Click on the above link to visit the KPMG Germany webpage on the Mondaq website
For disclaimer and copyright see end of this article.
I. Taxation of individuals
1. New zero tax bracket amounts
2. Home offices or workrooms
3. Educational costs
4. Deduction for costs of second household
5. Deductions for children and child support contributions
6. Child support contributions
7. National nursing care insurance: exemption for certain care providers
8. Flat rate kilometre allowances unchanged
9. Meal expense deductions
10. Taxation of cross-border commuters
11. New home ownership subsidy system
12. New depreciation rates for residential rental property
13. New standard deduction for rental expenses
14. Postponement of short-form assessment
15. Assessment procedure for changes in tax status
16. Speculative capital gains
17. Gain on sale of stock (repeal of 1 % exception)
18. Loss on sale of stock
19. Deletion of exemption on sale or termination of a business
20. Estate tax: standard funeral cost deduction
21. Gratuitous transfers between spouses
22. Transfers of businesses by gift or inheritance
II. Business taxation
1. Wage tax
2. Tax accounting law
3. Tax Reorganisation Law
4. Capital taxes
5. VAT
a) Job-processing in another EU country
b) Pre- and post-carriage directly connected to intra-community transport of goods
c) Input VAT recovery procedures
6. Investment Subsidy Act (Investitionszulagengesetz)
7. Development Areas Act (Foerdergebietsgesetz)
a) Current rules
b) Changes resulting from the 1996 Tax Act
c) Development Areas loans
The lower and upper houses of the German parliament adopted the recommendations of the Mediation Committee on the 1996 Tax Act on 21 and 22 September 1995. The new bill was enacted into law on October 12th. The third phase of the business tax reforms was excluded from the act, so that the abolition of trade tax on capital, the reduction of trade tax on earnings, and the retroactive avoidance of constructive dividends are among the provisions which have not passed into law. A new attempt to enact the third phase reforms is still expected, however.
The 1996 Tax Act was amended even before it went into effect by a second law enacted on 18 December 1995. This law extends through 1996 the exemption from trade tax on capital in the New German States. Such a measure had been expected, in one form or the other. Mention is made of other, less important modifications at the appropriate place below.
The following provides an overview of the principal changes in the taxation of individuals and businesses, including those resulting from the Home Ownership Subsidy Act, which received final approval from the Bundesrat on 24 November 1995.
I. Taxation of individuals
1. New zero tax bracket amounts
A major provision of the new Act as enacted results from a decision of the German Federal Constitutional Court that the income needed to support a minimum standard of living must be exempt from tax. In order to meet this requirement, the upper limit of the zero tax bracket amounts will be increased in 1996 to DM 12,095 for single persons and DM 24,191 for married couples. Further increases will take place in the years to follow (1997 - 1998: DM 12,365 / DM 24,731; 1999: DM 13,067 / DM 26,135). The lowest tax bracket on income in excess of these amounts will be 25.9%.
2. Home offices or workrooms
In the past, all costs relating to the establishment and maintenance of an office or workroom in the home were deductible as income-related expenses, provided the general requirements were met. From 1 January 1996, costs relating to a home office and its equipment will only be deductible if the professional or business use of the office represents more than 50% of the overall professional or business activities of the taxpayer, or if no other place of work is available for the professional or business activities. In addition, the maximum deduction will in most cases be limited to DM 2,400 per year. The ceiling of DM 2,400 will not apply if the office is the main focus of the overall business or professional activities.
3. Educational costs
To date, the maximum deduction for educational costs relating to a profession which is not yet actually exercised (e.g. studies, taking a doctor's degree) has been DM 900 per year, or DM 1,200 per year when living away from home. These maximum deductions are being raised with effect from 1 January 1996 to DM 1,800 per year, and to DM 2,400 per year when living away from home.
4. Deduction for costs of second household
If an employee is working away from the location where he maintains a household of his own, causing him to e.g. rent an apartment at the place of work, he has in the past been able to deduct reasonable costs for the maintenance of a second household at the place of work as income-related expenses for an unlimited period. With effect from 1 January 1996, the deduction of all such expenses relating to work at one and the same location will be limited to a period of two years. Time prior to 1996 also counts against this period. Costs relating to one trip home per week to visit the family are deductible during this period. Whereas, in the past, meal allowances could be deducted over an unlimited period for the duration of the maintenance of a second household, this will only be permissible from 1 January 1996 onwards during the first three months, in the amount of DM 46 per full calendar day (24 hours).
