Global Tax Alert | 7 June 2013

German legislature finally passes 2013 annual tax act measures

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After a 5 June conference committee session, the German lower and upper house passed on 6 and 7 June 2013, the “Act concerning the Implementation of the Administrative Cooperation Directive and the Amendment of Taxation Provisions” (Amtshilferichtlinien-Umsetzungsgesetz – AmtshilfeRLUmsG - the Act). The Act includes in essence, all the undisputed measures of the former “Tax Act 2013,” which failed to receive approval in February 2013, but was subsequently revived by an initiative of the German Bundesrat (the upper house). Most of the provisions of the Act will become effective either with the day which follows the lower house vote date (6 June 2013), although some of the provisions apply retroactively as of 1 January 2013, or to all open years.

The Act governs now, inter alia:

  • The implementation of the “Authorized OECD Approach”: (AOA) on the attribution of profits to a permanent establishment, which treats the permanent establishment as a separate and independent enterprise. The relevant provisions will be mostly applied as of 1 January 2013.
  • The implementation of the 2009 EU information exchange and administrative cooperation directive: Automatic information exchange will start under the Act as of 1 January 2015 for periods beginning on 1 January 2014.
  • Elimination of Real Estate Transfer Tax (RETT) blocker structures (Anti RETT Blocker Act): The 95% or greater transfer of a company owning German real estate triggers RETT. When determining the 95% threshold in a tiered structure with multiple owners / shareholders, prior law prevented the triggering of RETT even if, based on economic value, more than 95% of the company was transferred. As per the Act, such tiered RETT blocker structures are now disregarded, and under the intention of the law, any indirect economic ownership acquisition of 95% or more in a German real estate owning company is subjected to RETT. The new provision applies to all transfers occurring on or after 7 June 2013.
  • RETT group transaction exception: The German RETT Act includes a very limited group restructuring exception, which exempts taxable real estate transfers from RETT if they are caused by statutory reorganizations under the German Reorganization Act implemented within a controlled group (e.g., mergers, spin offs, hive downs). The group exception is now extended to all controlled group transfers, which are based on company law transactions (e.g., contributions of real estate or shares in a real estate company against new shares or partnership interests). The new provision applies to all transfers occurring on or after 7 June 2013.
  • Hybrid instruments: Dividend distributions or other payments from equity instruments will no longer qualify for the German dividend exemption, if such payments are deductible in the jurisdiction of the issuer. The new rule applies to all payments received in the first fiscal year of the recipient which begins after 31 December 2013 (that is, in 2014, if the recipient is a calendar year taxpayer).
  • Taxation of cross-border partnership payments: Recent German case law prevented Germany from taxing interest or royalty payments of a German partnership to its partners as business profits of the German partnership, if those payments were made to partners resident in a foreign treaty jurisdiction (applicable to most German tax treaty jurisdictions). The Act introduces a treaty override rule which now subjects those payments in essence to German taxation. In the event that the foreign jurisdiction taxes those payments without crediting the German applicable tax, the German tax is reduced by the foreign tax paid on such income. The provision applies to all open years of a taxpayer. It remains to be seen, whether German courts will tolerate in the years to come the treaty override approach of the provision.
  • Withholding tax on payments to hybrid entities: Treaty benefits on reduced withholding tax rates are not granted to a foreign recipient, if the recipient of the underlying payment is, under the laws of the other treaty jurisdiction, not the (taxable) recipient of the payment. In this event, treaty benefits are only granted to the person, which is the recipient of the payment under the rules of the other jurisdiction, provided that this person can avail itself of the benefits of a German tax treaty. The rule applies to any payments made on or after 7 June 2013.
  • Limitation of retroactive loss utilization in certain merger transactions: Under prior law, losses of a transferee in a merger transaction could be used to shelter profits of the transferor accumulated within a period of up to eight months prior to the merger filing date. This opportunity has been removed for all merger transactions filed on or after 7 June 2013.
  • Tightening of repo and stock lending transactions with partnerships: The existing rules which disallow certain tax benefits stemming from structured repo and stock lending transactions are extended to situations in which certain partnerships act as the lenders. The rule applies to transactions where shares are transferred on or after 1 January 2014.

In addition, the Act includes, among multiple other measures, some changes in the VAT and tax procedure law area, as well as amendments of the Estate and Gift Tax Act, which curtail certain estate and gift tax planning opportunities by transferring interests in a “cash company.” The compromise did not cover proposed rules concerning the shortening of record keeping periods for tax relevant documents. Those provisions will be discussed in the next session of the conference committee on 26 June 2013. A proposal of the upper house to extend the criminal law statute of limitation for acts of tax evasion was also not adopted.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, German Tax Desk, New York
  • Jorg Menger
    +1 212 773 5250
    jorg.menger@ey.com
  • Thomas Eckhardt
    +1 212 773 8265
    thomas.eckhardt@ey.com
  • Simone Guter
    +1 212 773 4350
    simone.guter@ey.com
  • Robert Polatzky
    +1 212 773 7853
    robert.polatzky@ey.com
  • Theresa Seitner
    +1 212 773 0635
    theresa.seitner@ey.com
  • Daniela Ahrling
    +1 212 773 4752
    daniela.ahrling@ey.com

EYG no. CM3512