- New Accounting Standards Implementation Act (Bilanzrichtlinie-Umsetzungsgesetz)
- Introduction of Country by Country Reporting in Germany
- New Sec. 8d of the Corporations Tax Act improves use of loss carried forward for corporations
- New rules for correction of tax declarations (Sec. 153 AEAO)
- No Trade Tax when just letting a shopping centre without any additional services
- New Important German High Fiscal Court Ruling Regarding VAT in connection with Consignment Storages
- Input Tax: German High Fiscal Court defines new rules for retroactive effects of correction of invoices
- Updated list of all double taxation treaties
- New DTT Germany-Australia indirectly introduces BEPS action plan no. 7 in Germany
Newly implemented German Tax Acts
Bilanzrichtlinie-Umsetzungsgesetz (Accounting Standards Implementation Act)
The new Accounting Standards Implementation Act (in German: „Bilanzrichtlinie-Umsetzungsgesetz“ or short „BilRUG“) must be applied to all annual financial statements starting with FY 2016. It includes important changes in the accounting standards. Here are the most important changes:
- Size criteria
The size category of a corporation depends on three thresholds. A corporation is considered as a small corporation if at least two out of the following three criteria are not exceeded on two consecutive balance sheet dates
- Balance-sheet Total: 6,000,000 EUR
- Total Revenues: 12,000,000 EUR
- Average number of employees: 50
These new higher thresholds may be applied retroactively (optional) to financial years after 2013. Small corporations profit from e.g. less reporting duties in the notes, the exemption from obligatory audits of the annual financial statements, and that the P&L does not have to be published anymore.
Turnover has been re-defined. So far turnover comprised of sales that were connected to all ordinary business transactions. According to the new definition turnover is defined as “all revenues from the sale and letting of products as well as from performing services, less sales reductions, VAT and turnover linked taxes”, i.e. many types of other income (e.g. rental income) must now be shown as turnover.
In case the useful life of internally generated intangible assets cannot be estimated reliably, they must be depreciated over 10 years. This also applies to goodwill.
When applying the new definition of turnover for the first time, the incomparableness of the current turnover with the previous year must be mentioned in the notes to the annual financial statements. The overall turnover of the previous year, that would have been shown in the financial statements of the previous year if the new rules had been applied, must be displayed as well.
Extraordinary expenses or profits do not have to be shown as separate P&L positions anymore. Instead, if there are significant extraordinary expenses or profits, they have to be described in the notes. On the whole, more information must be displayed in the notes, esp. for mid-sized corporations. Small corporations profit from a number of reliefs.
Introduction of Country by Country Reporting in Germany
Germany has introduced Country by Country Reporting as of Jan 1st. 2017. It is codified in Sec. 138a of the General Tax Code (AO). Besides description of business transactions, the new obligation for the local file now also includes description of the economic and legal basis of an intercompany agreement that is in line with the arm’s length principle. It also includes the Masterfile (see OECD- final report to action no. 13). Companies must now meet the following transfer pricing requirements:
- All companies with intragroup deliveries or services must prove that transfer prices are at arm‘s length if requested by the German tax authorities.
- A local file must be prepared if all German companies within a group exceed either 5 million Euros intragroup deliveries or 500,000 Euros intragroup services.
- A Master File must be prepared if the total group exceeds 100 million Euros group turnover.
- A Country by Country Reporting must be prepared if the total group exceeds 750 million Euros consolidated group turnover.
New Sec. 8d of the Corporations Tax Act improves the usability of losses carried forward for corporations
So far losses carried forward of a corporation cannot be used anymore if more than 50% of the shares are sold or transferred to a single owner within a five- year period. If more than 25% but not more than 50% of the shares are sold or transferred to a single owner within a five- year period, the loss carried forward is extinguished proportionally to the percentage of sold shares.
Retroactively with effect as of 1st. Jan 2016, the loss carried forward of a corporation is not extinguished in case of a major change of the shareholder structure if the type of business remains more or less the same for at least three years and the loss carried forward cannot be used according to other tax rules (Sec. 8d Corporations tax Act).
Sec. 153 AEAO (correction of tax declarations)
A new Sec. 153 AEAO (Utilization Decree of the General Tax Code) was introduced in order to clarify the rule in Sec. 153 AO (General Tax Act) which deals with the correction of tax declarations. In contrast to other correction rules (e.g. self-disclosure of tax fraud or tax negligence, which may result in criminal proceedings and imprisonment of up to 10 years if not done properly), Sec. 153 AO deals with mistakes that happened without intent.
