Tax Information December 2024

Content of tax information December 2024

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Introduction of the Business Identification Number (W-IdNr.) starting November 2024

We would like to inform you about an important update in the German tax system: the introduction of the Business Identification Number (W-IdNr.), which is being issued since November 2024. This new number will be assigned to all economically active individuals and businesses in Germany, and it aims to simplify communication between businesses, individuals, and authorities.

What is the Business Identification Number (W-IdNr.)?

The W-IdNr. is a unique identification number assigned to all economically active individuals and businesses in Germany. This includes companies of all legal forms. The purpose of this new identification number is to simplify communication between the parties involved and improve administrative processes within the tax system.

How will the W-IdNr. be implemented?

  • Starting date: The nationwide introduction of the W-IdNr. has begun on November 1, 2024.
  • Gradual rollout: The assignment of the W-IdNr. will be carried out in stages, with full implementation expected by 2026.
  • Issuing authority: The W-IdNr. will be exclusively issued by the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt), and there will be no cost for receiving the number.

Who will receive the W-IdNr.?

The W-IdNr. will be assigned to all economically active individuals and businesses in Germany. This applies to businesses of all legal forms (e.g., sole proprietors, partnerships, corporations).

What does this mean for you?

For Businesses: If you are a business owner, you will receive a W-IdNr. in the future. This number will be used for various official communications with tax authorities and other public bodies.

No Changes to Other Identification Numbers:

Your tax number (Steuernummer) will remain valid, and you will continue to use it on tax forms from the state tax authorities. The tax identification number (IdNr.) for individuals will also continue to function as a unique identifier for natural persons.

Purpose of the W-IdNr.:

The primary goal of the W-IdNr. is to simplify the communication between businesses, individuals, and authorities, as well as streamline processes between the authorities themselves. This is part of a broader effort to improve efficiency in the tax and administrative systems.

What is the format of the W-IdNr.?

The W-IdNr. will consist of the letters “DE” followed by nine digits.

Additional Information:

The W-IdNr.-Regulation (W-IdNr.-Verordnung) will regulate various details about the W-IdNr., such as the exact timing of its introduction, the rules for its issuance, and deadlines for its deletion.

What do you need to do?

Currently, no immediate action is required from your side unless you are contacted by the authorities for the early issuance of the W-IdNr. We will ensure that you are updated as the rollout progresses and help you navigate any steps you need to take.

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Important Changes in VAT for Small Businesses starting in 2025 – Take Action Now!

There will be significant updates to the Small Business Regulation (Kleinunternehmerregelung) starting on January 1, 2025. These changes particularly affect the sales thresholds for small businesses and could have a major impact on your tax situation. We would like to inform you of the key updates so that you can plan accordingly.

Key Changes to the Sales Thresholds:

The small business regulation allows entrepreneurs not to charge VAT in their invoices and reduces their administrative efforts by not having to submit regular VAT returns. Under the current rules, you could apply for the small business regulation if:

  1. Your sales in the previous year were under €22,000
  2. Your sales in the current year were expected to be under €50,000

Starting January 1, 2025, these thresholds will be significantly increased to:

  1. €25,000 for the previous year
  2. €100,000 for the current year

What Does This mean for You?

Higher Sales Limits: If your sales in 2024 are below €25,000 and you expect them to remain below €100,000 in 2025, you will continue to qualify for the Small Business Regulation. This increase in the sales thresholds makes the regulation more accessible to small businesses.

Strict Thresholds: From 2025 onwards, the new limits will be hard thresholds. This means that if your sales exceed €100,000 in the current year, you will immediately lose your small business status. You will then be required to charge and remit VAT on your invoices. This change differs from the previous system, where a forecast estimate of annual sales was sufficient, and a mid-year switch was not required.

What Should You Do?

Monitor Your Sales: Starting in 2025, it will be crucial to regularly track your sales to determine if you exceed the new threshold of €100,000. Pay close attention in the latter months of the year to ensure you switch to the standard VAT system in time if necessary.

Conclusion

Tax Planning and Advice: If you’re unsure whether continuing under the small business regulation is advantageous or if switching to the regular VAT system might be better, we are here to provide personalized advice and help you make the right decision.

These changes provide greater planning certainty, but also introduce additional responsibilities for tracking your sales. We highly recommend adjusting your tax strategy early on to accommodate these updates. If you have any questions or need assistance, we will be happy to assist you as your tax consultant.

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The employee’s home office as a permanent establishment

Foreign companies with only a few employees in Germany often try to avoid creating a permanent establishment in Germany as this would result in additional administrative burdens and also in having to pay taxes on the income that can be attributed to Germany. Therefore, these companies often ask their German staff to work from home or visit client and potential clients without an official office. Since German tax authorities closely watch what is going on, the question often came up if the homeoffice of an employee can create a permanent establishment. Especially during the COVID lockdown many people worked from home and those normally working abroad and living in Germany had to fear that they would create a permanent establishment of their employer in Germany.

Decree on application of the General Fiscal Code

In 2024 changes have been made in the decree on application of the General Fiscal Code that bring much more clarity and security. This is the basic rules now:

An employee working from home does not generally constitute a permanent establishment.

As a rule, the employer does not have sufficient power of disposal over the home office even if:

  • costs for the home office and its equipment are borne by the employer,
  • a rental agreement for home office space is concluded between the employee and the employer,
  • no other workplace is made available to the employee.

