Germany: 154. New Tax Legislation: Tax Reform Report

Last Updated: 19 December 1998
KPMG Germany Webpage
Click on the above link to visit the KPMG Germany webpage on the Mondaq website
For disclaimer and copyright see end of this article.

The German tax reform situation remains substantially as described in article no. 151. The present article:

  • summarises interim developments;
  • supplements certain topics dealt with in our previous article;
  • describes significant measures not covered or dealt with only briefly in our previous article; and
  • corrects misleading figures in our previous article.

Sections 2 and 3 of this article are based on our client letter regarding the tax reform plans as at 20 November 1998. Interested persons should request the full text of this client letter, which may have been updated by the time this article has been distributed.

1. Interim developments

The new government of Social Democrats and Greens now intends to delay passage of its major new tax reform bill, which was introduced in draft form on 10 November 1998, until the early Spring of 1999. The effective dates of the various measures contained in the bill remain unchanged and will thus be retroactive to 1 January 1999 in many cases. The contemplated effective date of the planned energy tax increases and concomitant reductions in social charges, which are not part of the November draft legislation, has been put back to 1 April 1999, however.

The draft legislation remains highly unpopular with industry and tax experts. Major changes in the draft bill at present appear neither likely nor out of the question.

The tax administration in the State of Hesse has for instance suggested abolishing or reducing the safe havens under Germany's thin capitalisation rules (sec. 8a KStG) instead of eliminating tax recognition for writedowns of fixed and current assets to going concern value. Whether this or other proposed amendments in the draft legislation has any chance of adoption is at present unclear.

Minor tax legislation has passed the Federal Parliament and was ratified by the Federal Council on 18 December 1998. This legislation (two separate measures) relates to the following:

  • Adjustments in pension reserves to take account of increased life expectancy
  • Extension to 10 years of the period for safekeeping of bookkeeping documents
  • Reduction of the lowest marginal income tax rate from 25.9 % to 23.9 %
  • Increase in government child support payments from DM 220 to DM 250 per month for the first and second child.

The above would all take effect on 1 January 1999.

Considerable controversy continues to surround the government's plans to abolish flat rate wage taxation for qualifying part-time workers. Instead, social charges are to be deducted from the wages of these part-time workers. The proposals are criticised by the State governments, who would bear part of the lost tax revenue, and to some extent also by social insurance experts, who argue that the social insurance claims of the affected workers would in the long run exceed their contributions.

2. Comments supplementary to our prior article

2.1 Elimination and reversal of writedowns to going concern value

In article no. 151 (sec. 4.1.4 and 4.1.5), we reported on provisions in the draft legislation which would eliminate tax recognition for writedowns of fixed and current assets to going concern value for fiscal years ending after 31 December 1998.

It is not clear whether assets written down to going concern value prior to the effective date of the new law must be written back up to their historic cost (adjusted for scheduled depreciation) in the 1999 fiscal year even if they have not recovered in value. Contrary to the comments in our previous article, this reading of the law appears permissible, however. In other words, writeups of assets previously written down may occur whether the asset has recovered in value or not. Writeups can at least be spread over five years. On the other hand, there are also unconfirmed reports that going concern value is intended to represent the upper limit of any reversals of previous writedowns.

In the same connection, it is noted that the proposed changes in the law leave open the possibility of unscheduled depreciation for extraordinary technical or economic wear (sec. 7 (1) sent. 5 EStG). At least certain writedowns previously taken by reason of a decline in going concern value should be permissible on the grounds of extraordinary technical or economic wear as well.

2.2 Passive activity losses of corporations and partnerships

Sec. 4.2.4 of our previous article discussed the planned restrictions on the utilisation of passive activity losses. The proposed changes were treated in more depth in sec. 1.4.2 of article no. 148. Here it was noted that the amendments in their present form would affect corporations and partnerships as well as individuals because certain income derived by such entities would be "passive" income under the proposed rules.

It is not clear whether the drafters of the legislation foresaw or desired this effect, which has since been the subject of public discussion. Changes in the law appear possible at least with respect to corporations.

3. Matters not covered or briefly covered in our prior article

3.1 Reorganisation provisions

3.1.1 Trade tax reorganisation losses (sec. 18 (2) UmwStG)

Sec. 18 (2) UmwStG has been revised to prevent trade tax consideration of any loss sustained by the receiving partnership when a corporation is merged or converted into a partnership. This revision is intended to provide statutory confirmation of a position taken by the tax authorities in their directive on the Tax Reorganisation Act. Failure to count the reorganisation loss for trade tax purposes means that no step-up in basis occurs for trade tax purposes. Consequently, a special calculation of profits for trade tax purposes will be required in the future in addition to the calculations according to company law and income tax law. Since, in the opinion of the tax authorities, the amended statute only clarifies what has been the law all along, no transition provisions are included.

