Germany: 167. Specifics of New German Tax Reforms

Last Updated: 2 June 1999
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This article discusses the specific provisions of the new tax reform legislation. Information on the fiscal impact of the reforms is provided by article 166.

Neither the new "ecological" taxes nor the changes in the taxation of low-paying jobs are covered by the following article. See the separate articles nos. 168 and 169 respectively.

I. Profit Determination

1. General

End of deductibility of foreign branch losses (sec. 2a (3) and (4) EStG)

The election under sec. 2a (3) and (4) EStG to deduct the losses of foreign branches located in tax treaty countries has been repealed. The deduction of such losses is possible in the 1998 assessment period for the last time. The recapture of otherwise tax-exempt foreign branch profits will continue through the 2008 assessment period. The recapture rules previously in effect regarding incorporation of foreign branches continue to apply throughout this period as well. The foregoing applies analogously to foreign branches which deducted losses under sec. 2 AIG (Auslandsinvestitionsgesetz - Foreign Investment Act), which was replaced by sec. 2a (3) and (4) EStG in 1990.

Tax-free foreign dividends: 15 % deemed non-deductible related expenses
(sec. 3c EStG, sec. 8b (7) KStG)

The government did not follow through on its initial plans to expand the scope of sec. 3c EStG, which denies a deduction for expenses related to tax-free income. Instead, a special provision has been added to the Corporation Tax Act as new sec. 8b (7) KStG dealing with dividends received free of tax pursuant to a tax treaty participation exemption. Under this new provision, 15 % of the participation exemption dividends received in a fiscal year are deemed to constitute non-deductible expense irrespective of the actual amount of any related deductible expense. The new provision is effective from 1 January 1999 onwards.

Contrary to reports to this effect in the press, the 15 % lump sum rule does not apply to gain on the sale of participation exemption shares.

Elimination of possibility for revising balance sheet (sec. 4 (2) EStG)

It will no longer be possible to change a balance sheet after its submission to the tax authorities when the balance sheet as submitted is in accordance with German GAAP. The provision previously in effect allowed changes to such balance sheets with the consent of the tax authorities. The repeal of this provision means that it will no longer be possible to exercise elections in the context of a tax field audit in progress. The new rule also applies to assessment years prior to 1999.

End of so-called "double account structures" (sec. 4 (4a) EStG)

The amendments originally planned in this area have been considerably modified. A de minimus limit of DM 8,000 has been created for interest deductions, within which half of the interest paid is treated as non-deductible. There are special rules for the sale and withdrawal of assets related to debt interest.

Elimination of the deductibility of bribes (sec. 4 (5) EStG)

Payments made or other benefits conferred in fiscal years beginning after 31 December 1998 are no longer deductible as business expenses if they fulfil the elements of the crime of bribery (Bestechung) or constitute an administrative offence (Ordnungswidrigkeit). Whereas under prior law denial of deductions was conditioned upon actual criminal conviction, this is no longer the case. The tax authorities remain obligated to notify the office of the public prosecutor etc. The new provisions also apply to bribes paid to foreign recipients.

Deductibility of extra meal expense (sec. 4 (7) sent. 1 EStG)

The statute now expressly provides that extra meal expense (e.g. in connection with business travel) need no longer be separately recorded because such expense is now only deductible in the standard lump sum statutory amounts.

Maintenance expense for buildings in restoration areas or urban development areas or for historic structures (sec. 4 (8) EStG)

Plans were abandoned to abolish the option to spread maintenance expense for buildings in restoration areas or urban development areas and for historic structures over several years.

Limitation on tax-neutral rollover of capital gains (sec. 6b EStG)

The benefit of sec. 6b EStG has been limited to gain on the sale or other disposition of land and buildings.

Qualifying gain may be transferred to buildings and, in some cases, land which is part of the taxpayer's same or separate business (Betrieb). If the taxpayer holds an interest in a partnership, transfer to the corresponding assets belonging to his special business property (Sonderbetriebsvermoegen) is also possible.

It remains possible to set up a tax-free rollover reserve. However, the transfer of the reserve is subject to the same restrictions as immediate transfer of gain and hence limited to buildings and, in some cases, land.

Corresponding rules are expressly applicable to partnerships and joint-property communities (Gemeinschaften).

There are special provisions for standing crops and timber for land and forestry businesses.

The changes in sec. 6b EStG first apply to gain realised on sales or other dispositions occurring after 31 December 1998. Dispositions through this date are governed by the version of sec. 6b EStG in force at the time the disposition occurred.

Taxpayers required to keep books must use official form to request reduction of tax prepayment assessments (sec. 37 (3) EStG)

Requests by accrual basis taxpayers for reduction of their tax prepayments by reason of changes made by the Tax Relief Act will only be acted upon by the tax authorities if the request is filed on an official form.

2. Valuation

Retention of writedowns to going concern value
(sec. 6 (1) no. 1 sent. 1 and 2, no. 2 EStG)

The ability to write assets down to going concern value has been retained for depreciable and non-depreciable fixed assets and for current assets. In the future, however, writedowns to going concern value are contingent upon a probable permanent decline in value in the sense of a long-term drop of the going concern value below the relevant book value.

It remains possible to calculate the value of current assets held for sale by means of the retrograde method.

The new law clarifies that "relevant asset book value" refers to the cost of purchase or production (or to the appropriate alternative value, such as contribution value, value upon revaluation, etc.), reduced by depreciation for wear and tear, special depreciation and allowances, deductions under sec. 6b EStG, and similar provisions.

Strict requirement to reverse prior writedowns
(sec. 6 (1) no. 1 sent. 4, no. 2 sent. 3; sec. 7 (1) sent. 6 EStG)

In connection with the limitation of writedowns to going concern value to permanent declines in value, a strict requirement has been introduced to reverse prior writedowns when the asset in question has recovered in value (Wertaufholungsgebot).

The value at which all assets are shown at any balance sheet date is generally their adjusted historical cost. Adjusted historical cost, which must in some cases be traced back to the 1948 opening balance sheet following the German currency reform, represents the upper limit of any reversal of prior writedowns. Going concern value constitutes a second upper limit only if it can be shown that the going concern value at the balance sheet date is under adjusted historical cost by reason of probable permanent decline in value.