Exception:

The employer may exceptionally have power of disposal over the home office if the employee performs management functions. If the company does not have its own premises, the management’s home office may be classified as business premises.

How to minimize that risk?

If it cannot be avoided that a manging director lives in Germany, the following tips may help:

  • The centre of business management within the meaning of § 10 AO (General Fiscal Code) should be located at a foreign place of activity – office or home office If there is one managing director all operational decisions (relevant to the day-to-day running of the company) should be made out of Germany. This not only comprises of signing contracts on behalf of the company abroad.
  • Proof of supervisory/control function in the case of any local managing directors: Make sure that local managing directors only exercise supervisory or control functions and do not make operational decisions.
  • If there are several managing directors, the foreign managing director(s) should have more power/decisive tasks than the German one, especially in finance matters (CFO). If not possible the foreign directors should be given the right of final decision within the framework of rules of procedure.

Summary

The homeoffice of an employee normally does not create a permanent establishment of a company. In case the employee is a managing director of the company this may be different. If you wish to avoid that special precautions must be taken.

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Retroactive Changes in transfer pricing rules for 2024

On 12th December 2024, the German Federal Ministry of Finance (BMF) published the new version of the “Administrative Principles on Transfer Pricing – Principles for the Correction of Income pursuant to Section 1 AStG” together with annexes. The document is 135 pages long and discusses the principles for the international definition of income according to the arm’s length principle in the provisions of domestic German law and the DTAs from the viewpoint of the German tax authorities. It is not binding for the taxpayer and for fiscal courts, but if a taxpayer does not want to follow them, he should be prepared to go to court as it is binding for the tax authorities.

It is generally applicable for the first time for the 2024 assessment period and therefore retroactively since 1st. January 2024. The previous administrative principles on transfer pricing 2023 are to be applied for the last time for the 2023 assessment period. Also, the BMF circular of 9.11.2001 (Administrative principles – posting of employees) is repealed by the current BMF circular.

The main changes include

  • According to Section 1 (3d) AStG, it should not comply with the arm’s length principle if the taxpayer cannot credibly demonstrate that (a) it could have provided the debt service for the entire term from the outset (debt sustainability) and (b) the financing is economically necessary and used for the business purpose;
  • New explanations on determining the arm’s length interest rate. It is particularly relevant that in cases where the scope of the companies to be included in a group of companies differs from that of the group, it is now necessary to consider how rating agencies would carry out the rating.
  • Another new aspect is that, according to the final letter, the ratings of the Deutsche Bundesbank are recognized for the purposes of interest rate benchmarking.
  • It also states that if the corporate group consistently applies the corporate group’s rating in relation to all financing relationships with Germany (both inbound and outbound), remuneration for increased creditworthiness in relation to intra-group financing relationships is also not to be applied.
  • In addition, a new reference to the BMF letter “Steuerliche Behandlung des Arbeitslohns nach den Doppelbesteuerungsabkommen” (Tax treatment of wages under double taxation agreements) was included with regard to the secondment of employees (letter dated 12.12.2023). The arm’s length principle must be observed in cases of temporary employment.
  • In addition, the administrative principles in connection with the relocation of functions are presented, including the definition, application and practical relevance.

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Other Changes in transfer pricing rules

New Transfer Pricing documentation Rules

There will be the following changes to tighter and broader submission obligations for transfer pricing documentation from 2025:

– Within 30 days of an audit order by the tax authorities, the following must be submitted:

  • A so-called “transaction matrix” (still unclear whether this applies to all or only companies above a certain level of intra-group sales or services)
  • The master file (only applies to companies with more than € 100 million group turnover in the previous year)
  • Documentation of extraordinary business transactions

–  Within 30 days of a separate request the following must be submitted:

  • Other parts of the transfer pricing documentation (e.g. Local File).

A precise definition of the contents of the transaction matrix is to follow in an updated Profit Deferral Recording Ordinance (GAufZV) that will follow later.

New Transaction Matrix

According to the explanatory memorandum and submission requirements of the new law, the new transaction matrix should include the following 7 points.

  1. the subject matter and nature of the transactions
  2. the parties involved in the transactions, identifying the service recipient and service provider
  3. the volume and consideration of the transactions, e.g. loan amount and interest rate
  4. the contractual basis, even if this was verbal.
  5. the transfer pricing method used.
  6. the tax jurisdictions involved.
  7. whether transactions are not subject to standard taxation in the tax jurisdiction concerned.

Penalties

The penalties for failing to implement the new regulations have been significantly tightened and range from the tax office being authorized to estimate income if records submitted are not submitted or are substantially unusable to severe surcharges. The surcharges amount to €5,000, but a minimum of 5% and a maximum of 10% of the additional amount.

For the late submission of usable records, a surcharge of at least €100 per day the deadline is exceeded, up to a maximum of €1 million.

Recommendation:

Companies should not wait until an audit is announced or the authorities approach them before preparing transfer pricing documentation. 30 days are usually too short to prepare what is needed. Also, it will be very difficult to trace what was going on before when you try to prepare this documentation as not all will remember, esp. when there is new staff in place. We strongly recommend preparing/updating transfer pricing documentation documents immediately and when there are changes and have the documentation readily available at any time.

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