3.1.2 Trade tax loss carryforward on merger and divisive reorganisations (sec. 19 (2) UmwStG)

Sec. 19 (2) UmwStG has been amended with effect from the 1999 assessment period so that a trade tax loss can only pass to the receiving corporation in corporate mergers or divisive reorganisations if the corporation which receives the business or sub-business which caused the loss continues to operate such business or sub-business (Betrieb or Betriebsteil) on a comparable scale for five years following the reorganisation. Under previous law, it was sufficient that the business (Geschäftsbetrieb) of the transferring corporation not have been discontinued at the time of the reorganisation.

3.1.3 Blocking amount under sec. 50c EStG in merger situations (sec. 13 (4) UmwStG)

An upstream merger of a corporation whose shares are encumbered by a blocking amount within the meaning of sec. 50c EStG will cause the blocking amount to attach to the shares of the receiving corporation instead of vanishing along with the shares in the disappearing corporation. In the opinion of the tax authorities, this provision likewise merely "clarifies" the existing law. It can have major tax consequences for mergers which have already occurred or take place in the future.

3.1.4 Partition of assets of a commercial partnership (sec. 16 (3) sent. 1 EStG

From 1 January 1999 onwards, partition of a commercial partnership will only be possible for tax purposes if the partition involves transfer of branches of activity (Teilbetriebe) or interests in commercial partnerships to another business operation (Betriebsvermögen). If the former partners receive individual assets or if the assets received do not become part of another business operation, the partition will be treated as a taxable liquidation of an interest in a commercial partnership. This puts an end to the previous option of transferring individual assets from one business operation to another at book value. The relevant provisions of the Co-Entrepreneur Directive are no longer applicable. Tax-free transfers of appreciated assets will in the future only be possible under the provisions of the Tax Reorganisation Act and sec. 6b EStG.

3.2 Loss utilisation provisions

3.2.1. Trade tax reorganisation losses

Trade tax loss carryforward on merger and divisive reorganisations

See sec. 3.1.1 and 3.1.2 above.

3.2.2 Losses on the sale of material shareholdings (sec. 17 (2) EStG)

Modifications have been made in the provisions respecting the utilisation of losses on sale of material shareholdings in corporations.

3.2.3 Losses from margin transactions (sec. 15 (4) EStG)

The intention is to prohibit carryback of commercial business losses from margin transactions (examples: options or commodities futures transactions). It will also no longer be possible to net such losses against other commercial business income or income of other types. Netting is to be limited exclusively to future profits from margin transactions.

3.3 Investment funds

3.3.1 Short-term capital gains for investment funds (sec. 39 (1) and (1a) KAGG)

Short-term capital gains (so-called "speculation gains") within the meaning of sec. 22, 23 EStG will constitute taxable income from capital or taxable business income in the hands of investment funds. These gains are also part of accrued profit (Zwischengewinn). The new rules are to apply to speculation gains received by a fund after 31 December 1998.

3.3.2 Speculation gains under the Foreign Investment Act

Corresponding changes are planned in the provisions of the Foreign Investment Act (Auslandinvestmentgesetz). Speculation gains (including margin transactions) will thus also be subject to taxation if realised by foreign investment funds. Furthermore, the definition of accrued profit is expanded to include such income just as for domestic investment funds.

3.3.3 Withholding tax on investment fund dividends (sec. 39 (2) KAGG)

Dividends received on German stock by a domestic investment fund are subject to 25 % withholding tax whether distributed or retained by the fund.

3.4 Withholding tax

3.4.1 Withholding tax on investment fund dividends

See sec. 3.3.3 above.

3.4.2 Non-resident tax liability for artistic and other activities (sec. 49 (1) no. 2d EStG)

The new rules extend the scope of withholding to include payments by a resident person to a non-resident for the exploitation (Verwertung) in Germany of performances and the like outside Germany (example: broadcast in Germany of concerts recorded abroad).

3.4.3 Non-resident withholding (sec. 50a (7) EStG)

The proposed legislation would introduce a new general 25 % withholding requirement for all payments to non-residents. The draft provision thus goes far beyond its original purpose, which was to ensure the taxation of foreign contractors who have so far been able to evade their tax liabilities because of the temporary nature of their domestic activities. It remains to be seen whether this provision will be enacted in its present form.

3.5 Consolidated tax groups (Organschaft)

3.5.1 Trade tax requirements (sec. 2 (2) sent. 2 GewStG)

The cross-reference to sec. 14 KStG is expanded to include sec. 14 no. 3 KStG. This means that the lead entity in a consolidated tax group for trade tax purposes must have both its principal place of management and its legal seat in Germany. Lead entities with senior managers residing abroad should pay particular attention to the requirement of a domestic principal place of management. When the lead entity is a partnership, certain special provisions apply and must be considered.

3.5.2 Trade tax add-back for writedowns of shareholdings to going concern value (sec. 8 no. 10 GewStG)

The previous version of sec. 8 no. 10 GewStG provided for an add-back to the extent profits had been reduced by writedowns of shares in corporations to going concern value by reason of dividend distributions which were eliminated from profits under sec. 9 GewStG. In accordance with prior court decisions and the position taken by the tax authorities, this provision is now extended to include writedowns to going concern value by reason of profit transferred by members of a tax consolidated group to the lead entity.

