Thomas Sauter, KPMG Frankfurt
For editorial cut-off date, disclaimer, and notice of copyright see end of this article.
1 General scope
The 2001 Tax Amendment Act (Gesetz zur Änderung steuerlicher Vorschriften of 20 December 2001 or Steueränderungsgesetz 2001 for short)1 is a lengthy document making changes in the following areas of German tax law:
• personal income tax
• value added tax
• valuation law
• investment subsidies
• other tax laws
The changes in VAT law are summarised in an article in KPMG German News no. 1/2002 p. 43 (article no. 250). The changes in valuation law, investment subsidy law, and other tax laws are not covered. This article deals with the principal income tax changes contained in the 2001 Tax Amendment Act. The new legislation affects 43 of the 99 sections currently contained in the Income Tax Act and includes important withholding tax modifications, including an overhaul of Germany's nonresident income tax withholding and refund procedures under tax treaties.2 A few minor changes affect businesses (sec. 3 below). Most other changes affect individuals or domestic investors as opposed to businesses or international investors.
The overall revenue impact of the 2001 Tax Amendment Act is relatively minor. According to the figures provided by the Finance Committee of the Federal Parliament on 08 November 2001,3 the bill will increase tax revenue by an overall sum of approx. €87 million per year or €870 million over ten years. This figure refers to tax assessable, not to actual cash flow. The Finance Committee data appears fragmentary, however.
2 Withholding tax changes
2.1 Tax treaty withholding
The procedures for obtaining refunds of tax withheld and for obtaining exemptions from the normal rates of withholding by reason of a tax treaty or by reason of the EU Parent-Subsidiary Directive (§§ 50d, 43b EStG) have been completely re-written (new § 50d EStG). A primary purpose of the changes is to reverse the result reached by the Federal Tax Court in its judgement of 11 October 2000.4 This decision appeared to permit withholding exemptions to be applied for and issued even after expiration of the statute of limitations for assessment of the tax in question.
As revised, a withholding exemption can only apply prospectively to income not yet paid at the time the exemption takes effect. An exemption can be retroactively effective only to the date of filing of the exemption request. Furthermore, the obligor (debtor) is permitted to withhold at a reduced rate only if in possession of an exemption certificate (new § 50d (1), last two sentences). Applications for refunds must be filed by the end of the fourth calendar year following that in which the income was paid, or within six months of the date of payment of the withholding tax, whichever is later. This provision gives creditors six months to file for a refund even in constructive dividend situations where the debtor remits tax shortly before expiration of the statute of limitations for assessment.5
2.2 Nonresident withholding tax
2.2.1 Income from capital
§ 49 (1) no. 5 (a) EStG has been modified so that the income referred to in § 38b (5) KAGG is included within the scope of German-source income taxable to non-residents. Under § 38b (5) KAGG, a withholding tax of 20 % is imposed on German source dividends. New § 49 (1) no. 5 (a) EStG applies to dividends that are no longer subject to the old corporation tax credit procedures.6
2.2.2 Artistic performances and athletic events
The nonresident withholding rates under § 50a (4) sent. 2 - 4 EStG have been graduated to provide reduced rates where small sums are earned from artistic performances or participation in athletic events. The new withholding rates apply to compensation paid from 1 January 2002 onwards:7
up to €250
up to €500
up to €1,000
The withholding rates apply to the entire income amount. Hence, withholding on income of €1,000 would be €150 (15 %), but withholding on income of €1,001 would be €250.25 (25 %, the standard rate).
2.2.3 Jurisdiction of tax offices
§ 50a (7) sent. 3 EStG and § 73e sent. 6 EStDV have been modified to provide that tax withheld at the direction of the tax office with jurisdiction over the nonresident person to whom payment is due (the payment obligee or creditor) is to be remitted to the same tax office. The change applies to withholding ordered by a tax office from 1 January 2002 onwards.
2.3 Construction withholding tax
The 2001 Tax Amendment Act makes minor changes in the construction withholding tax that applies under §§ 48 ff. EStG to payments made for construction work on or after 1 January 2002. See the article in KPMG German News no. 1/2002 p. 25 (article no. 247) on the construction withholding tax.
3 Changes affecting businesses
3.1 Valuation of accruals
§ 5 (4b) sent. 1 EStG prohibits the establishment of an accrual for the cost of purchasing or producing an asset. This provision has been reworded to make clear that it applies only to the cost of assets that will be capitalised in future fiscal years, not to assets capitalised in the fiscal year in question. An accrual is permissible for such assets where the cost is for some reason uncertain. The amendment applies from the 2001 assessment period onwards, but is regarded as a clarification of pre-existing law. Hence, the same rule applies to prior years.
3.2 Capitalisation of non-creditable input VAT
Prior law permitted amounts of non-creditable input VAT that were small either in absolute terms or in relation to total input VAT to be expensed instead of capitalised as part of the acquisition cost of new assets (§ 9b (1) sent. 2 EStG). This treatment has now been terminated with effect from the 2001 assessment period onwards, thus requiring capitalisation of all input VAT on assets purchased unless the input tax is creditable (deductible) for VAT purposes.