If a businessman does not check whether a certain business is taxable in Germany, this is normally seen as approvingly accepting undeclared taxes and therefore is regarded as tax fraud that is not covered by Sec. 153 AO. It may be interesting to know that there can be an exception. In case the corporation has implemented an internal control system that serves to check that all tax obligations are met (tax compliance system), this can be an indication that there may not be tax fraud or tax negligence. If that is true, a simple correction of declarations may be possible acc. to Sec. 153 AO.
Therefore, it may be useful and beneficial to the management to implement a tax compliance system for a German company. Benefitax is happy to offer support in the implementation process or to audit existing systems.
Planned German Tax Acts
Draft bill on non-deductibility of preferentially taxed intragroup royalties
On 25th. January 2017, the German government introduced a draft bill re. BEPS action plan no. 5 (harmful tax practises). The aim is to tax profits in the country where the activity that creates the value takes place, and not in the country that offers the maximum tax benefits.
It concerns “harmful” tax practises esp. in connection with IP-Boxes, license- boxes or patent boxes. The draft bill aims at limiting deductibility of intra group royalties in cases where group members might be resident in preferential intellectual property regimes. The tax deduction of cross-border intra group royalties may be partially denied if:
- the recipient of the royalty is resident in a country that does not apply “nexus approach” as explained in BEPS Action 5; and
- the effective taxation of the royalty is less than 25%.
The higher the tax rate of the creditor, the more the debtor can deduct from his taxable income.
The new rules, if adopted, would apply to any royalty payments after 31 December 2017.
No Trade Tax when just letting a shopping centre without any additional services
Letting a shopping centre is seen as private asset management and is therefore not subject to German trade tax. Acc. to the German Federal Fiscal Court (decision dated 14 July 2016, Az. IV R 34/13,) it is considered private asset management if a shopping centre is let and the tenants are offered accompanying services by the lessor or third parties that act on behalf of the lessors. To be more specific, a trade business is not created by providing the necessary infrastructure for running the shopping centre and carry out marketing operations for the shopping centre in addition to letting the space. The key factor for the court was that the services concern infrastructure that is essential for letting the shopping centre. Typical services in this context are cleaning, surveillance, supply of sanitary and social rooms. Advertising and promotion are special services but, if in connection with the shopping centre, this is seen as serving predominantly the interest to let the building.
New Important German High Fiscal Court Ruling Regarding VAT in connection with Consignment Storages
On 18th January 2017 the German high fiscal court made a ruling that might have a huge impact on the VAT treatment of consignment storages in Germany. According to the German tax authorities, any shipments from another EU-country to a consignment storage of the same company in Germany are treated as two separated deliveries, one from the other EU-country to Germany (VAT-free), and a second one from the consignment storage to the German customer (with German VAT). The court ruling disagrees and states that under certain circumstances there is only one delivery from the other country to the end customer in Germany via a consignment store. This delivery would be a VAT-free intra-community supply. The ruling is applicable in case there is only customer that is allowed to take goods out of the consignment storage whenever needed, and in case there is a permanent delivery contract in place between the supplier and the customer. As a consequence, the supplier would not be obliged to register for VAT purposes in Germany anymore. Apart from deliveries from another EU-country to Germany, the ruling is also applicable to deliveries from a third country to Germany in case the described circumstances are met. It should be noted however, that the ruling has not been implemented into German tax rules yet and it is thus recommended to wait until that happens to get rid of the German VAT registration.
Input Tax: German High Fiscal Court defines new rules for retroactive effects of correction of invoices
In the past it was not possible to correct invoices retroactively back in the year the invoices were issued. The tax authorities only accepted invoice corrections in the year the correction was made and not in the year the invoice was issued. This sometimes resulted in huge interest payments on previously wrongfully deducted input tax. Wrongfully deducted because certain invoice criteria had not been met. The ECJ ruled that this practice violates EU law (European Court of Justice, dated 15. Sept.2016, C-518/14, Rs. Senatex). Unfortunately, the ECJ did not specify the minimum requirements of an invoice that may be corrected retroactively. Following the ECJ decision the BFH (German High Fiscal Court ) made a ruling in which it determines in detail how the ECJ ruling has to be interpreted in Germany (BFH dated 20.10.2016, Az. V R 26/15).
According to the BFH, an invoice may be corrected retroactively if it contains five basic details, i.e. details re.
- the person issuing the invoice,
- the recipient,
- the service description,
- the full invoice sum and
- the VAT shown separately.
Acc. to the BFH, it is sufficient that the various invoice components are not too vague, incomplete or clearly inaccurate, which would be regarded as equal to missing information. It is thus sufficient to describe the invoiced services as „general business advice”.
The ECJ also did not elaborate on the latest possible date a correction would be possible. The BFH therefore made it clear that, in absence of specific legal regulations, the day of the last hearing before the fiscal court, is the last possible correction date.