5. Deductions for children and child support contributions
With effect from 1 January 1996, the standard annual deductions for children will be raised from the present level of DM 2,052 per parent (DM 4,104 for married couples) per child and calendar year to DM 3,132 / DM 6,264 (1997: DM 3,456 / DM 6,912) for single and joint filers respectively. Child deductions will also be prorated on a monthly basis in the future. More importantly, starting in 1996 standard deductions for children and government child support contributions will be mutually exclusive instead of cumulative as in the past. Generally, only the child support contributions will be paid (see also the following paragraph on child support contributions). When issuing personal tax assessments, the tax authorities will automatically decide whether the tax savings to the taxpayer from claiming the standard deduction exceed the amount of child support contributions. If this is the case, they will reimburse the excess of such tax savings over the child support contributions already received. As a result of the new law, a married couple with one child and gross monthly earnings of DM 4,000 will be DM 252 better off each month. A family with two children and gross monthly earnings of DM 5,000 will have an additional DM 195 available each month. With gross monthly earnings of DM 6,000, the same family will be DM 169 better off, and at DM 7,000, DM 125 better off each month. (Source: Press release of German Federal Ministry of Finance).
6. Child support contributions
Starting in January 1996, government child support contributions will no longer be paid by the Labour Offices (Arbeitsaemter). Instead, employers will pay the contributions and deduct the amounts so paid from payroll tax (wage tax) remitted to the tax authorities. Firms with no more than 50 permanent employees can opt out of the obligation to disburse child support contributions. The child support contribution fund managed by the Labour Offices will be renamed "Family Fund" (Familienkasse). If a taxpayer has no employer or if his employer has opted out of the obligation to disburse child support contributions, these contributions will be paid by the Family Fund. Starting in January 1996, the child support contributions will amount to DM 200 per month for the first and second child, DM 300 for the third child and DM 350 per month for each additional child. The child support contributions for the first and second child will increase from DM 200 to DM 220 in January 1997, while the child support contributions for the third and any additional children will remain unchanged. Child support contributions will be paid irrespective of earnings.
7.National nursing care insurance: exemption for certain care providers
The mandatory nursing care insurance system (Pflegeversicherung) which took effect in Germany in 1995 permits persons needing care to choose between nursing services and cash payments intended to enable them to purchase such services. Such benefits, in cash or in kind, are free of income tax under sec. 3 no. 1a EStG. The new act contains a provision (new sec. 3 no. 36 EStG) making clear that cash benefits, if selected and e.g. paid to a someone who cares for the needy individual, are free of tax for the provider as well as for the recipient of nursing services if the provider is a family member or someone rendering nursing services out of objective moral obligation. Cash benefits from a private nursing care insurance policy are likewise not taxable to the care provider or to the care recipient on the same conditions up to the cash amounts which the public insurance system would have paid.
8. Flat rate kilometre allowances unchanged
No change was made in the flat rate motor car kilometre allowances for commuting between home and the regular place of work and for trips home to visit the family. Originally planned was the replacement of the present deduction of DM 0.70 per driven kilometre of one-way distance by a uniform kilometre deduction amount irrespective of the means of transportation selected. However, the new provision was not adopted.
9. Meal expense deductions
Meal expenses incurred due to absence from home and the regular place of work for reasons connected with the taxpayer's work will be deductible from 1 January 1996 onwards at the following flat rates: DM 46 for 24 hours, DM 20 for between 14 and 24 hours, and DM 10 for less than 14 hours. The three new flat rate categories will apply in the future to persons engaged as drivers, persons whose place of employment constantly changes (e.g. workers on building sites) and to business trips within Germany. They replace the ten different flat rate categories which have applied to date. The different flat rates for meal expenses in connection with trips abroad are not affected by the new rules.
10. Taxation of cross-border commuters
The cross-border commuter provisions of sec. 50 par. 4 EStG had to be amended following the European Court of Justice's decision of 14 February 1995 in the "Schumacker" case.
Pursuant to the new sec. 1 par. 3 EStG, non-resident taxpayers must on request be treated in the same way as a resident taxpayer, irrespective of the type of earnings, if at least 90% their total income during the calendar year is subject to German income tax or if the portion of the earnings not subject to German income tax does not exceed DM 12,000 (or DM 24,000 in the case of joint returns) during the calendar year. The amount of the earnings not subject to German tax must be confirmed in writing by the responsible foreign tax office.