The transition provisions of sec. 52 (16) EStG permit the reversal of prior writedowns to be spread over five years by means of a tax free reserve.

The requirement to reverse prior writedowns when an asset recovers in value applies to taxpayers who determine profits under sec. 4 (1) or sec. 5 EStG. The reversal is also mandatory when the grounds of unscheduled depreciation for exceptional technical or economic wear cease to apply (sec. 7 (1) sent. 6 EStG). It is thus not possible to avoid the reversal by reclassifying a previous writedown to going concern value as a writedown for exceptional technical or economic wear. Upon reversal of writedowns previously taken by reason of technical or economic wear, it is apparently not possible to spread the resulting gain over a five year period for want of a corresponding transition provision.

Valuation discount for certain imported goods (sec. 80 EStDV)

The valuation discount previously available on purchase of certain imported goods has been discontinued as of the first fiscal year ending after 31 December 1998.


3. Accruals, liabilities

Prohibition on accruals for purchase and production costs (sec. 5 (4b) sent. 1 EStG)

It is no longer permissible to establish accruals for expenses which represent the cost of asset purchase or production.

Existing accruals of this sort must be completely reversed in the first assessment period which is still open. Such reversal may therefore be retroactive.

Accrual for radioactive residues (sec. 5 (4b) sent. 2 EStG)

Accruals on account of obligations to harmlessly reuse radioactive residues or radioactive parts removed or dismantled from nuclear facilities are no longer permissible to the extent the expenditure is related to work done on, or processing of, nuclear fuel which has been obtained by reconditioning irradiated nuclear fuel and does not constitute nuclear waste. Accruals for obligations to harmlessly reuse nuclear waste are thus not affected.

Realistic valuation of accruals (sec. 6 (1) no. 3a (a) EStG)

In valuing accruals for similar liabilities, the new legislation provides that the probability that claims will actually be asserted against the taxpayer is to be taken into account based on past experience.

The transition provision of sec. 52 (16) EStG permits the profit resulting from reversal of such accruals to be spread over a ten year period.

Valuation of accruals on a direct cost basis (sec. 6 (1) no. 3 (b) EStG)

Accruals not based on obligations to pay a sum of money must be valued with regard only to direct costs and an appropriate percentage of necessary overhead costs.

The transition provision of sec. 52 (16) EStG permits the profit resulting from reversal of such accruals to be spread over a ten year period.

Consideration of income in valuing accruals (sec. 6 (1) no. 3a (c) EStG)

Benefits which will probably be derived (e.g. income earned) in the course of performance of the obligation underlying an accrual are to be deducted in valuing the accrual to the extent such benefits are not shown as receivables.

The transition provision of sec. 52 (16) EStG permits the profit resulting from reversal of such accruals to be spread over a ten year period.

Phased-in accruals; extension of the phase-in period for nuclear power plants
(sec. 6 (1) no. 3a (d) EStG)

Based on the case law of the Federal Tax Court, the tax authorities have in the past permitted accruals to be built up in instalments over a number of years for certain obligations to restore property to its prior state and to dispose of waste. This practice has now been codified.

Accruals for the obligation to decommission a nuclear power plant are to be built up pro rata temporis in equal yearly instalments over the period beginning with its first use and ending when decommissioning must be commenced. If the time of decommissioning is not certain, the phase-in period amounts to 25 years.

The transition provision of sec. 52 (16) EStG permits the profit resulting from reversal of such accruals to be spread over a ten year period.

Requirement to discount long term accruals to present value
(sec. 6 (1) no. 3a (e) EStG)

A requirement to discount to present value has been introduced for accruals for which no interest is due. An exception exists for accruals maturing in less than 12 months from the balance sheet date. The discount rate is 5.5 %.

The transition provision of sec. 52 (16) EStG permits the profit resulting from reversal of such accruals to be spread over a ten year period.

Valuation of pension accruals (sec. 6a EStG)

Sec. 52 (7a) EStG provides that the new biometric calculation base data published in 1998 (for instance, Dr. Klaus Heubeck's life expectancy tables) are to be used starting with the first fiscal year ending after 31 December 1998. The tax authorities approved this base data in their directive of 31 December 1998. The equal distribution of pension accrual increases over three years, which is optional under sec. 6a (4) sent. 2 EStG, becomes mandatory in such cases.

Claims accruals in the insurance industry (sec. 20 (2), sec. 54 (8c) KStG)

The individual value assigned to the risks from a specific claim filed is to be adjusted by a flat rate discount in each particular branch of the insurance industry to take account of past experience in insurance claims settlement.

The new, more realistic valuation rules for claims accruals (Schadensrueckstellungen) are to apply to years prior to 1999 as well.

Insurance industry accruals for premium refunds/coverage liabilities
(sec. 21 (3), sec. 21a KStG)

The valuation rules contained in new sec. 6 (1) no. 3 (a) EStG (e.g. realistic valuation) are not to apply to accruals established by insurance companies for premium refunds.

Furthermore, the new sec. 6 (1) no. 3a (e) EStG is to be applied to insurance companies with the proviso that differentiated interest rates may be used to discount accruals for coverage liabilities (Deckungsrueckstellungen).

Requirement to discount long-term liabilities (sec. 6 (1) no. 3 EStG)

Non-interest bearing liabilities maturing in 12 months or more must be discounted at an interest rate of 5.5 %. An exception is made for liabilities as a result of payments on account or advance performance.

The transition provision of sec. 52 (16) EStG permits the profit resulting from reversal of such accruals to be spread over a ten year period.


4. Depreciation

Contribution of non-business income producing assets (sec. 7 (1) (4) EStG)

After 31 December 1998, contributions of non-business income-producing assets (for instance, non-business rental property) to an activity which produces business income result in an adjusted asset basis for depreciation purposes. This adjusted basis is essentially historic cost of purchase or production less depreciation already taken, including special allowances and special depreciation. The change prevents the use of such contributions to generate additional depreciation volume. The change applies to buildings as well.