We hope that the German tax authorities will implement the new rules soon. Until then all cases should be kept open. The ECJ is of the opinion, that paying interest is inadequate but the EU member states shall be authorized to provide sanctions in cases of non-compliance of the formal conditions for refund of input VAT such as fines. One needs to wait and see if the German legislative bodies will introduce new rules re. that.
Changes in Tax Agreements
Updated list of all double taxation treaties
The Federal Ministry of Finance in Germany published an updated list of double taxation and other treaties on its homepage as of Jan 1st. 2017. It can be viewed or downloaded here. Please make sure you also consider latest changes before you rely on it.
The following treaties and Protocols entered into force on 1st January 2017:
- Albania – Iceland Income Tax Treaty (2014)
- Algeria – Mauritania Income and Capital Tax Treaty (2011)
- Algeria – Saudi Arabia Income and Capital Tax Treaty (2013)
- Algeria – United Kingdom Income and Capital Tax Treaty (2015)
- Andorra – Liechtenstein Income and Capital Tax Treaty (2015)
- Andorra – Luxembourg Income and Capital Tax Treaty (2014)
- Armenia – Indonesia Income and Capital Tax Treaty (2005)
- Armenia – Serbia Income and Capital Tax Treaty (2014)
- Australia – Germany Income and Capital Tax Treaty (2015)
- Austria – Turkmenistan Income and Capital Tax Treaty (2015)
- Azerbaijan – San Marino Income and Capital Tax Treaty (2015)
- Azerbaijan – Sweden Income Tax Treaty (2016)
- Bahrain – Cyprus Income Tax Treaty (2015)
- Bahrain – Portugal Income Tax Treaty (2015)
- Bahrain – Tajikistan Income Tax Treaty (2014)
- Brunei – Korea (Rep.) Income Tax Treaty (2014)
- Bulgaria – Romania Income Tax Treaty (2015)
- Canada – Israel Income Tax Treaty (2016)
- Canada – Taiwan Income Tax Agreement (2016)
- Chile – China (People’s Rep.) Income Tax Treaty (2015)
- Chile – Italy Income Tax Treaty (2015)
- Chile – Japan Income Tax Treaty (2016)
- Chile – South Africa Income and Capital Tax Treaty (2012)
- China (People’s Rep.) – Germany Income and Capital Tax Treaty (2014)
- China (People’s Rep.) – Russia Income Tax Treaty (2014)
- China (People’s Rep.) – Zimbabwe Income Tax Treaty (2015)
- Costa Rica – Germany Income and Capital Tax Treaty (2014)
- Croatia – Luxembourg Income and Capital Tax Treaty (2014)
- Cyprus – Georgia Income and Capital Tax Treaty (2015)
- Cyprus – India Income Tax Treaty (2016)
- Cyprus – Latvia Income Tax Treaty (2016)
- Czech Republic – Iran Income Tax Treaty (2015)
- Estonia – Vietnam Income Tax Treaty (2015)
- Ethiopia – Ireland Income Tax Treaty (2014)
- Ethiopia – Saudi Arabia Income Tax Treaty (2013)
- France – Singapore Income Tax Treaty (2015)
- Georgia – Korea (Rep.) Income Tax Treaty (2016)
- Georgia – Liechtenstein Income and Capital Tax Treaty (2015)
- Germany – Israel Income and Capital Tax Treaty (2014)
- Guernsey – Seychelles Income Tax Treaty (2014)
- Guinea – Morocco Income Tax Treaty (2014)
- Hong Kong – Romania Income Tax Agreement (2015)
- Hong Kong – Russia Income Tax Agreement (2016)
- Hungary – Iran Income and Capital Tax Treaty (2015)
- Hungary – Turkmenistan Income and Capital Tax Treaty (2016)
- Iceland – Liechtenstein Income and Capital Tax Treaty (2016)
- India – Indonesia Income Tax Treaty (2012)
- India – Korea (Rep.) Income Tax Treaty (2015)
- Ireland – Pakistan Income Tax Treaty (2015)
- Ivory Coast – Morocco Income Tax Treaty (2006)
- Japan – Taiwan Income Tax Agreement (2015)
- Jersey – Rwanda Income Tax Treaty (2015)
- Kazakhstan – Saudi Arabia Income Tax Treaty (2011)
- Kazakhstan – Serbia Income and Capital Tax Treaty (2015)
- Korea (Rep.) – Serbia Income Tax Treaty (2016)
- Korea (Rep.) – Tajikistan Income Tax Treaty (2013)
- Korea (Rep.) – Turkmenistan Income Tax Treaty (2015)
- Laos – Singapore Income Tax Treaty (2014)
- Liechtenstein – Switzerland Income and Capital Tax Treaty (2015)
- Luxembourg – Serbia Income and Capital Tax Treaty (2015)
- Macedonia (FYR) – Saudi Arabia Income Tax Treaty (2014)
- Malaysia – Slovak Republic Income Tax Treaty (2015)
- Mali – Monaco Income Tax Treaty (2012)
- Malta – Vietnam Income Tax Treaty (2016)
- Norway – Romania Income Tax Treaty (2015)
- Oman – Switzerland Income Tax Treaty (2015)
- Philippines – Turkey Income Tax Treaty (2009)
- Poland – Taiwan Income Tax Agreement (2016)
- Portugal – Saudi Arabia Income Tax Treaty (2015)
- Portugal – Senegal Income Tax Treaty (2014)
- Portugal – Vietnam Income Tax Treaty (2015)