Under the same conditions, resident taxpayers with EU or EEA citizenship whose families live in another country in the European Union (EU or EEA) will also be entitled to claim all family-related tax relief, such as the splitting rates for married couples, the deduction of maintenance payments between spouses who are separated, the household allowance, and expenses for care of children (sec. 1 a EStG).
In view of the decision of the European Court of Justice, instructions issued by the German Federal Ministry of Finance on 25 August 1995 state that the relevant provisions in the 1996 Tax Act, unless by their express terms not applicable until 1996, are to be applied immediately both to wage withholding and advance payments of income tax and to all assessment proceedings still pending.
All non-resident taxpayers affected should therefore immediately file a request with the tax office with jurisdiction for their place of employment for a certificate under new sec. 39c par. 4 EStG. Resident taxpayers affected should have their tax office make the necessary amendments to their wage tax card, so that wage tax can be deducted on the basis of the proper tax class and allowances. If excessive advance payments of income tax have been assessed, application for their abatement should be made to the responsible tax office.
Retroactive application of these rules should be requested where applicable for tax assessments which are still open for prior years.
Non-resident taxpayers with foreign earnings exceeding DM 12,000 (DM 24,000 for joint filers) or more than 10% of the total family earnings can at least file an annual tax return if they are resident citizens of an EU or EEA state. Up till now, tax withholding was final for dependent earned income. The assessment will be processed by the tax office responsible for the permanent establishment of the employer.
11. New home ownership subsidy system
In accordance with an agreement reached in the Finance Committee on 26 October 1995 between the Government and the Opposition in the lower house of the German parliament, the home ownership tax incentives under the current sec. 10e EStG will cease to apply to homes purchased after the end of this year (effective date of purchase contract) and to self-constructed homes as to which construction has not commenced by the end of this year (date of application for building permit). Persons applying for a building permit or signing a purchase contract from 27 October 1995 till the end of this year can choose between the present incentives under sec. 10 e EStG and the new system of home ownership subsidies which takes effect in 1996.
Under the new system, the current tax deductions will be replaced by eight annual straight homeowner subsidy payments of DM 5,000 or 5 % of the cost of acquisition of new homes (land and building), whichever is less. A home is still "new" if purchased by the end of the second year following the year of its completion. On purchase of "used" homes, the annual subsidy percentage and limit are 2.5 % and DM 2,500 respectively. The maximum total subsidies for new and used homes are therefore DM 40,000 and DM 20,000 respectively, spread over a period of eight years.
Home ownership subsidies based on family size (number of children) will be paid in addition to the personal subsidy described above. The children's subsidies amount from 1996 onwards to DM 1,500 per child per year during the eight year subsidy period or DM 12,000 per child overall. The children's subsidies replace the current tax refund of DM 1,000 per child per year ("Baukindergeld").
The sum of personal and children's subsidies is, however, limited to the acquisition costs. The subsidies are only granted to persons not exceeding the income limits presently in effect of DM 120,000 / DM 240,000 (single and married). The limits refer to income net of income-related deductions but before personal deductions, and thus correspond neither to gross income nor to taxable income. Unlike the previous system, however, the income limit will in the future be determined with respect to average income in the year of acquisition and the year before. Income will thus no longer be reviewed in each year of the benefit period. In new sec. 10i EStG, a standard deduction of DM 3,500 is created for all so-called "pre-occupancy costs" except pre-occupancy repair and maintenance costs (e.g. for loan discount and for notary fees in connection with the recordation of mortgages). The standard deduction is only available if the income limit is met. The maximum deduction for pre-occupancy repair and maintenance expenses in connection with home purchases is unchanged at DM 22,500. This deduction is available irrespective of income.
12. New depreciation rates for residential rental property
The depreciation possibilities for residential rental property have been changed to the taxpayer's disadvantage by the 1996 Tax Act. The declining balance depreciation rates for residential rental buildings constructed by the owner pursuant to building permits applied for after 31 December 1995 or purchased pursuant to a notarial agreement entered into after this date change as follows:
Present Depreciation Depreciation 1996 ff.