3.3 Accruals for pension commitments
Accruals for pension commitments are permissible only for commitments made in writing (§ 6a (1) no. 3 EStG). This requirement has now been made more detailed and requires information in writing on the nature, form, conditions, and amount of the future benefits. The amendment is again regarded as a clarification of pre-existing law applicable to assessment periods prior to 2001 as well.
4 Income from capital
4.1 Non-business income from innovative financial instruments
A number of changes have been made in § 20 EStG regarding the taxation of income from capital. Since German income tax law generally does not tax capital gains on financial instruments not held as business property, situations can arise in which it is difficult to segregate the taxable portion of proceeds on sale of a financial instrument from the non-taxable portion. With respect to so-called innovative financial instruments with variable rates of interest, the law provides that the entire excess of sales proceeds over basis is taxable (so-called "market yield") unless the taxpayer can demonstrate the issue yield of the instrument in question. The issue yield is essentially the locked-in revenue from the instrument regardless of market fluctuations. In its judgement of 24 October 2000 (VIII R 28/99 – BStBl II 2001, 97), the Federal Tax Court held the above rules inapplicable to instruments that have no issue yield in the first place. The tax authorities refused to acquiesce in this holding (directive of 7 Feb. 2001 – BStBl I 2001, 149). They have now secured an amendment to the law that codifies their view (new § 20 (2) sent. 1 no. 4 sent. 2 EStG).
The new version is applicable by its terms to all open cases.8 This is arguably a violation of the constitutional prohibition on retroactive application of tax laws.9
Where an innovative financial instrument is denominated in a foreign currency, the difference between proceeds on sale or redemption and purchase cost is calculated in the foreign currency, thus eliminating interim exchange rate fluctuations from the calculation of the differential amount. Interim exchange rate fluctuations continue to influence the value of the differential amount (market yield) expressed in Euro.10
The new law also makes other changes in the scope and application of the market yield method.
4.2 Reporting to the Federal Office of Finance
The annual earnings of foreign investment funds covered by § 18a AuslInvestmG must be reported to the Federal Office of Finance by May 31st of the following year. The same applies to filers of collective withholding tax refund applications. The revised reporting requirements apply to income received on or after 1 January 2002.11
Separate reporting of dividends and other items of income from capital for which an exemption request is in effect is terminated for income received on or after 1 January 2002.12
4.3 Income from capital for agricultural and forestry businesses
Changes have been made in the treatment of certain income from capital for owners of farming and forestry businesses so as to terminate the prior de facto exclusion of such income (§ 13a EStG). The new statute applies for fiscal years beginning on or after 1 January 2002.
5 Individuals as owners of businesses
5.1 Capital losses on sale of shares in corporations
Changes were made in 1999 to the wording of the rules governing the deductibility of loss realised by individuals on the sale of shares in corporations held by the seller as private property, as opposed to business property. The reworded rules were supposed to be "clearer, not different," yet applied by their terms only to sales and other disposals on or after 1 January 1999. The 2001 Tax Amendment Act contains a provision applying these loss limitation restrictions to the assessment periods 1996 to 1998.13
5.2 Credit of trade tax against personal income tax
The 2000 Tax Reduction Act created a limited credit of trade tax against personal income tax from 2001 onwards.14 The 2001 Tax Amendment Act adjusts certain features of the new regime.
5.3 Segregation of business from private interest expense
Since 1999, the Income Tax Act has contained provisions limiting the ability of individuals operating businesses in non-corporate form to structure loans so that the interest qualifies as a business expense (§ 4 (4a) EStG). Considerable changes have now been made in the mechanics of these provisions. The changes generally apply from the 2001 assessment period onwards.
5.4 Income spreading
See sec. 6.1 below regarding a procedural change in the income spreading provisions.
6 Taxation of individuals
6.1 Income spreading
From 2001 onwards, the tax authorities will automatically apply the income spreading provisions of § 34 (1) EStG to qualified income (including, but not limited to, certain capital gains on the sale of businesses) where tax liability is lowered as a result. The prior procedure, by which the tax authorities were required to ask the taxpayer whether they should apply the income spreading provision, proved too cumbersome.
6.2 Employee stock
The waiting period for sale of stock granted to employees under § 19a EStG has been repealed with effect from the 2001 assessment period onwards.
6.3 Cost of commuting to work
Germany has traditionally permitted employees to deduct the cost of commuting between home and work. Prior to 2001, these deductions were graduated depending on the type of transportation used. Beginning in 2001, employees were permitted to deduct flat rate amounts of DM 0.70 / €0.36 for the first 10 km of one-way distance and DM 0.80 / €0.40 for each km of remaining one-way distance. Subject to a limit of DM 10,000 / €5,112, it no longer makes any difference how the employee gets to work. The ceiling amount can only be exceeded by proof of actual cost for public transportation or use of a motor vehicle. The primary change made by the 2001 Tax Amendment Act to this regime is to modify the calculation of one-way distance by permitting, under certain circumstances, the use of a route which is longer, but quicker.
