foreign Tax Law (AStG); in this case, in particular, the reform of the German supplementary taxation (§§ 7-14 AStG).
  • Identify and establish measures for appropriate taxation of the digital economy, and global Internet companies. Implementation of the BEPS commitments.
  • Adoption of tax incentives for research and development (R & D) activities, especially for SMEs.
  1. Taxation of individuals
  • Successive abolition of the solidarity surcharge – a 5,5% surcharge on the income tax - until 2021, with relief for lower and middle incomes in solidarity surcharge. Currently, a discharge of corporations – the 5,5 % surcharge is also levied on the corporate income tax - is likely not to be enacted. This remains to be seen.
  • A reform of the income tax rate is not foreseen, however no increase in the tax burden on citizens shall be enacted; therefore, the cold progression is to be reviewed on a two year basis.
  • Abolition of the 25% flat withholding tax on interest income with the establishment of a functioning automatic exchange of information. This would result in the taxation of interest income at ordinary progressive tax rates.
  • Reduction of contribution rates for unemployment insurance by 0.3 percentage points.
  • For commercial electric vehicles, the aim is to introduce a special depreciation to act as an incentive.
  1. Indirect taxes
  • Optimization of the collection and reimbursement procedure for import sales tax.
  • Introduction of a substantial financial transaction tax in the European context.
  • Combating VAT fraud and evasion in internet commerce transactions. Utilization of electronic marketplaces operators for lost sales tax, involvement of dishonest entrepreneurs via their platforms.
  • Exemptions from start-ups in the first two years after the establishment of the monthly advance VAT return.
  1. Others
  • Real estate transfer tax: Implementation of an effective and legally compliant regulation to end abusive tax structuring by means of share deals.
  • Examination of a tax emption for the first purchase tax on the first purchase of residential land for families as an incentive.
  • Extensive incentives for residential construction (including special depreciation in the amount of 5% p.a., in addition to the linear depreciation for four years for privately financed new residential construction in the affordable rental segment).
  • Introduction of a government grant scheme to support families building homes (Baukindergelds) for the first purchase of new building or inventory in the amount of EUR 1,200.- per child p.a. for ten years up to an income limit of EUR 75,000.- taxable household income.
  • Fiscal promotion of energy-efficient building renovation.
  • Securing the property tax as sources of revenue for the municipalities.
  • Improvement of combatting tax evasion and optimizing tax collection and tax audit by allowing the "confiscation" of all assets obtained from a criminal offense and illegal profits.
  • Strengthening of the Federal Central Tax Office (BZSt) as a central point of contact for non-residents, as well as customs in all areas of responsibility.

 

III. SUMMARY

Even though the coalition agreement does not include any specifics on the intended tax regulations, certain takeaways and observations can be made.

From a policy standpoint it is noteworthy that specifically and several times in the agreement close cooperation with the French Government is mentioned, not only in the tax area. To this background it can be expected that certain future measures and initiatives (in particular at the EU level) would be driven by combined efforts of the two governments.

In the context of the EU Anti-Tax Avoidance Directive (ATAD and ATAD2) the wording of the agreement potentially indicates that Germany is not intending to go far beyond what is required as a minimum standard under the EU-directive. The modernization of the German Controlled Foreign Company Provisions (CFC rules) does not come as a surprise, and has been on the agenda for some time. It will however be interesting to see whether the 25% tax rate (the rate under which low-taxation exists for purposes of the CFC rules) will in fact be reduced. The need for a reduction is evident, as in the context of a continuous reduction of the corporate tax rates in EU-Member States have made the low tax threshold of the CFC-provisions of 25 % an issue with Member States than can not be regarded as tax havens. The introduction of anti-hybrid rules for financing structures has been anticipated since a draft law that proposed anti-hybrid rules in 2014 (see GTLN 22 December 2014) was not implemented.

In addition, the new government’s plans for amending the interest deduction limitation rules remain to be seen, and it is unclear whether such changes would be in the form of technical amendments, a reduction of the current 30% EBITDA threshold or a response to a case pending before the Constitutional Court (see GTLN dated 16 February 2016). The agreement also does not detail the measures that would be introduced for taxation of the digital economy for multinational companies, and whether these would be aligned with the EU initiative on taxing the digital economy. 

The coalition agreement is a policy document, rather than draft law, and while taxpayers should not rely on the statements in the agreement, they should take the announcements in the agreement into consideration and closely monitor future developments.

 

XLNC MAGAZINE | No. 01 | May 2018

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