German cabinet publishes draft bill that, if passed, would provide relief from the current restrictions on interest barrier and tax loss carry forwards | Practical Law

German cabinet publishes draft bill that, if passed, would provide relief from the current restrictions on interest barrier and tax loss carry forwards | Practical Law

This article is part of the PLC Global Finance October e-mail update for Germany.

German cabinet publishes draft bill that, if passed, would provide relief from the current restrictions on interest barrier and tax loss carry forwards

by Heiko Stoll and Stefan Skulesch, Simmons & Simmons
Published on 12 Nov 2009 • Germany
This article is part of the PLC Global Finance October e-mail update for Germany.
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On 9 November 2009, the German cabinet published the draft Law for the Acceleration of Economic Growth (Wachstumsbeschleunigungsgesetz), which is generally expected to come into force on 1 January 2010. The Bill, if enacted, would provide relief from the current restrictions relating to thin cap rules (the so-called interest barrier) and tax loss carry forwards and would additionally provide for a number of other changes that will benefit taxpayers.
On 9 November 2009, the German cabinet published the draft Law for the Acceleration of Economic Growth (Wachstumsbeschleunigungsgesetz) (Bill), which is generally expected to come into force on 1 January 2010. The Bill contains welcome proposals to amend a number of important areas of German tax law, including the interest barrier rules and rules restricting tax loss carry forwards in case of a transfer of the loss making company.
If passed, the new rules under the Bill would provide relief from the current restrictions in these areas and would additionally provide for a number of other changes that will benefit taxpayers.

Treatment of tax loss carry forwards

The scope of application of section 8c of the German Corporate Income Tax Act (CITA), which provides for the partial or full loss of tax loss carry forwards (steuerliche Verlustvorträge), if more than 25% or 50% of the shares in a German company that has tax loss carry forwards (LossCo) are transferred within a period of five years, would be reduced as follows:
  • In contrast to the current wording of section 8c CITA, the Bill provides that mere intra-group transfers that take place after 31 December 2009 will no longer be subject to section 8c CITA; the Bill defines "intra-group transfers" as cases where the shares in both the transferor and the acquirer of the shares in LossCo are directly or indirectly held by a common shareholder.
  • Tax loss carry forwards will not be lost up to the amount of any hidden reserves of LossCo. In this context, the Bill defines "hidden reserves" as the difference between the equity as shown in the tax balance sheet and the fair market value of the LossCo shares to the extent the equity and the fair market value are attributable to assets that are subject to German tax.
  • The privilege for share transfers for the purposes of a recapitalisation prior to a crisis of LossCo will now be extended to apply for an unlimited period of time (currently this rule only applies until 31 December 2009).

German thin capitalisation rules (interest barrier)

The Bill would additionally introduce a number of changes to the operation of the German thin capitalisation rules (the so-called interest barrier). Generally, the interest barrier applies if the negative interest balance (that is, interest expense minus interest income) exceeds 30% of EBITDA as determined for tax purposes.
These changes include:
  • An increase of the threshold amount to EUR 3 million per "business". As a consequence, the interest barrier will not apply in a fiscal year if the annual interest expense of the business does not exceed the sum of:
    • EUR 3 million; and
    • the annual amount of the interest income.
  • Introduction of the "EBITDA Reserve", aimed at allowing businesses to build up an "EBITDA Reserve" in business years where 30% of EBITDA exceeds the negative interest balance. This EBITDA Reserve could then be used in the following five business years if the negative interest balance exceeds 30% of the EBITDA in one such business year and, therefore, the interest barrier, in principle, would apply. The EBITDA Reserve will be introduced with retroactive effect for business years beginning after 31 December 2006.
  • An increase of the threshold amount relating to the "escape clause" from currently 1% up to 2%. The "escape clause" provides for an equity ratio test between the German business being subject to the interest barrier rules and the group which the German business is a consolidated member of.

Trade tax

Decrease of the taxable add-back of leasing and rental payments paid for the use of real estate from currently 16.25% to 12.5%.

Real estate transfer tax

In case of specific intra-group restructurings (for example, mergers, splits) no real estate transfer tax is triggered, provided, that certain additional requirements are fulfilled. These conditions require that the transferor has held the property for at least five years and that the property is not sold by the acquirer during the five-year period after the restructuring.

Comment

Overall, in light of the changes to the restrictions on tax loss carry forwards, consideration should be given (where appropriate) to delaying transactions until after 31 December 2009 to take advantage of the proposed new rules.