Germany: Draft bill proposes option for corporate taxation of commercial partnerships

The German Federal government published the draft bill for the modernisation of corporate taxation law

A draft bill for the modernisation of corporate taxation law has been published

The German Federal government published the draft bill for the modernisation of corporate taxation law.

The draft bill would introduce an option for corporate taxation of commercial partnerships, and includes the following measures to modernise corporate taxation law:

  • Option for corporate taxation for commercial partnerships and partnerships
  • Tax deductibility of foreign exchange losses relating to shareholder loans
  • Opening up the German Reorganisation Tax Act to transformations of corporations worldwide

Option for corporate taxation

The draft bill aims to introduce an option for commercial partnerships to be taxed like a corporation.

  • For income tax purposes, companies opting for such treatment would be deemed equivalent to corporations (also for the purposes of trade tax).
  • The partners would be treated as not personally liable shareholders of a corporation.
  • Under civil law, the company would remain a partnership.

In order to exercise this option, an application would be filed to the competent tax office by the partnership. The application would be irrevocable and would need to be made before the start of the fiscal year in which taxation as a corporation is to apply. Retroactive application would not be possible.

The transition from transparent taxation as a partnership to corporate taxation would be treated as change of form for tax purposes. To determine that this fictitious change of form would be “tax neutral,” the requirements of the German Reorganisation Tax Act would have to be met.

The draft bill would allow for a reversion option. On application, the company could revert to transparent taxation as partnership. This event would be treated as change of form—from a corporation to a partnership, also without retroactive tax effect. The application would have to be made before the start of the fiscal year in which taxation as partnership is to apply again.

Excluded from the option for corporate taxation are:

  • Investment funds within the meaning of the German Investment Taxation Law [InvStG]
  • Companies that are not subject to taxation comparable to German unlimited corporate tax liability after exercising the option in the country in which their place of effective management is located—this is to prevent hybrid arrangements.

The effective date of the amendments would be 1 January 2022.

Reduction in profits from exchange rate fluctuations relating to shareholder loans

Reductions in profits relating to loan receivables of a major shareholder (shareholding of more than 25%) of a corporation, from certain financially comparable receivables and related to the use of collateral for such loan receivables generally are not tax deductible.

According to the contemplated amendment in the draft bill, foreign exchange losses would not be deemed reductions in profits, and thus no longer would be subject to non-deductibility. The amendment would be applied for the first time to reductions in profits occurring after 31 December 2021. For reductions in profits from previous periods, the appeal proceedings at the German Federal Tax Court (file ref. I R 41/20) would be taken into account.

Opening parts of Reorganisation Tax Act relevant for corporations to worldwide transactions

Application of the Reorganisation Tax Act to transformations of corporations is currently limited to companies from EU/EEA countries. In addition, the Corporation Tax Act provides for beneficial treatment for certain mergers of third-country corporations.

The Reorganisation Tax Act would now to be opened up for certain transformations of corporations worldwide. This would concern, in particular, spin-offs or demergers of third-country companies as well as cross-border mergers. However, contributions and the exchange of shares would not be covered.

  • The transformation would have to show the structural features of a domestic transformation.
  • In addition, the Federal Republic of Germany's right to tax could not be restricted or excluded.
  • The opening up to worldwide application would apply initially for transformations with a transfer date for tax purposes after 31 December 2021.

What’s next?

The Bundestag must pass the draft bill before the end of the legislative period—meaning before the constituent meeting of the new Bundestag after the federal elections on 26 September 2021. Otherwise, the draft bill would be subject to “discontinuity.” The final scheduled meeting week of the Bundestag is set for the week from 21 to 25 June 2021.

Read a May 2021 report [PDF 375 KB] prepared by the KPMG member firm in Germany

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