Years 1 - 4 7% Years 1 - 8 5%
Years 5 - 10 5% Years 9 - 14 2.5%
Years 11 - 16 2% Years 15 - 50 1.25%
Years 17 - 40 1.25%
As a result, only 45% of the construction or purchase costs can be depreciated over the first 10 years compared with 58% under the present law.
13. New standard deduction for rental expenses
Instead of itemising, the residential landlord/lessor can take a standard deduction for certain rental expenses from 1996 onwards. The standard deduction is DM 42 per m2 of living space. This standard deduction is in addition to depreciation (normal, accelerated and/or special) and loan interest.
14. Postponement of short-form assessment
The originally planned introduction of an accelerated and simplified income tax assessment procedure known as the "short-form assessment" has been postponed until 1997. The details of the new procedure have not yet been finalised. An administrative pronouncement on the subject is expected shortly.
15. Assessment procedure for changes in tax status
For years of change from non-resident to resident income tax status and vice versa, it will only be necessary to submit one tax return from 1996 onwards. The income earned during the period of non-resident status will now simply be added to the income earned during the period of resident status. The new rules tend to result in higher taxes on the income earned during the period of non-resident status, since heretofore separate calculations were performed for the periods of resident and non-resident status, giving the taxpayer a double benefit from the graduated tax rates in same cases. Results under the new system will, however, very much depend on the particular circumstances.
16. Speculative capital gains
Speculative capital gains are incurred if private assets are sold within a certain minimum holding period. The holding period for real property is two years and for other assets, in particular stock, six months. The speculative profit is currently the excess of sales proceeds over the sum of acquisition cost plus expenses.
Under the amended sec. 23 EStG, the acquisition cost must in the future be reduced by depreciation (normal, accelerated, and/or special) to the extent this was deducted from taxable income (employment income, rental income, or investment income). The speculative profit will accordingly be increased by the amount of this depreciation. This change primarily affects the sale of real property.
17. Gain on sale of stock (repeal of 1 % exception)
Gain on the sale of shares in corporations held by individuals as non-business property is generally tax-free outside the speculation period. Pursuant to sec. 17 EStG, however, this does not apply if a material holding is involved. A material holding exists if the seller had a direct or indirect share of more than 25% in the company during the past five years.
At present, profits on sale were only subject to tax if shares sold during an assessment period exceeded 1% of the company's share capital. This exception has been deleted.
18. Loss on sale of stock
Losses on the sale of shares in corporations forming part of an individual's material holding will only be taken into account from 1 January 1996 onwards if the seller (or, in the event of an acquisition without consideration, his predecessor in interest) either acquired the material holding for consideration in conjunction with the formation of the corporation or acquired the shares for consideration more than five years before the sale, and the seller (or, in the event of an acquisition without consideration, his predecessor in interest) had a material holding in the company during this period. As a result of the restrictions on the deduction of losses under the new rules, careful consideration should, in certain cases, be given to the date of the sale.
19. Deletion of exemption on sale or termination of a business
In the past, a limited exemption existed under sec. 16 par. 4 EStG for gain on the sale or termination of a business (including interests in business partnerships). This has been deleted. An exemption of DM 60,000, reduced however by the amount by which the profit exceeds DM 300,000, will be granted on request to taxpayers who are over 55 years of age or who are permanently disabled as defined by the social security laws. This means that the exemption is completely phased out on gains of DM 360,000 or more.
20. Estate tax: standard funeral cost deduction
Presently, funeral costs of DM 10,000 can be deducted from the amount of a taxable inheritance without any supporting documentation. This amount has been raised to DM 20,000 with effect from 1 January 1996.
21. Gratuitous transfers between spouses
The Federal Tax Court recently held that gratuitous transfers between spouses do not escape gift taxation merely because the donor and the donee are married to, and have a duty to support, one another. The court ruled that the facts and circumstances of each transfer must be examined to determine whether the transfer resulted from the marriage (no gift tax) or from voluntary generosity (subject to gift tax). Since transfers between spouses occur very frequently, particularly in connection with owner-occupied residential property, the court's judgement meant that the tax authorities were duty-bound to investigate each particular case to see whether the transfer was a result of the marriage or of mere generosity. In order to reduce the burden on the tax authorities, the 1996 Tax Act has introduced a new gift tax exemption for transfers of owner-occupied residential property between spouses. The tax exemption will apply retroactively to all such transfers for which the gift tax accrues after 30 May 1994.