Special depreciation and anticipated special depreciation for small and medium sized businesses (sec. 7g EStG)

Contrary to original plans, the 20 % special depreciation allowed under sec. 7g (1) EStG and the possibility to set up tax-free reserves under sec. 7 (3) EStG have been retained. However, special depreciation for assets purchased or produced after 31 December 2000 will only be permitted if a profit-reducing reserve has been established in prior years for the future asset purchase or production (anticipated special depreciation) in an amount of up to 50 % of the cost of purchase or production.

Increased depreciation on buildings in restoration areas and urban development areas (sec. 7 h EStG)

The cutbacks originally planned in this area were not enacted.

Increased depreciation for historic structures (sec. 7i EStG)

The cutbacks originally planned in this area were not enacted.


II. Loss utilisation

Minimum taxation through loss offset limitation (sec. 2 (3) EStG)

The new law introduces a sort of minimum taxation by restricting loss offset possibilities. Full offset of losses from one of the seven basic income categories against positive income from another income category has been limited to DM 100,000 per year for single taxpayers and DM 200,000 per year for married couples filing jointly. In general, only half of the positive income in excess of these limits may be offset by negative income from other income categories. Losses which cannot be used may be carried forward under sec. 10d EStG. The original plans to introduce a new distinction between active and passive income were abandoned. There are no restrictions on loss offset within a single income category. For instance, a sole taxpayer operating several commercial businesses, either directly or as partner in a partnership, may offset the losses of one business against the profits of another without restriction (as before).

The new provision will not affect entities such as corporations which by legal definition derive solely commercial business income.

Limitations on loss carryback and carryforward (sec. 10d EStG)

Loss carryback has been limited in time to a single year and in amount to DM 2 million, falling to DM 1 million from 2001 onwards (previously, two years and DM 10 million). Losses not offset in the year in which they occur qualify for loss carryback and carryforward under sec. 10d EStG only subject to the same new restrictions as apply under sec. 2 (3) EStG (see above). Loss carrybacks and carryforwards will also be deducted before special personal deductions (Sonderausgaben), extraordinary personal expenses (aussergewoehnlichen Belastungen) and certain other amounts. Situations are therefore conceivable in which special personal deductions and extraordinary personal expenses will be "forfeited" as a result of losses carried backwards or forwards.

Prohibitions on loss offset and loss carryback/carryforward for tax shelter companies (sec. 2 b EStG)

Subject to the exception described below, losses (negative income) from interests acquired after 4 March 1999 in tax shelter partnerships and similar schemes may only be offset against gains (positive income) from such companies and schemes, whether the offset be in the year of the loss or in a prior or subsequent year by means of loss carryback or carryforward. This limitation is in addition to those existing under sec. 2 (3), 10d EStG. Tax shelter losses may not be offset against non-tax-shelter income in the year they accrue nor may they be carried backwards or forwards for purposes of offset against income from other sources. An investment is subject to these restrictions if the after-tax "return" (Rendite) is more than twice the before-tax "return" or if the prospect of tax savings through distributive shares of losses was held out to the investor.

The new rules do not apply to interests in tax shelter companies which acquire the assets they use to generate income by virtue of a binding contractual obligation incurred prior to 5 March 1999 or which commence the construction or manufacture of such assets prior to this date, provided the taxpayer acquires his interest no later than 31 December 2000. There are analogous rules for schemes not involving partnerships or joint property communities (Gemeinschaften).

Losses from forward transactions (sec. 15 (4) EStG)

Commercial business losses from forward transactions (forwards, options) may not be offset against commercial business profits or against other categories of positive income. Offset is strictly limited to profits from forward transactions in the same assessment period, in the preceding assessment period (carryback), or in subsequent assessment periods (carryforward).

Two exceptions from the prohibition on loss deduction do, however, exist. Banks, financial service companies, and financing companies within the meaning of bank regulatory law (Kreditwesengesetz) are permitted to offset losses from forward transactions provided these are undertaken in the normal course of business. Other companies are to be permitted to offset such losses to the extent they result from forward transactions entered into to hedge transactions undertaken in the normal course of business (e.g. commodities futures transactions to hedge purchasing and sales risks).

Negative "other income" and short term capital losses (sec. 22 no. 3, sec. 23 (3) EStG)

Negative "other income" of the sort defined in sec. 22 no. 3 EStG (e.g. from occasional leasing or intermediary activities) and private short term capital losses (sec. 23 EStG) can be offset against profits in the same assessment period, in the preceding assessment period (carryback), or in subsequent assessment periods (carryforward). The transition provision originally planned for these changes was dropped from the tax bill. The new rules accordingly apply from the 1999 assessment period onwards.

Concerning the treatment of negative other income within the meaning of sec. 22 no. 3 EStG in the assessment periods 1984 to 1998 (carryback and carryforward), we refer to the administrative announcement of the Hanover Regional Tax Office of 22 January 1999 (OFD Hanover DB 1999, 409). There would appear to be no corresponding announcement from the tax authorities with regard to short term capital losses (sec. 23 EStG). There is reason to doubt the constitutionality of this arrangement if similar carryforward and carryback possibilities are not allowed for short term capital losses until 1999.


III. Commercial business income

Surrender of an interest in a commercial partnership (sec. 16 (3) sent. 1 EStG)

In addition to income from the liquidation of a commercial business, taxable commercial capital gains also include income from the surrender of an interest in a commercial partnership and income from the surrender of an interest as general partner of a partnership limited by shares (Kommanditgesellschaft auf Aktien).

Partition of assets of a commercial partnership (sec. 16 (3) sent. 2 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 (Betriebsvermoegen). If the former partners receive only 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. These changes will have an impact on the settlement of estates among multiple heirs. In effect, the option previously available to transfer individual assets at book value to another business operation is no longer available for partitions taking place after 31 December 1998.

Exemption for gain on sale of a commercial business (sec. 16 (4) EStG)

Contrary to original plans, the exemption of up to DM 60,000 has been retained for gain realised on the disposition or liquidation of commercial businesses, branches of activity, or partnership interests.

