Tax Information September 2024

Content of tax information September 2024

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Introduction of the E-Invoice in 2025: What companies need to know now

The digitalisation of business processes is progressing steadily, and there is no way around e-invoicing in accounting either.

  • From 1 January 2025 all companies must be able to receive electronic invoices.
  • From 1 January 2027 companies with B2B services or deliveries with a turnover of more than 800,000 in the previous year will be obliged to issue electronic invoices to those business customers only.
  • From 1 January 2028 all companies with B2B services or deliveries must issue e-invoices to business customers.

What is an e-invoice?

An e-invoice is an invoice that is issued, transmitted and received in a structured electronic format. This means that the invoice is not available as a PDF or image file, but in a structured electronic data format as defined in the European EN 16931 series of standards such as ZUGFeRD or X-invoice that can be processed automatically by machines.

Why switch to e-invoices?

Switching to e-invoices has numerous advantages:

  • Increased efficiency: the manual effort involved in processing paper invoices is eliminated. Invoices can be captured and processed automatically.
  • Cost savings: By eliminating printing, postage and storage, companies save costs.
  • Faster incoming payments: Electronic invoices can be processed and paid more quickly.
  • Environmentally friendly: Paper consumption is significantly reduced.

How do you prepare?

  • Check technical equipment: Make sure your accounting software is capable of creating and processing e-invoices in the required format.
  • Employee training: Your employees should be trained in how to use the new technology. This applies to both the creation and processing of e-invoices.
  • Communication with business partners: Inform your business partners about the switch to e-invoices and agree on the technical details.
  • Observe the legal framework: Ensure that your e-invoices comply with legal requirements, particularly with regard to retention obligations and data protection.

Conclusion

Switching to e-invoices is an important step towards digitalisation and offers numerous advantages. At the same time, however, it also requires thorough preparation to ensure a smooth transition. As tax consultants, we are happy to assist you with the implementation and ensure that your company fulfils the legal requirements.

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Hurry up: Savings for employees and employers through the inflation adjustment premium rus out at the end of 2024

After the COVID lockdown inflation in Germany increased sharply and a lot of employees faced higher costs. As one initiative of relief, the German government decided that all employers may pay a one-time inflation adjustment premium of up to 3,000 Euros to each employee. This is completely tax free and also does not raise social security benefits, neither for the employer nor for the employee. Employees do not have to declare this additional income in their personal income tax declarations

The amount can be paid at one time or in installments. It can be paid to all employes in full, also part-time workers, mini jobbers, apprentices or those on parental leave. It is sufficient if they work with the employer for a short time.

The payment can also come from the mother company of a group of companies, if the employees work for their German subsidiary, but it must be taken down in the payroll accounting documents of the German subsidiary for later revision.

The benefit must be granted in addition to the salary already owed, i.e. the tax exemption only applies to a “new” benefit provided by the employer. Bonusses already agreed on before 26th. October 2022 cannot be rededicated as inflation adjustment premium but can be used for “new” bonusses. The premium can also not be used to compensate overtime hours for which a special compensation has been agreed on before 26th. October 2022. If there was no such agreement before the inflation adjustment premium can be used to compensate overtime hours.

Conclusion

Hurry up if you wish to grant the tax free bonus of 3,000 € to your employees as this special regime will run out on 31 December 2024. Payments after this date cannot profit from the inflation adjustment premium.

If you wish to read more about „How to increase the net salary of employees in Germany and tax free benefits please see my publication in the  GGI Newsletter ITPG 1-2024.

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Apply for an exemption certificate as a precautionary measure: Why you should act now?

In the complex world of tax law, it is crucial for entrepreneurs to act with foresight in order to avoid unnecessary tax burdens. One aspect that is often overlooked is applying for an exemption certificate for taxes at source in good time. Without this certificate, unexpected tax claims may arise in the event of capital gains or hidden distributions. This article explains why the exemption certificate is so important and how you can protect yourself from unnecessary payments.

What is a certificate of exemption?

