Tax news Germany - October 2021
von Peter Scheller
The development of German tax legislation is characterised by constant, and sometimes fast-moving, changes. This is also the case with the taxation rules for trans-border transactions. International taxation is not only of importance for Germans with economic interests abroad. Foreigners with economic interests in Germany, or for those foreigners who live and work in Germany, are also affected by changes in the German tax law. This article is to inform you about recent changes in legislation, rulings of the fiscal courts and decrees of the tax authorities.
The following topics may be of interest for expatriates living and working, or companies doing business, in Germany.
1) Capital participation of employees
It is a taxable fringe benefit if a business entity grants shares or capital participation to its employees without charging a price or using a price below market value. Until the end of 2020, a benefit of up to 360 Euro per year was tax-free. From 1 January 2021 the tax-free amount increased to 1,440 Euro.
If a small or medium-sized company grants shares or participations in excess of the above mentioned tax-free amounts, the income taxation can be deferred up to 12 years. The fringe benefit has to be taxed before this deadline if the employee sells the shares or participations or if the employment terminates. A major problem is that the deferment of taxes does not apply to social security contributions. This results in the inconsistent situation that the fringe benefit is not taxed at the grant date, but social security contributions are due immediately when the benefit is granted.
Salaries and other remunerations paid to employees who are performing their work predominantly in Germany are subject to German income tax. This also applies if the employee is working for a foreign employer remotely in Germany. These payments are also subject to German social security contributions if the employee is not working on an assignment contract in Germany (see also here).
The tax-free amount of 1,440 Euro can also be used by an employee working in Germany if a foreign employer grants shares or participations.
However, whether the employee can use the 12-year deferral is questionable. This is due to the fact that a foreign company cannot withhold income tax of its employees if it has no permanent establishment or permanent representative in Germany. Therefore, the employee has to declare salaries and fringe benefits in his or her income tax return. The German law however disallows the deferral if the application of the employee is carried out in his or her income tax return.
2) Option of a partnership to be taxed as a corporation
In a lot of countries partnerships are not used to carry out trade and business activities. By contrast, in Germany partnerships are widely used to do business. The German taxation of partnerships is very different from the taxation of corporations. Partnerships treated as transparent entities: The profits will not be taxed by the partnership but is levied at the level of its shareholders.
Germany has now introduced a regulation which allows partnerships to be treated as a corporation. The corporation is subject to German corporation tax, the solidarity surplus charge and also trade and business tax. Distributions will be taxed at the level of the shareholders. From 2022 a partnership can opt to be taxed as a corporation.
Foreign partnerships are also entitled to opt for the treatment as a corporation. However, this only applies if the partnership is subject to corporation tax in its home country. Therefore, in most cases foreign partnerships cannot opt for a treatment as a corporation in Germany.
3) Real estate transfer tax
The transfer of real estate is subject to a special tax. The tax rate on the transfer of real estate varies from state to state (from 3.5% in Bavaria to 6.5% in various other states). Until June 30th 2021 the real estate transfer tax was also applicable when 95% of the shares were transferred to new shareholders. From 1 July 2021 onwards the tax is due if 90% of the shares are transferred to new shareholders within a 10-year period.
This transfer tax also applies for foreign companies who are owners of German real estate.
4) Depreciations of computer hardware and software
German tax authorities reduced the average use of computer hardware and software to one year. This means that hardware and software can be depreciated within a 12-month period. This applies for financial years ending after 31 December 2020.
The one-year period does not apply for manufacturing hardware such as 3D printers.
This also applies for foreign companies who have their place of effective management or a permanent establishment in Germany.
5) Losses of capital assets
Losses from capital investments up to 10,000 Euro per year could be credited previously against income from capital investment. From 1st January 2020 the deductible amount has been doubled to 20,000 Euro.
Individuals who are tax resident in Germany have to pay tax on their dividends, interests and capital gains in Germany. Whether the investments are held in a German or a foreign bank is irrelevant. Therefore, expatriates who live in Germany can also use foreign losses from capital investments to off-set against other income from capital investments.
Authors: Peter Scheller, Tax adviser, Master of International Taxation
Alexander Wangerowski, Tax adviser, www.aw-steuern.de
- capital assets
- capital participation
- corporation tax
- income tax
- real estate transfer tax