Threshold of material ownership of corporations (sec. 17 (1) EStG)

Beginning with the 1999 assessment period, shareholdings in corporations of 10 % or more will be material. Under prior law, corporate ownership was only material if it exceeded 25 %. The threshold of materiality determines whether gain on sale of shares held as non-business property is taxable or not. The threshold for preferential treatment under the inheritance and gift tax law remains unchanged at 25+ %.

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

Loss on sale of a material shareholding in a corporation is not deductible to the extent attributable to shares acquired by the taxpayer gratuitously in the five preceding years. This does not apply if the taxpayer's predecessor in interest could have claimed the loss in the taxpayer's stead.

The capital loss is furthermore not deductible to the extent attributable to shares which the shareholder acquired for consideration and did not hold as part of a material shareholding without interruption for the five years preceding the loss realisation. The loss may, however, be claimed for shares acquired in the last five years if their acquisition caused the taxpayer's shareholding to become material or if they were acquired after crossing the materiality threshold.

Exemption for gain on sale of material shareholdings (sec. 17 (3 EStG)

Contrary to original plans, the exemption of up to DM 20,000 has been retained for gain realised on the sale of material interests in corporations.


IV. Professional service income

Exemption for gain on sale of professional service businesses (sec. 18 (3) EStG)

Contrary to original plans, the exemption of up to DM 60,000 has been retained for gain realised on the disposition or liquidation of professional service businesses, branches of activity, or partnership interests.


V. Income from capital

50 % reduction of the investment income exemption (sec. 20 (4) EStG)

Personal investment income is at present only taxed to the extent it exceeds the sum of expenses incurred to earn such income and an exemption amount of DM 6,000 for single filers and DM 12,000 for joint filers. From the year 2000 onwards, these exemptions will be cut in half to DM 3,000 / DM 6,000.

Securities mutual funds (sec. 37o, 38b, 39, 40, 41, 43 KAGG)

Contrary to the original draft legislation, capital gains earned by a securities investment fund from securities transactions inside the short term capital gain holding period (now one year) will not be taxable whether retained or distributed by the fund. Gains on forward transactions are taxable, however, even if these are entered into solely to hedge securities held by the fund. Accordingly, gains on forward transactions inside a securities investment fund are now included in accrued profit (Zwischengewinn) and hence trigger withholding tax plus solidarity surcharge. The new rules are applicable to forward transactions entered into after 31 March 1999.

Withholding tax plus solidarity surcharge must be deducted from dividends received by an investment fund after 31 March 1999, whether retained or distributed. Gains from the sale of securities and subscription rights are, however, not subject to withholding.

Silent partnership mutual funds (sec. 43a and 43b KAGG)

The treatment of silent partnership mutual funds is analogous to that of securities mutual funds.

Real property mutual funds (sec. 44 - 48, 50 KAGG)

The distributed gains of a real property mutual fund from sale of real property and similar interests are subject to withholding and deduction of solidarity surcharge if the gains are realised within a period of ten years from the time of purchase. This change reflects the extension of the income tax holding period for tax-exempt private real estate sale from two to ten years.

The retained earnings of the fund from sales within the ten year holding period are taxable to the investor in the future.

The new provisions on the taxation of capital gains apply to sales and other dispositions effected after 31 March 1999.

Foreign Investment Act

The above amendments to the Investment Companies Act (KAGG) are applicable mutatis mutandis for securities mutual funds within the meaning of the Foreign Investment Act (AuslInvestmG).


VI. Lease and rental income

Elimination of the standardised expense deduction (sec. 9a (1) no. 2 EStG)

Under prior law, it was possible to determine net lease and rental income using a standard expense amount of DM 42 per square metre instead of actual cost. This standardised deduction possibility has be eliminated from 1999 on.


VII. Other income

Holding period for short-term capital gain from sale of non-business real estate (sec. 23 (1) no. 1 EStG)

The holding period (so-called "speculation period") within which gain on the sale of non-business real estate and similar rights is taxable has been increased from two years to ten years for sales after 31 December 1998. Furthermore, gain on buildings constructed and sold within the holding period will in the future also be taxable under sec. 23 EStG. However, no taxable gain arises on sale of a dwelling which has been used exclusively for the owner's residential purposes in the period between purchase or completion and sale or in the year of sale and in the two preceding years.

Holding period for other property including stock (sec. 23 (1 no. 2 EStG)

The holding period required to avoid taxation of private gain on sale of stock and other property besides real estate has been lengthened to one year (from six months) for sales after 31 December 1998.

Holding period for assets previously withdrawn from a business and for "contribution-generated shares" (sec. 23 (1) sent. 2 EStG)

The withdrawal of assets from a business will in the future be treated as an acquisition by purchase. The same applies to requests filed for elective taxation of contribution-generated shares taken in a reorganisation. The result of these amendments is that the property in question will be subject to the full short term capital gain holding period in the period following the withdrawal or elective taxation, as the case may be. This counteracts the tax benefit of undervaluation of withdrawn assets. Originally, the intention was to create special holding periods for these types of events. However, the standard holding periods (one year or ten years) apply under the bill as finally enacted.

"Speculation gain" from forward transactions (sec. 23 (1 no. 4 EStG)

Gain on forward transactions (e.g. commodities and currency futures transactions, option certificates, indexed instruments) entered into after 31 December 1998 will be taxable in the future if the forward position is closed or the option is exercised within one year of the time of contracting. The margin equalisation amount less related expenses will be taxable to private investors. Under prior law, it was possible to realise such gains tax free in certain circumstances.

Unlike sec. 15 (4) EStG, sec. 23 (1) no. 4 EStG is not restricted in scope and thus also applies to forward transactions entered into for hedging purposes.


VIII. Other income tax provisions

1. General

Maintenance expense for historic buildings and buildings in restoration areas and urban development areas (sec. 11a, 11b EStG)

Plans were abandoned to abolish the option to spread such deductions over several years.

Non-deductible expenses (sec. 12 EStG)

sec. 12 no. 3 EStG, which deals with non-deductible expenses, has been adjusted to harmonise with changes made to the VAT law. The prohibition on deduction is extended from taxes on income and other personal taxes to include VAT on supplies constituting withdrawals from the taxpayer's business and input VAT on expenses for which a deduction is denied under sec. 12 no. 1 and sec. 4 (5) sent. 1 to 5 and 7 or (7) EStG. The new version of sec. 12 EStG applies beginning with the 1999 assessment year.