An exemption certificate is a document that protects companies from the obligation to deduct withholding tax. For example, if you receive dividends or other investment income, a withholding tax of 25% and solidarity surcharge of 5.5% must normally be withheld by the paying agent and must be paid to the tax office. You can avoid this deduction with a valid exemption certificate.

Precautionary application: Protection against unexpected tax charges

An exemption certificate should not only be applied for when capital gains are expected, but also as a precautionary measure to avoid unforeseen tax claims. This is particularly important in the following case.

Hidden profit distributions (vGA)

During tax audits, the tax office may determine that a hidden profit distribution has occurred. A hidden profit distribution exists if the company grants benefits to a shareholder that are not an open profit distribution, but are made in the context of business relationships, e.g. through excessive salaries, unreasonable interest, rents or other unusual benefits. In such cases, a vGA is treated as a profit share on which withholding tax is levied. Without an exemption certificate, the company is obliged to pay withholding tax, which can lead to considerable financial burdens as it may take years until the tax is refunded. A precautionary application for an exemption certificate can help to avoid this situation.

The exemption certificate is only valid from the date on which it is issued by the tax office. A retroactive application is not possible. Make sure that you apply for the exemption certificate in good time, as it may take up to twelve months to get it and it is usually only valid for a certain period of time in the future with a maximum of three years. A timely application prevents capital gains tax from being withheld, which you would later have to reclaim at great expense and time delay.

We will be happy to apply for the exemption certificate for you.

Conclusion

A precautionary application for an exemption certificate can protect your company from unexpected tax burdens, especially if a hidden profit distribution is discovered during a tax audit. Act with foresight and avoid unnecessary financial burdens by taking action in good time. If you have any questions regarding the application or the associated tax obligations, we will be happy to assist you as your tax consultant.

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How much profit must be attributed to a locker, is a co-working space sufficient for obtaining a tax number, or the old question of PE or no PE?

On the one hand we are getting more and more requests from companies who have doubts if their ongoing business activities, physical presence or employees in Germany create a permanent establishment (PE) in Germany. On the other hand, some of our new clients who just established a German subsidiary don’t get a German tax number because they did not pay attention when signing a contract with an office provider. I have therefore decided to make a presentation on this for tax advisors from all over the world in October but are happy to summarize the highlights for you below.

According to section 12 of the German General Fiscal Code a permanent establishment shall mean any fixed place of business or facility serving the business of an enterprise. Examples are the place of business management, branches, offices, factories or workshops, warehouses, purchasing offices or sales outlets, mines, quarries or other stationary, moving or floating facilities for the exploitation of natural resources or building sites or constructions or installation projects, including those moving or floating.

Therefore, a PE requires a business facility or installation with a fixed relationship to the earth’s surface, which is of a certain duration, serves the activity of the company and over which the taxable person has a power of disposal that is not merely temporary. Unfortunately, there is no details to this in the binding law so that there is a lot of uncertainty around and often courts must make a final decision if what you do creates a PE or not. In order to make this more understandable here are some examples:

