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1. Changes in the effective dates of new provisions

The amendments to the "Act for the Further Reform of the Taxation of Enterprises" reported on in article no. 99 were enacted into law in late December 1997. These amendments benefit taxpayers by making changes in the transitional provisions on the entry into force of stricter rules for loss utilisation by corporate shells (sec. 8 (4) KStG) and loss utilisation under the Tax Reorganisation Act. They also retard the effective date of the repeal of the tax exemption for recapitalisation gains on waivers of debt (sec. 3 no. 66 EStG). See our previous article for details.

2. Reduction in the solidarity surcharge

As reported in article no. 100, the solidarity surcharge has been reduced from 1998 onwards by two percentage points. It now amounts to 5.5 % of personal and corporate income instead of 7.5 % as before.

3. Increase in the VAT rate effective 1 April 1998

As expected (see article no. 100), the standard VAT rate has been increased from 15 % to 16 % from 1 April 1998 onwards. The reduced VAT rate remains unchanged at 7 %, however. In spite of the increase, Germany's VAT rates are still among the lowest in the European Union.

Details respecting the transition from the old to the new VAT rate are contained in a lengthy directive issued by the Federal Ministry of Finance dated 10 February 1998 (BB 1998, 455). The most important transition rule is that the new higher rate applies to goods delivered and services performed from 1 April 1998 onwards. The date of invoicing is irrelevant as is the date of receipt of payment and the date when performance was due under the relevant contract. It makes no difference whether an entrepreneur remits VAT based on a cash or accrual basis.

There are a number of situations in which the basic rule is difficult to apply. These situations include payments received on account, partial performance (Teilleistungen), and supplies of goods and services over extended periods of time (Dauerleistungen). The directive issued by the tax authorities provides detailed guidance on these and other issues as does an article by Winter (DB 1998, 160).

4. Tax reform

Article no. 100 reported on a new round of bi-partisan negotiations on major tax reform (p. 15). These negotiations have since collapsed and there would appear to be no prospect of fundamental changes in the German tax system before the national elections scheduled for late September 1998.

Major tax reform remains a live issue, however. The states of Bavaria, Baden-Wuerttemberg, and Hessen have recently each prepared separate draft tax reform proposals, all of which focus on the elimination of perceived tax loopholes and unjustified tax benefits. It is significant that Hessen is currently governed by a coalition of the Social Democrat (SPD) and Green parties while Baden-Wuerttemberg has a Christian Democrat (CDU) government and Bavaria is governed by the Christian Socialists (CSU). The governments of these three states thus include both the principal members of the current national government (CDU/CSU) and the two most important opposition parties (SPD and Greens). The concern of state government with tax reform is a reflection of growing financial difficulties at the state and local level. Should it win the coming elections, the SPD has promised to introduce legislation broadening the income tax base and modestly reducing the highest marginal income tax rate from 53 % to 49 %, or maybe 45 %, for individuals. The SPD proposal is revenue-neutral overall and includes revival of the net worth tax for individuals, though not for businesses. The parties currently in power continue to adhere to their prior proposals, which are more ambitious as regards the tax rates and involve net tax reduction.

There is a strong consensus among all parties on closing tax loopholes and broadening the tax base. Many of the revenue-generating measures discussed in our previous articles on the tax reform debate (see articles nos. 60 and 70) thus stand a good chance of making their way into law no matter what the outcome of the forthcoming elections. The tax initiatives of the German states contain additional ideas.

The essential proposal of Baden-Wuerttemberg, for instance, is to switch from the exemption method to the credit method to avoid double taxation on all "passive" foreign source income.

Taxpayers likely to be affected by the sorts of changes which are under discussion would be well advised to consider exactly what impact such changes might have and think about alternatives.

Disclaimer and Copyright

This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.