Distribution of maintenance expense (sec. 82 b EStDV)

Maintenance expense incurred after 31 December 1998 for non-business residential buildings can no longer be spread over several years. Such costs must be completely expensed in the year in which they arose.

Support payments to a person legally entitled to support
(sec. 33a (1) sentences 1 and 4 EStG)

The maximum deduction is DM 12,000 through 1998. This amount is to be increased as follows in later years: 1999: DM 13,020; 2000 and 2001: DM 13,500; 2002: DM 14,040.

Assessment of income tax (sec. 46 (2) no. 5 EStG)

From 1999 on, dependent employees will in general fall under the formal income tax assessment procedure if they have received a settlement payment or a payment in compensation of multiple years of work on which the employer has deducted wage tax under sec. 39b (3) sent. 9 EStG (withholding on "other benefits").


2. Special personal expenses

Elimination of deductibility of interest on back taxes, deferred taxes, and taxes as to which collection has been stayed (sec. 10 (1) no. 5 EStG)

Interest on back taxes, deferred taxes, and taxes as to which collection has been stayed are no longer deductible as special personal expenses.

Domestic help (sec. 10 (1) no. 8 EStG)

From 1999 onwards, deduction of expenses for domestic help is subject to the additional requirement that the employment not constitute a low-paying job (geringfuegige Beschaeftigung) as defined in sec. 8 (1) no. 1 of the Code of Social Law.

School tuition for children (sec. 10 (1) no. 9 EStG)

Plans were abandoned to abolish the deductibility of private school tuition for children.

Deduction of charitable donations exceeding DM 50,000 (sec. 10b (1) EStG)

Carryback of large donations (donations exceeding DM 50,000) is limited to one year.

Tax preference for owner occupied historic buildings (sec. 10f EStG)

The changes originally planned in this area were not enacted.

Tax preference for objects of cultural importance (sec. 10g EStG)

The changes originally planned in this area were not enacted.

Elimination of the deduction for "advance costs" (sec. 10i EStG)

Prior law allowed a standard deduction of DM 3,500 as "advance costs" in connection with the purchase of a dwelling which qualifies for a home ownership subsidy and permitted deduction of additional pre-occupancy renovation expense up to a limit of DM 22,500. Both of these benefits have been eliminated unless the taxpayer entered into the purchase contract prior to 1 January 1999 or commenced construction prior to this date.


IX. Wage tax

Reduction in settlement payment exemption amounts (sec. 3 no. 9 EStG)

Prior law granted exemptions ranging from DM 24,000 to DM 36,000, depending on age and length of employment, for settlement payments received by employees on employer-initiated termination of an employment relationship. These have been reduced by 1/3, retroactive to 1 January 1999, to DM 16,000, DM 20,000, or DM 24,000. Plans to phase out the exemptions on settlements exceeding DM 50,000 were abandoned, however.

The 50 % reduction in the tax rate previously applicable to such settlements under sec. 34 EStG has been abolished, as anticipated. An income-spreading provision can apply under certain conditions.

The transition provisions provide that the old exemption amounts (DM 24,000, DM 30,000, or DM 36,000) continue to apply to settlement agreements entered into prior to 1 January 1999, to the extent the settlement amount is paid to the employee prior to 1 April 1999.

Exemptions for transition payments and assistance (sec. 3 no. 10 EStG)

The tax exemptions for transition payments and assistance has been limited to DM 24,000. The new limit does not apply to transition payments and assistance received prior to 1 April 1999.

Repeal of the exemption for payments on employee and business anniversaries (sec. 3 no. 52 EStG, sec. 3 LStDV)

Special payments by the employer to employees in accordance with administrative ordinance are now subject to tax. This means the elimination of the exemptions for employee anniversary payments, for instance.

Employee reporting obligation for wages received from third parties
(sec. 38 (1) EStG)

The changes originally planned in this area were not enacted.

Payments for multiple years of work (sec. 39b (3) EStG)

Changes are made in the rules governing the reduction of wage tax on payments for multiple years of work and for indemnification payments.

Passing flat rate wage tax along to the employee (sec. 40 (3) , sec. 11 (1) sent. 3 EStG)

Under prior law, wage tax which is passed along to the employee in a manner permitted by labour law reduces the base for calculating flat rate wage tax in the situations covered by sec. 40 and 40a EStG. In cases falling under sec. 40b EStG it reduces the standard individual wage tax. The amendments in this area deem the tax passed along to constitute wages received by the employee. The new rules apply for wage tax passed along from 1 April 1999 onwards.

Obligation to correct wage tax following retroactive legislation
(sec. 41c (1) no. 2 EStG)

The employer is entitled to correct wage tax withholding by means of subsequent adjustments in the case of retroactive changes in the law. Such adjustment may be in the employee's favour or disfavour. If the employer fails to correct for a retroactive increase in wage tax withholding (for instance, because the employment relationship has been terminated and the wage tax withholding certificate already issued), he is required to notify the tax offices for his various branches accordingly in order to avoid personal liability. This applies in particular to the changes made in the taxation of settlement payments.


X. Withholding tax

Withholding exemption certificates (sec. 44a, 52 (55) EStG)

As a consequence of the 50 % reduction in the investment income exemption (sec. 20 (4) EStG), the old withholding exemption requests are partially invalidated (generally, reduced in amount by half) from the year 2000 onwards.

Bank disclosure obligations regarding exemption requests (sec. 45d EStG)

sec. 45d (1) no. 3 EStG has been changed to provide that banks are required to disclose to the Federal Finance Office (Bundesamt der Finanzen) the specific amount for which no withholding occurred by reason of the withholding exemption request (so-called "actual amount notice"). Previously, banks needed only to disclose the amount for which the taxpayer had requested an exemption from withholding (withholding exemption volume; so-called "nominal amount notice"). The new rules apply from 1 January 1999 onwards and represent a sort of reporting of income on capital to which the investment income exemption applied. This data is to be compared for the first time with the records of the welfare system in an attempt to combat welfare abuse.