- Romania – United Arab Emirates Income Tax Treaty (2015)
- Rwanda – Singapore Income Tax Treaty (2014)
- San Marino – Vietnam Income and Capital Tax Treaty (2013)
- Saudi Arabia – Sweden Income and Capital Tax Treaty (2015)
- Saudi Arabia – Venezuela Income Tax Treaty (2015)
- Senegal – United Kingdom Income Tax Treaty (2015)
- Singapore – South Africa Income Tax Treaty (2015)
- Singapore – Thailand Income Tax Treaty (2015)
- South Africa – United Arab Emirates Income Tax Treaty (2015)
- Turkmenistan – United Kingdom Income Tax Treaty (2016)
- United Arab Emirates – United Kingdom Income Tax Treaty (2016)
- Uruguay – Vietnam Income and Capital Tax Treaty (2013)
- Albania – Switzerland Income and Capital Tax Treaty (1999)
- Austria – Belgium Income and Capital Tax Treaty (1971)
- Bahrain – China (People’s Rep.) Income Tax Treaty (2002)
- China (People’s Rep.) – Indonesia Income Tax Treaty (2001)
- China (People’s Rep.) – Macau Income Tax Agreement (2003)
- China (People’s Rep.) – Russia Income Tax Treaty (2014)
- Ethiopia – Netherlands Income Tax Treaty (2012)
- France – Luxembourg Income and Capital Tax Treaty (1958)
- Germany – Netherlands Income Tax Treaty (2012)
- India – Japan Income Tax Treaty (1989)
- Luxembourg – Tunisia Income and Capital Tax Treaty (1996)
- Malaysia – New Zealand Income Tax Treaty (1976)
- Mali – Monaco Income Tax Treaty (2012)
- Norway – Switzerland Income and Capital Tax Treaty (1987)
- Russia – Singapore Income Tax Treaty (2002)
- Singapore – United Arab Emirates Income Tax Treaty (1995)
New DTT Germany-Australia indirectly introduces BEPS action plan no. 7 in Germany
BEPS action plan no. 7 is introduced indirectly by changing double taxation treaties. Germany now follows a future interpretation of article 5 of the OECD model tax treaty. Below is a quote from article 5 chapter 8 of the new DTT Germany- Australia, which entered into force on 7th December 2016, where this has been introduced already. If you look at the underlined lines, you will see that a permanent establishment in another country can no longer be avoided by signing contracts at the seat of the mother company.
“…Notwithstanding the provisions of paragraphs 1 and 2 (a P. E. is the following…) but subject to the provisions of paragraph 9 (independent agents), where a person is acting in a Contracting State on behalf of an enterprise and
a) in doing so, habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and these contracts are
- in the name of the enterprise, or
- for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use, or
- for the provision of services by that enterprise, or
b) manufactures or processes in a Contracting State for the enterprise goods or merchandise belonging to the enterprise,
that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 6 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.”
This new rule will have big influence on many companies doing business abroad via a rep office that so far was not considered as a permanent establishment (P.E.). So far it was possible to avoid a P.E. and all obligations connected to that (e.g. bookkeeping in Germany, submitting tax declarations in Germany, paying taxes on a fair share of the profits of the company for the German P.E. etc.) by e.g. only preparing contracts with clients by German staff and having them signed abroad.
Once the new rule is applied, this will no longer be possible. The implementation in all existing double taxation agreements shall be done by the so called multilateral instrument in 2017:
- All exceptions for the constitution of a permanent establishment shall be under the condition of ancillary and preparatory functions
- Anti-fragmentation rule: the partitioning of ancillary and preparatory functions on/of several companies shall be prevented , i.e. one has to look at a summarized consideration of the individual activities
- Characteristic feature of independent agents:
- Controlling influence with direct or indirect participation at least 50%
- More than 90% of the mediated sales (brokerage) to a nearby company
Therefore all companies affected need to reconsider their sales activities. Either they reduce the sales activities and therefore do not create a permanent establishment in another country or they go on as before or even increase their sales activities on other countries and accept a permanent establishment or even better establish a subsidiary abroad.
Other planned changes
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