6.4 Exemption for incremental wages paid under semi-retirement law
The Semi-Retirement Assistance Act (Altersteilzeitgesetz) is intended to fight unemployment and promote gradual transition to retirement by allowing employees aged 55 and over to move from full-time to semi-retired status with minimal impact on their later social security pension. A primary condition is a reduction of working hours to half of standard in return for compensation at least 20 % above normal (incremental wages) on the continuing part-time employment. If the employer simultaneously hires an unemployed individual, the government will reimburse the employer for the incremental wage amounts. Furthermore, the incremental amount is tax exempt for the employee under § 3 no. 28 EStG. The scope of the exemption was expanded in 1998 to include civil servants and judges, and has now been expanded once more to include other groups of employees, such as church officials and ministers, whose salaries are not subject to social insurance contributions. The expanded exemption applies beginning with the 2001 assessment period.15
6.5 Wage tax card
The wording of §§ 41b ff. EStG is modified with regard to tax exempt incremental wage amounts.
6.6 Progression clause
Two new items (incremental wages under the Semi-Retirement Assistance Act – see sec. 6.4 above – and certain welfare payments) are added to the list of exempt income that is counted for purposes of determining the applicable tax rate (§ 32b EStG).
6.7 Tax-free subsidies for inner-city historic district home ownership
Subsidies are available from 2002 onwards for the purchase of owner-occupied family-sized dwellings in historic parts of towns and inner-cities in the new German States (former East Germany). Like similar subsidies in the past, the new subsidies are exempted from income tax by § 3 no. 58 EStG.
6.8 Tax exemption for foreign service payments
§ 3 no. 64 EStG has been modified to include employees of publicly funded organisations (such the GTZ, a government-owned corporation for international development) in the scope of a tax exemption for extra compensation provided in connection with foreign service. The exemption was previously limited to foreign service by employees of public law juridical persons or to a limited cost-of-living adjustment. The amendment applies de jure from the 2001 assessment period onwards, but was applied de facto to prior years by the tax authorities as well.
6.9 Support payments to public assistance recipients
Prior law allowed deductions, within certain limits, of support payments to recipients of public assistance (e.g. welfare or unemployment assistance), to the extent public payments were reduced by the payments. The taxpayer was required to produce certification from the social or labour authorities as to the amount of the reduction. This requirement proved unworkable and has been dropped. From assessment period 2001 onwards, it is enough to show that public assistance payments are reduced in principle by the support payments, without proving the exact amount of the reduction.
6.10 Government child support contributions
§ 36 (2) sent. 1 EStG has been modified to make clear that income tax is increased by government child support payments (Kindergeld) where taxable income is reduced by a standard child support deduction (Kinderfreibetrag). The standard child care deduction (Unterhaltsfreibetrag) is irrelevant. (The standard deductions apply only where their tax benefit exceeds the government child support amount – § 31 EStG).
7 Other income tax changes
The 2001 Tax Amendment Act makes various other changes to income tax law not discussed in this article.
Editorial cut-off date: 20 March 2002
Disclaimer and notice of 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. KPMG Germany in particular insists 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 that the article is current only through its editorial cut-off date shown immediately above (not to be confused with the later date as of which the article was placed online – the date appearing at the article's outset). Related developments subsequent to the editorial cut-off are not necessarily reported on in later articles. 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 KPMG Germany's articles are carefully reviewed, it can accept no responsibility in the event of any inaccuracy or omission. Any claims nevertheless raised against KPMG Germany 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 Germany (KPMG Deutsche Treuhand-Gesellschaft AG). No use of or quotation from the article is permitted without full attribution to KPMG Germany and the article's stated author(s), if any. Distribution to third persons is prohibited without the express written consent of KPMG Germany in advance.
1 BGBl 2001, 3794. A useful German language summary of income tax changes resulting from the 2001 Tax Amendment Act, on which this article relies in part, is provided by Christoffel in INF 2002, 33.
2 See sec. 2 below.
3 BT-Drs. 14/7341.
4 I R 34/99 – BFH/NV 2001, 383.
5 Cf. Christoffel (Fn.1) p. 38/2.
6 New § 52 (57a) sent. 3 EStG.
7 New § 52 (58a) EStG.
8 New § 52 (37b) EStG.
9 Cf. Christoffel (Fn.1) at p. 36/1.
10 Christoffel (Fn.1) p. 36 sec. 12.2 is critical of the new rule.
11 New § 45d (1) sent. 1 and § 52 (53) sent. 3 EStG.
12 New § 45d (1) sent. 1 no. 3 and § 52 (53) sent. 3 EStG.
13 New § 45d (1) sent. 1 no. 3 and § 52 (53) sent. 3 EStG.
14 See KPMG German News no. 2/2000 p. 21 = sec. 3.8 of article no. 209.
15 New § 52 (1) EStG.