  • If the operative management is done in Germany this will create a PE or a tax liability of a foreign corporation. If you wish to avoid that you need to be able to prove that all material decision were taken outside of Germany. Store travel and hotel receipts, add the place (outside Germany) where you have signed documents, don’t give too much power of attorney to your German employees and create sufficient substance (e.g. employees, office, phone) abroad.
  • If there is a German entity and one or several entities of the same company abroad, the German tax authorities will usually assume that all profits less certain costs plus a margin must be taxed in Germany (cost+). Therefore, it is important to calculate and document the attribution of profits following the Authorised OECD Approach (AOA). This includes the determination of the services/sales of a PE and later on the attribution of profits to the different entities.
  • Office providers offer a lot of various space possibilities for those companies that do not yet need their own large office. It is not easy to find the cheapest solution that will also suffice to obtain a tax number in Germany. A mere letterbox, virtual office, part-time coworking space, floating station or hot desk is usually not sufficient and may delay the process of fiscal registration by far. The minimum requirements for a fixed workplace is a desk, chair and lockable filling container. This can be an office space of your own (lockable room with office equipment) or a full-time coworking space with access to a table, chair and a locker of your own.
    You must have access to your working space at all times. A limit of e.g. 5 or 10 times per month is not sufficient. Moreover, you must make sure that all mail sent to your German business address is read and answered within short time (e.g. by the court or tax office). Please make sure opening, scanning and forwarding surface mail by email is included in the contract with your office provider. Please also note not to sign a service contract. You need a rental contract for trade registration with the city.
  • The BFH (superior fiscal court in Germany) had already ruled in 2019 that a locker provided to an engineer working as a subcontractor for the maintenance of aircraft for the exclusive use of the tools to be provided by him is a fixed facility and therefore created a German PE. However, the court did not rule which profit must be attributed to that locker. The tax office tends to calculate the profit by the amount the German clients had to pay for the service including expenses and deduct a flat-rate discount of e.g. 20% for business expenses. Therefore, we recommend to a) check the contracts with German clients if lockers will be provided, b) no laptops will be provided to the employees and c) the profits will be calculated according to the Ordinance on the Apportionment of Permanent Establishment Profits (BsGaV).

 

Conclusion

It is vital to pay attention when doing business in Germany if what you do creates a permanent establishment. If you wish to create a German entity watch out to sign the correct contract. The management of the company is responsible for financial compliance. In case you are not sure please ask a tax consultant like us.

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Determination of intra-group interest rates – New German rules not in line with OECD guideline

The new Section 1 (3d) AStG (Foreign Tax Act) largely elevates the requirements of the VWG 2023 (administrative principles, which were binding only for the tax authorities) to the status of law. However, section 1 para. 3d sentence 1 no. 2 AStG has no predecessor in the VWG. According to this, arm’s length interest is to be derived on the basis of the group rating and no longer the stand-alone rating. Therefore, this new German approach breaks with previous case law and, in its sweeping nature, also with the OECD guidelines.

According to the explanatory memorandum, the introduction of Section 1 (3d, 3e) AStG is to be seen as a reaction to recent BFH (superior fiscal court) case law, according to which the intra-group interest rate is derived from the economic circumstances and the creditworthiness of the intra-group borrower. In the opinion of the German legislator, this principle is susceptible to structuring, because groups can then choose the creditworthiness and therefore the interest rate of the subsidiaries themselves, for example by providing them with the appropriate equity and debt capital. There is an increased risk that double taxation cases and mutual agreement procedures will increase.

Besides that, the old rules for determining intra-group interest-rates remain except for the above mentioned changes. As they may not be clear to all here a short summary:

General rule

To determine the appropriate (arm’s length) interest rate, the Comparable Uncontrolled Price Method (CUP) is to be applied as a matter of priority. The arm’s length price is the interest rate at which third parties would have granted the loan on the money or capital market under comparable conditions.

  • If the German company has refinanced the loan it has granted with the bank, the benefit granted to the shareholder can be calculated according to the debit interest charged by the bank.
  • Otherwise, the usual bank credit interest rates form the lower limit and the usual bank debit interest rates form the upper limit of the “prevented increase in assets”. The relevant amount of the estimate must be determined within the margin. The lack of collateralization of the loan must be taken into account.
  • As a rule, the recognition of debit interest is not justified if the GmbH does not conduct any banking transactions and therefore does not have the associated expenses.
  • If no other indications are discernible, it can be assumed on the basis of experience that private lenders and borrowers share the customary bank margin between debit and credit interest.
  • If the subsidiary grants its controlling shareholder a loan that has the character of a fluctuating unsecured personal loan, overdraft interest rates for private households can serve as a reference point when estimating the arm’s length interest rate.

Conclusion

Special attention must be paid to the determination of interest when intra-group loans or receivables are provided. Please note the new German rules that differ from the OECD rules. If not applied this may lead to corrections by the German tax authorities. We recommend having this checked by a German tax expert.

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