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 which occurred outside Germany (example: broadcast in Germany of concerts recorded abroad).

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

A new 25 % withholding requirement has been introduced for payments to non-resident contractors (Werkunternehmer).

A domestic contract awarder is required to report payments and remit tax within eight days of the time of payment unless the non-resident contractor has provided certification from the Federal Finance Office or from the tax office with assessment authority showing the contractor to be entitled to a tax exemption or a tax reduction. This procedure is intended to ensure effective taxation of foreign contractors.

Withholding does not automatically satisfy the underlying tax liability. It serves merely to ensure compliance. Tax withheld is credited against tax ultimately assessed.


XI. Income tax rate provisions

More gradual tax rate progression (sec. 32a EStG)

The new legislation "smoothes" out the present steep climb of the income tax rates so that they ascend more gradually from the initial tax rate to the top marginal tax rate. The relevant provisions take effect in two phases: a relatively small realignment in the year 2000 followed by a major revision in the year 2002. These are the most important provisions in the tax reform package as far as fiscal impact is concerned. See article no. 166 for more detail.

Zero bracket amounts (sec.32a (1) no. 1 EStG)

The zero bracket amounts will be increased in three phases: (i) in 1999 to DM 13,067/DM 26,135; (ii) in 2000 to DM 13,499/DM 26,999; and (iii) in 2002 to DM 14,093/DM 28,187 (single and joint filers respectively).

Reduction of minimum and maximum tax rates (sec. 32a (1) no. 2 to 5 EStG)

The minimum tax rate is reduced in three phases: (i) in 1999 to 23.9 %; (ii) in 2000 to 22.9 %; and (iii) in 2002 to 19.9 %. The maximum tax rate is reduced in two phases: (i) in 2000 to 51 % and (ii) in 2002 to 48.5 %. The number of tax brackets between the lowest and highest tax rates has been increased from four to five.

Splitting rate (sec. 32a (5) sent. 1 EStG)

The changes originally planned in this area were not enacted.

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

Tax free foreign income derived by individuals under a tax consolidation structure (Organschaft) is now subject to the general progression clause.

Reduced personal tax rates for commercial business income derived under tax consolidation rules (sec. 32c (2) EStG)

The reduced tax rates for the commercial business income of individuals do not apply to corporate profits derived by individuals through a tax consolidation structure. It probably makes no difference whether corporate profits are received directly or through an intervening partnership.

Maximum income tax rate for commercial business income (sec. 32c (4) EStG)

The maximum income tax rate for income effectively subject to trade tax is reduced to 45 % in 1999 and to 43 % in the year 2000. The base amount above which the capped income tax rate applies has been reduced commensurately.

Preferential tax rate for "extraordinary" income (sec. 34 EStG)

The 50 % reduction in tax rates for "extraordinary" income has been eliminated in favour of a five-year income spreading provision. The 1998 assessment period is the last to which the prior version of sec. 34 EStG is applicable.

Income tax relief if inheritance tax imposed (sec. 35 EStG)

The provision presently in effect to soften the impact of double taxation by inheritance and income taxes (with regard to income subject to inheritance tax within the past five years) has been repealed as of the 1999 assessment period.


XII. Corporation tax

Shareholder financing (thin capitalisation) (sec. 8a KStG)

No changes are made in Germany's thin capitalisation rules (sec. 8a KStG) by the new Tax Relief Act. There are, however, reports to the effect that changes in this area are possible as part of additional tax legislation expected by the end of this year (1999).

Sale of shares in foreign corporations (sec. 8b (2) sent. 2 KStG)

It will no longer be possible to deduct losses arising on the sale of shares in a foreign corporation or in connection with the liquidation or reduction of stated capital of foreign corporations if the dividends of such corporations were tax exempt (participation exemption) and hence a gain on sale would also have escaped taxation. The amendment is intended to prevent deduction of losses when positive income from the same transaction would be tax exempt. The new provision applies from 1 January 1999 onwards.

Deemed non-deductible expense related to participation exemption dividends
(sec. 8b (7) KStG, sec. 3c EStG)

We refer in this connection to our comments under sec. I.1 above.

Large charitable donations (sec. 9 (1) no. 2 sent. 3 and 4 KStG)

A single donation of more than DM 50,000 to promote the causes designated in the provision is deductible (subject to the deduction limits) only in the year of donation and in the six subsequent years (previous seven year carryforward).

Non-deductible expenses (sec. 10 no. 2 KStG)

sec. 10 no. 2 KStG has been amended to deny the deductibility of VAT on supplies constituting withdrawals or constructive dividends and input tax on expenses which are not deductible pursuant to sec. 4 (5) sent. 1 to 4 and 7 or (7) EStG. Also no longer deductible are interest payments on back taxes (sec. 233a AO), interest on taxes which have been deferred (sec. 234 AO), and interest on taxes the collection of which has been stayed (sec. 237 AO). The new rules take effect on 1 January 1999.

Special reserve for building and loan associations
(sec. 21b KStG in conj. with sec. 54 (8f) KStG)

Building and loan associations (Bausparkassen) are permitted to set up a reserve in the amount of 3 % of building savings deposits for the last time in the last fiscal year to end before 1 January 1999. Existing reserves must be transferred to earnings over a period of not more than five years at a rate of not less than 20 % per year unless reversal of the reserve is required under sec. 21a sent. 3 KStG.

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

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

Dividend taxation (sec. 23 (2) KStG)

The retained earning tax rate remains 45 % for dividends (including creditable corporation tax with respect thereto) received by resident corporate entities whose own distributions constitute income of the sort described in sec. 20 (1) (2) EStG, to the extent the dividend received comes out of the subsidiary's equity basket EK 45. An exception exists for express tax-exempt corporations and associations within the meaning of sec. 5 (1) no. 9 KStG with regard to dividends allocable to a business operation which does not qualify for the tax exemption.

Limitation on credit of foreign taxes (sec. 26 (6) sent. 3 KStG)

The limitation on credit of foreign taxes on foreign source income is to be calculated using the standard 40 % tax rate or a lower rate.

Use of EK-45 for distributions permanently fixed
(sec. 28 (4), sec. 54 (10a KStG)

To the extent the distributing corporation certifies a dividend to come out of EK 45, this is deemed final.