3.5.3 Progression clause for tax consolidation (sec. 32b EStG)

Tax free foreign income derived by individuals under a tax consolidation structure (Organschaft) will be subjected to the general progression clause.

3.6 Investment income

3.6.1 Earnings from margin transactions (sec. 23 (1) no. 5 EStG)

Under the new law, non-business earnings from margin transactions within the meaning of sec. 764 of the Civil Code will be subject to taxation. According to the official explanation of the measure, it is intended to apply to futures transactions in which a cash equalisation payment is contemplated instead of a delivery of goods.

3.6.2 Bank disclosure obligation concerning withholding exemption requests (sec. 45d EStG)

Sec. 45d (1) no. 3 EStG is to be amended effective from 1999 onwards to require banks to report to the Federal Finance Office (Bundesamt für Finanzen) the actual income amount with respect to which no tax was withheld pursuant to an exemption request instead of the requested exemption limit.

3.7 Real estate transfer tax

3.7.1 Material change of ownership (sec. 1 (2a) GrEStG)

Sec. 1 (2a) GrEStG is amended to take account of indirect changes in the ownership structure of a partnership which owns real property. For example, a change in the sole shareholder of a corporation holding a 95% interest in such a partnership will be treated as a material change of ownership in the future. The revised version of sec. 1 (2a) GrEStG is applicable to acquisitions taking place subsequent to the day on which the law is promulgated.

3.7.2 Unification of interests and transfer of interests (sec. 1 (3) GrEStG)

Under prior law, no unification of interests occurs unless 100 % of the interests in a company holding real property are united, directly or indirectly, in the hands of an acquirer. In the future, real estate transfer tax will be triggered if 95 % or more of the interests are united in the hands of a single person. This applies analogously to transfers of shares. The new rules apply to acquisitions effected after 31 December 1999.

3.7.3 Incremental taxation (sec.1 (6) GrEStG)

Acquisitions under sec. 1 (2a) GrEStG (material change in ownership) will no longer be taken into account for purposes of the incremental taxation under sec. 1 (6) GrEStG. The new law applies to acquisitions effected subsequent to the date on which the law is promulgated.

3.7.4 Transfers to a partnership (sec. 5 GrEStG)

This provision applies to conveyances of real property by a partner to the partnership in which he holds an interest. It provides that real estate transfer tax is not levied to the extent of the contributing partner's interest in the partnership. In the future, this exemption will be subject to the condition that the contributing partner remain a member of the partnership for a period of five years after conveyance of the real estate. The exemption is also denied if the partner does not continue to share in appreciation as would an owner. The new rules first apply to acquisitions effected after 31 December 1999.

3.7.5 Tax base (sec. 8 GrEStG)

The standardised values under sec. 138 (2) or (3) BewG will in the future be used to determine the tax base for material changes in the ownership of a partnership as defined in sec. 1 (2a) GrEStG. The new rule applies to acquisitions effected subsequent to the date of promulgation of the law.

3.8 Other provisions

3.8.1 Reduction of the corporation tax rate (sec. 23 (1) KStG)

From 1999 onwards, both the corporation tax rate for retained earnings (currently 45 %) and the reduced corporation tax rate for non-resident corporations (currently 42 %) are being reduced to 40 %. The reduced rate also applies to other corporate entities, to property funds, and to associations.

The retained earnings tax rate remains 45 % for dividends (including creditable corporation tax with respect thereto) received by corporate entities entitled to the corporation tax credit from subsidiaries subject to the corporation tax credit system, to the extent the distribution comes out of the subsidiary's equity basket EK 45. This provision makes it impossible to convert EK 45 into EK 40 by paying div-idends to group companies.

3.8.2 Inheritance tax: trusts (sec. 3 (2) no. 1, sec. 7 (1) no. 8 and 9 ErbStG)

Transfers by gift or inheritance to trusts which lack legal capacity and have either their legal seat or their principal place of management in a foreign country will be subject to inheritance and gift tax in the future. Tax arises at the time of passage of the property. The new law will apply to transfers of property taking place after 31 December 1998. Dissolution of the trust and transfer of the property to the beneficiary will constitute a separate taxable event.

3.8.3 Tax Procedure Act: violation of reporting and presentation obligations (sec. 379a AO)

Failure to submit tax returns or produce documents within a deadline set by the tax authorities despite express demand on their part will constitute an administrative offence punishable by fine of up to DM 10,000. Third parties required to issue tax certifications under sec. 150 (4) sent. 2 AO can also commit such offences.

4. Correction

In article no. 151, we included a table showing the projected revenue impact of the draft legislation of 10 November 1998. Unfortunately, in certain versions of the article, the table largely used a decimal comma, as is standard in German, instead of the decimal point customary in English. The decimal point should replace the comma everywhere it appears in the table. the error was corrected in later releases of the article. We apologise for any confusion caused by our error.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.