22. Transfers of businesses by gift or inheritance
The 1994 Business Location Protection Act had already provided certain relief from gift and inheritance tax on transfers of businesses by gift or inheritance. Entrepreneurs can transfer business property of up to DM 500,000 free of tax to their business successors over a ten year period. This exemption is now being extended to participations in corporations whose registered office is in Germany at the time the tax arises if the donor or decedent held at least 25 % of the share capital.
In addition, the 1996 Tax Act provides that business property in excess of the exemption amount will only be taxed on 75% of its normal taxable value. A similar provision already exists under the net worth tax. This valuation deduction of 25% will apply to all acquisitions by devise/bequest or inheritance, and to certain into vivos transfers ("anticipated inheritance"). According to the legislative history, the valuation deduction is not tied to the exemption. Accordingly, the valuation deduction can be claimed more than once during a ten year period.
As in the past, the benefits will be cancelled retroactively if the transferee sells the property on which relief was granted or a material portion thereof within five years of the transfer. The same applies in the event of other dispositions over the property on which relief was granted which ultimately cause its separation from the property bestowed under the business succession.
II. Business taxation
1. Wage tax
1. An exemption of DM 50 per month will be introduced with effect from 1 January 1996 for certain compensation in kind, i.e. earnings not consisting of cash, such as housing, food, goods, services and miscellaneous remuneration in kind. This exemption will not apply, amongst other things, to the use of company cars free of charge and other benefits which have tax values defined by law.
2. If part-time staff are employed to a limited extent (e.g. for less than 86 hours per month in the case of monthly wage payments) for a low wage (through 31 December 1995 up to DM 580 per month for monthly wage payments), the employer is permitted to remit wage tax owing as a result of this employment relationship at a flat rate of 15%, without requiring the employee to produce a wage tax card. As of January 1996, the applicable flat rate in such cases increases from 15% to 20%. The same increase applies to the flat rate wage tax on life and accident insurance premiums on policies taken out by the employer for his employees. The amount of such premiums qualifying for the benefit increases to DM 3,408 in 1996.
3. Starting in January 1996, government child support contributions will normally be paid out by the employer with the wages. Small and medium-sized business with less than 50 permanent employees can opt out of the obligation to make payments. The monthly child support contributions increase in January 1996 to DM 200 for the first and second child. The payment for the third child will increase in January 1996 to DM 300 per month, and that for each additional child to DM 350 per month.
4. For wage tax purposes, the taxable benefit from private use of company cars will be calculated from 1 January 1996 at a flat rate of 1% of the list price (including extras and VAT) per month. Commuting between home and work will from 1 January 1996 be subject to wage tax at 0.03% of the list price per kilometre of one-way distance between home and the place of work. Instead of the 1% rule, the entire motor car expenses can also be allocated and taxed accordingly by keeping a vehicle logbook. There are also new rules for trips home for taxpayers with two households for work-related reasons. These were apparently misdrafted in the 1996 Tax Act, but are expected to be amended to provide that trips in excess of one per week are taxable at 0.002 % of list price per kilometre of one-way distance.
2. Tax accounting law
1. In order to simplify the taxation process, the 1996 Tax Act empowers the tax authorities to introduce a standard deduction for operating expenses for freelancers and small businesses (to replace itemisation). The tax authorities have however not so far made use of this authority.
2. As of January 1996, "the conferring of advantages and the expenses related thereto" (bribes) are no longer deductible as business expenses if there has been an unappealable sentence in German criminal proceedings by reason of making or receiving the bribe or if a fine has been imposed with final and absolute effect, or if criminal proceedings have been terminated in return for payment of a fine (sec.153 ff. Code of Criminal Procedure). The tax office is now explicitly required by law to inform the appropriate public prosecutor or regulatory authority of facts coming to light in the course of tax proceedings (e.g. on the occasion of a tax field audit) which justify the suspicion of bribes paid or received in violation of German law (criminal offence or misdemeanour). The tax authorities may not impose sanctions against the taxpayer in order to uncover such facts.
3. The business portion of real property used partly for business and partly for private purposes need no longer be treated as business property as of January 1996 if the value of the portion used for business purposes does not account for more than one-fifth of the fair market value of the entire property and does not exceed DM 40,000 ("immateriality limit").