Tax certificate for dividends (sec. 44 (1) sent. 1 no. 6 KStG)

As a consequence of the change made in sec. 23 (2) KStG, the tax certificate of the distributing corporation must in the future state what portion of the dividend comes from EK 45. This portion must be certified even if it is zero.


XIII. Trade tax

Consolidated groups (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 taken into account.

Harsher consequences of denial of status as equity participation company with regard to trade tax exemption (sec. 3 no. 23 GewStG)

For equity participation companies within the meaning of sec. 25 (1) UBGG (law regarding equity participation companies of 17.12.1986), the revocation or waiver of this status has retroactive effect unless the company's stock was publicly offered. Official notices of grant, revocation, or waiver of such status are "base assessment notices" (Grundlagenbescheide) within the meaning of the Tax Procedure Act (sec. 171 (10) AO).

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. 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.

Large charitable donations (sec. 9 no. 5 sent. 3 and 4 GewStG)

A single donation of more than DM 50,000 to promote the causes designated in the provision is deductible (subject to the deduction limits) only in the year of donation and in the six subsequent years (previous seven year carryforward).

Exemption and special rates for partnerships (sec. 11 GewStG)

The changes originally planned in this area were not enacted.


XIV. Tax reorganisation act and asset transfer

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.

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 (Geschaeftsbetrieb) of the transferring corporation not have been discontinued at the time of the reorganisation.

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.

Gratuitous transfer of a business, branch of activity, or interest in a commercial partnership (sec. 6 (3) EStG)

The rule of sec. 7 (1) EStDV (income tax implementing regulations) has been carried over to sec. 6 (3) EStG. Gratuitous transfers of businesses, branches of activity, or interests in commercial partnerships can be accomplished without triggering tax for the transferor. His basis and other tax attributes carry over to his successor in interest.

Gratuitous transfers of individual assets to another taxpayer (sec. 6 (4) EStG)

The substance of sec. 7 (2) EStDV has been carried over to sec. 6 (4) EStG. The receiving business must capitalise assets gratuitously received at their fair market value (gemeiner Wert).

Other transfers of individual assets (sec. 6 (5) EStG)

New sec. 6 (5) EStG contains an exhaustive list of the situations in which individual assets can be transferred without triggering tax. All situations are subject to the condition that ultimate taxation of the unrealised appreciation inherent in the assets be assured.

  • Transfer from one business (Betriebsvermoegen) to another business of the same taxpayer.
  • Transfer from one of the taxpayers businesses to his special business property (Sonderbetriebsvermoegen) as partner in a commercial partnership and vice versa.
  • Transfer between different special business properties of the same taxpayer as partner in different commercial partnerships.

Transfer of individual assets without triggering tax is not permitted under sec. 6 (5) EStG in the following cases:

  • Transfer of an asset from the business property of a partner in a commercial partnership to the partnership itself (Gesamthandsvermoegen) and vice versa.
  • Transfer of an asset from a commercial partnership to the special business property of a partner and vice versa.
  • Transfer between the special business properties of different partners in the same commercial partnership.

The new provisions supersede a great deal of the so-called Co-Entrepreneur Directive, which previously governed such issues.

Transfer of individual assets by exchange, constructive contribution, and division of a business (sec. 6 (6) EStG)

The new provisions render the Exchange Opinion inapplicable to the exchange of assets, in particular to like-kind exchanges of shares in corporations. An exchange of assets is now treated as a disposition as a basic matter.

Constructive contribution is in principle treated as equivalent to a disposition (sec. 6 (6) sent. 2 EStG). The consequence is that the transferring business realises gain on the transfer to the extent of the unrealised appreciation inherent in the transferred asset ("hidden reserves"). The transferor's basis in the shares held in the receiving corporation is increased by the going concern value of the contributed asset.

It is presently unclear whether tax-free transfers are still possible when dividing a business into an operative entity and an asset-holding entity (Betriebsaufspaltung) or during the period in which such division exists.


XV. Value added tax

Expansion of scope of supplies of goods and services (sec. 1 (1) UStG)

So-called gratuitous in-kind benefits, services supplied to employees, the taxation of self-supplies, and gratuitous supplies by associations to their members will be treated in the future as subsets of supplies of goods and services in accordance with the 6th EC Directive. Such supplies are subject to tax where the entrepreneur is established or at the place of branch establishment, as the case may be. No tax exemption is allowed for export of goods and for processing and other work on goods.

Continuation of determination of the taxable value of meals provided to employees with reference to administrative ordinance (sec. 10 (4) UStG)

In a reversal of previous plans, the taxable value of meals provided to employees in self-operated cafeterias continues to be determined under an administrative ordinance (Sachbezugsverordnung) dealing with in-kind benefits.

Input tax credit on goods used only in part for business purposes (sec. 15 (1) UStG)

Purchased goods must now be used at least 10 % for business purposes in order to confer a pro rata input tax credit.

Input tax deduction for travel costs (sec. 15 (1a) UStG)

The input tax deduction is dropped for travel costs (i.e. the cost of meals and accommodations, moving costs, and the cost of use of vehicles belonging to employees). The rules on standardised input tax deduction amounts for travel and moving costs (sec. 36 - 39 UStDV) have accordingly been deleted.

Input tax for company cars (sec. 15 (1b) UStG)

The input tax deduction on the cost of purchasing and maintaining cars has been lowered to 50 % for vehicles also used for private purposes. The limitation applies only to vehicles owned by sole proprietorships and for partners in partnerships. If a vehicle is provided to an employee in the context of an employment relationship for consideration, the vehicle is used entirely for business purposes and no reduction of input tax applies. However, the supply is taxable under a provision newly added to the law (sec. 3 (9a) UStG - use of enterprise property for employee's private needs).

The 50 % denial of input tax credit applies to vehicles purchased after 1 April 1999. The private use of vehicles purchased prior to this date remains taxable.

Changes in the use of vehicles first used solely for business purposes or solely for private purposes will be tracked over a period of five years under sec. 15a UStG. If the vehicle is sold or withdrawn from the business within this period, an adjustment will likewise be made by reason of the change in use in order to prevent cumulative value added tax.

