Germany: 099. Tax Legislation: Promulgation And Amendment Of Business Tax Reform Bill

Last Updated: 17 December 1997
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The "Act for the Further Reform of the Taxation of Enterprises", reported on in article no. 80, was promulgated on 31 October 1997 and has accordingly entered into force. Repeal of the trade tax on capital effective from 1998 onwards and extension through 1997 of non-collection of the trade tax on capital in the new German states are the most important measures contained in the new law. The other major provisions in the new tax legislation are all revenue-generating changes included to neutralise the effect of repeal of the trade tax on capital.

1. Amendments to the new legislation

A separate tax bill amending the effective dates of key provisions in the "Act for the Further Reform of the Taxation of Enterprises" has received the approval of the Conference Committee of the German parliament and the Federal Council. These amendments thus appear likely to become law.

The amendments are as follows:

  • At present, repeal of the tax exemption for recapitalisation gains on the waiver of debt (sec. 3 no. 66 EStG) applies to fiscal years ending from 1997 on. The new legislation would push the effective date back by one year to fiscal years ending from 1998 on.
  • At present, the stricter requirements for legal identity and preservation of loss carryforwards under the new version of sec. 8 (4) KStG apply to tax years from 1997 on. The new legislation would retard the effective date by one year for corporations which lost their legal identity (under the new stricter standards) prior to 6 August 1997. For such corporations, the new provisions would apply starting with the 1998 tax year.
  • The various changes in loss utilisation under the Tax Reorganisation Act currently apply to reorganisations entered in the Commercial Register from 1997 on. The new bill would cause the loss utilisation restrictions to apply to reorganisations for which a request for entry in the Commercial Register was filed after 5 August 1997, irrespective of the date of actual entry pursuant to the request.

The sections which follow discuss additional aspects of certain provisions contained in the "Act for the Further Reform of the Taxation of Enterprises".

2. Effective date of amendment to sec. 50c EStG

Contrary to the impression which may have been given by our prior article, the changes reported on in sec. 50c EStG (income tax act) take effect for tax years from 1997 onwards (not as of the date of promulgation of the law - sec. 52 (1) EStG). Section 50c EStG is an important anti-avoidance provision which in certain circumstances prevents writedowns in the value of shares by reason of dividends paid and step-ups in basis on conversion of a corporation into a partnership. Previously, the statute had operated essentially upon purchase of shares in a German corporation by a domestic purchaser from a seller not entitled to the corporation tax credit with respect to those shares (i.e. non-resident sellers not holding the shares in a domestic permanent establishment, either directly or through a partnership). New sec. 50c (11) EStG extends the provision to apply to purchase of shares in a German corporation from all persons not taxable in Germany on the sale of the shares. The primary targets of the amendment are individuals holding stakes of up to 25 % as private property (as opposed to business property).

In an excellent essay dealing with all the major changes in the tax law wrought by the new legislation (DStR 1997, 1427), Fueger/Rieger argue (p. 1431/2) that application of the amendment in sec. 50c EStG "from the tax year 1997 onwards" means that

i. the participation with respect to which a so-called "blocking amount" arises under sec. 50c EStG must have been acquired from 1 January 1997 onwards and

ii. the blocking amount must affect income for the tax years 1997 onwards.

If they are correct in this view, the second condition would mean for instance that the amendment to sec. 50c EStG would not apply to conversion of a corporation purchased in 1997 into a partnership if the conversion were retroactive to 1996. Retroactivity of up to eight months prior to the date of the relevant filing with the Commercial Register is possible in principle.

Lishaut (DB 1997, 2190) does not entirely share the view of Fueger/Rieger. According to Lishaut (page 2194/2), the date of acquisition of the participation is irrelevant to the operation of the new law.

3. Effective date of new corporate loss utilisation provisions

As reported in article no. 80, the new law has severely tightened the requirements for the "economic identity" which a corporation must maintain to offset its past operating losses against future earnings.

These provisions are likewise applicable starting with the 1997 tax year (sec. 54 (6) KStG), not as of the date of promulgation of the law as our previous article implied.

In the essay above cited (pp. 1436 ff.), Fueger/Rieger interpret this provision as referring to the tax year in which loss carryforwards are utilised, not the tax year in which the events occurred which caused the corporation in question to lose its "economic identity". If they are correct, this would mean that recapitalisations or purchases of loss corporations in years prior to 1997 which did not cause a loss of economic identity under the old law but result in such loss under the new wording would be affected by the new law to the extent they have not exhausted their loss carryforwards by 1996 at the latest.

The expected amendment to the law discussed in section 1 above would permit the former, less stringent version of sec. 8 (4) KStG to apply to corporations which lose their economic identity in 1997 prior to August 6th. The denial of use of loss carryforwards would be postponed for such corporations until 1998.

4. Effective date of new reorganisation loss utilisation restrictions

As stated in our prior article, the new loss utilisation restrictions for reorganisations of corporations into partnerships and into other corporations apply to transactions entered in the Commercial Register from 1 January 1997 onwards. Fueger/Rieger question the constitutionality of this provision (p. 1440/2). They point out that the taxpayer has no control over the date of entry in the Commercial Register. (The time needed by a Commercial Register to enter a transaction can vary considerably depending on the volume of transactions it handles and other factors.) They also note that, by its terms, the new law could apply to transactions completed in 1996 and for tax purposes retroactive to 1996 merely because the Commercial Register entry was delayed until 1997.

The expected amendment to the law discussed in section 1 above would considerably mitigate the problems discussed by Fueger/Rieger and permit reorganisations to come under the old law as long as the request for entry in the Commercial Register was filed prior to 6 August 1997.

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.

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