Input tax credit on third-party meal expenses (sec. 15 (1a) UStG)

The input tax credit is eliminated with respect to that part of third-party meal expense which is not deductible for income tax purposes (20 %).

Input tax credit on presents worth more than DM 75 (sec. 15 (1a) UStG)

The input tax credit is no longer available on presents worth more than DM 75. However, taxation as a gratuitous supply has also been abolished.

Effective date

All value added tax changes are effective as of 1 April 1999.


XVI. Real estate transfer tax

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 holds 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. Direct and indirect changes in the ownership structure of a partnership holding real property will in the future only trigger real estate transfer tax is at least 95 % of the shares change hands. The test of whether a change in ownership is "material" or not has been dropped from the statute. Under this test, changes in ownership of less than 95 % might trigger tax. The revised version of sec. 1 (2a) GrEStG is applicable to acquisitions taking place after 31 December 1999.

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

Under prior law, no unification of interests occurred 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.

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.

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 states 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's interest in the partnership continue undiminished for a period of five years. The new rules first apply to acquisitions effected after 31 December 1999.

Tax base (sec. 8 GrEStG)

The standardised values (Bedarfswert) under sec. 138 (2) or (3) BewStG (valuation law) 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. However, in this case and in the other two situations in which the standardised value was already used as the tax base (conveyance without consideration, unification of interests under sec. 1 (3) GrEStG), the calculation of the standardised value has been modified. If the acquisition relates to a building which is yet to be constructed or if a change in the ownership structure pursuant to sec. 1 (2a) GrEStG is based on a pre-existing plan to improve a plot of land, the standardised value is calculated based on the factual circumstances prevailing at the time of completion, instead of on the factual circumstances at the time of acquisition. The new rule applies to acquisitions effected subsequent to the date of promulgation of the law.


XVII. Inheritance tax

Transfer of an interest in a company ( sec. 3 (1) no. 2 sent. 2, sec. 7 (7) ErbStG)

The transfer of an interest in a partnership to the other partners has previously been a taxable event under the inheritance and gift tax laws to the extent the payment which the receiving partners must make to the heirs of the transferring partner or to third parties is less than the value of the interest for inheritance tax purposes. The receiving partners have a taxable acquisition to this extent.

Language has been added to the law to clarify that this provision applies to corporations as well as to partnerships. Provisions have also been inserted regarding the redemption of shares in such instances.

The new provisions apply for tax accruing subsequent to 4 March 1999.

Establishment and dissolution of a trust (sec. 3 (2) no. 1, sec. 7 (1) no. 8 and 9, sec. 9 (1) no. 1 c, sec. 15 (2) sent. 2, sec. 20 (1) ErbStG)

Just as in the case of transfer of property to a German foundation (Stiftung), inheritance tax now also arises upon formation or endowment of a property fund under foreign law if its purpose is to bind property (generally, foreign trusts). Tax arises upon formation or endowment of the trust. Dissolution of the trust and acquisition by interim beneficiaries during the duration of the trust constitute additional taxable events. Besides the trust itself, the person who formed or endowed it is also liable for the tax.

The new provisions apply for tax accruing subsequent to 4 March 1999.


XVIII. Investment subsidies

Non-qualifying investments (sec. 2 sent. 2 no. 4 InvZulG 1996)

The amendments extend the list of investments which do not qualify for subsidies to include assets purchased or manufactured after 2 September 1998 for processing and marketing certain agricultural products from the so-called "sensitive sectors".

Individual notice for large investments (sec. 7 (2) InvZulG 1996)

A provision affecting large investments has been added to sec. 7 (2) sent. 2 InvZulG 1996. The provision codifies the Federal Ministry of Finance directive of 18 September 1998. This provides that investment subsidies for investments which are part of an investment project which meets the notice requirements under the multi-sector regional subsidy framework for large investments cannot be fixed until the European Commission has set the relevant maximum subsidy limits.

1999 Investment Subsidy Act

The 1999 Investment Subsidy Act, which was promulgated on 18 August 1997, has until now been awaiting approval by the European Commission. While the EU Commission gave its approval by and large in its letter of 30 December 1998, it also expressed reservations on certain individual items and initiated a full review procedure under Art. 93 (2) of the EC Treaty (for details see the directive of the Federal Ministry of Finance of 12 January 1999). Until the concerns of the EU Commission have been addressed, investments cannot be subsidised on the basis of the provisions which the EU Commission criticised.


XIX. Development Areas Act

The changes to this law relate to special depreciation for investments in assets for the processing and marketing of "sensitive sector" agricultural and forestry products.


XX. Tax Procedure Act, Commercial Code

Retention periods for bookkeeping vouchers (sec. 147 (3) AO, sec. 257 (4) HGB)

The ten year retention period was extended to bookkeeping vouchers upon promulgation of the 1998 Tax Amendment Act on 23 December 1998. The new retention period applies to documents for which the retention period had not yet expired under the law in effect up to 23 December 1998.

Violation of reporting and presentation obligations (sec. 379a AO)

Under the initial draft legislation, failure to submit tax returns or produce documents within a deadline set by the tax authorities despite express demand on their part would have constituted an administrative offence punishable by fine of up to DM 10,000. This measure is not part of the bill as finally enacted.

XXI. Government child support contributions

Increased child support contributions (sec. 66 EStG)

Monthly child support contributions for the first and second child were increased effective 1 January 1999 from DM 220 to DM 250. The further increase to DM 260 in the year 2000 was not enacted since a recent decision by the Federal Constitutional Court necessitates separate legislation to alleviate the burdens on families. See also article no. 173.

Qualifying children (sec. 2 (2) BKGG)

Children over 18 years of age presently do not qualify if they have income of their own exceeding DM 12,000 per year. This limit will be amended as follows: (i) for 1999: DM 13,020; (ii) for 2000 and 2001: DM 13,500; (iii) from 2002 onwards: DM 14,040.

Disbursement by labour office (sec. 70 EStG)

From 1999 onwards, responsibility for disbursing child support payments is being returned to the family department of the labour offices (Kindergeldkasse).

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.

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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.