4. New rules similar to those applicable to employed persons have been introduced with effect from 1 January 1996 to determine the amount of non-deductible expenses by which taxable profit has to be increased on account of the use of a company car by a sole proprietor or partner in a partnership for trips between his home and place of work, or for trips home from his second household to visit the family. If a logbook is not maintained for the company car, the new rules with regard to the three types of utilisation of company cars will be as follows:
a) General private use: 1% of list price per month of use;
b) Commuting between home and place of work: the difference between 0.03 % of the list price and DM 0.70 per kilometre of one-way distance between home and place of business each month;
c) Trips home to visit the family in conjunction with the maintenance of two households for occupational reasons: excess of 0.002 % of list price over DM 0.70 per kilometre of one-way distance between primary home and place of work.
5. German law permits a deduction of foreign business losses pursuant to an election under sec. 2a par. 3 EStG even though profits from the same activity would have been tax exempt. Subsequent profits are, however, then taxable to the extent of losses deducted. From 1996 on, the amount of foreign losses deducted but not yet offset by later profits will be separately assessed. This simplifies the tax assessment procedure because differences of opinion as to the amount still subject to recapture have to be cleared up immediately following the assessment period, and not a number of years later.
6. As a result of the 1996 Tax Act, the advance depreciation permitted under sec. 7g par. 3 EStG in order to promote small and medium-sized businesses has been restricted to DM 300,000 at any given balance sheet date.
3. Tax Reorganisation Law
Contribution of business assets to a partnership. It is presently possible when contributing a business, a branch of activity, or a partnership interest to a corporation to make the contribution retroactive to a balance sheet date which was up to eight months earlier. Similar contributions to partnerships cannot be retroactive, however, under present law. This inconsistency has been eliminated with effect retroactive to 1 January 1995. The contribution to a partnership by way of universal succession can now be made effective at a balance sheet date which was up to eight months earlier. The advantage is that it is no longer necessary to draw up (and possibly audit) a special interim balance sheet.
4. Capital taxes
The exemption from net worth tax in the New German States has been extended through 1998. However, the exemption from net worth tax for business property in a permanent establishment located outside the New States belonging to a business whose place of management is located in the new states will be cancelled from 1996 onwards.
The exemption from trade tax on capital has been extended through 1996, but only for property attributable to a permanent establishment located in the New German States.
5. VAT
The 1996 Tax Act also makes a large number of changes in value added tax. The principal changes are in the following areas:
-- Taxation of job-processing,
-- Taxation of pre- and post-carriage directly connected to intra-community transport of goods, and
-- Input VAT recovery procedures.
The changes in the first two of the above three areas were necessary to bring Germany's tax law into compliance with the Second VAT Simplification Directive.
a) Job-processing in another EU country
Under the VAT law valid through 31 December 1995 (old law), the processing of another's goods in such manner as to change their function or nature could under certain circumstances result in an intra-community acquisition by the owner of the goods and in an intra-community delivery by the processor. The intra-community delivery is tax-free under certain circumstances.
Processing of goods without changing their function (e.g. repair) is presently treated as a service. The service is deemed performed at the place where the work is physically carried out (sec. 3a par. 2 no. 3 c UStG). This service is free of tax if the work is carried out for an entrepreneur resident abroad who places his order using a VAT ID number issued to him in another EU country and would be entitled to deduct the input VAT in full, provided he evidences this by means of an official entrepreneur's certificate (sec. 4 no. 1 c aa UStG).
Under the new law, the processing of goods belonging to another (job-processing) is always treated as a service whether or not the nature or function of the goods is changed thereby. As a consequence of the change, the delivery fiction in old sec. 3 par. 1a no. 2 UStG and the corresponding acquisition fiction in old sec. 1a par. 2 no. 2 UStG have been deleted.
If the object is moved out of Germany following the work performed on it, the place of performance can be shifted to another Member State if the customer provides the processor with a VAT ID number issued by that Member State (new sec. 3a par. 2 no. 3 c UStG).
b) Pre- and post-carriage directly connected to intra-community transport of goods
Under present law, the transportation of goods inside Germany either prior or subsequent to their intra-community transport (pre-carriage or post-carriage, also known as "leads and lags") is taxable in Germany. An exemption can apply if transportation is provided for an entrepreneur resident abroad who uses a VAT ID number issued by another EU member state and shows that he is entitled to deduct input VAT in full.
As a result of the new law (sec. 3b par. 3 sentence 3 UStG) taking effect on 1 January 1996, pre-carriage and post-carriage will be assimilated to the intra-community transport which they precede or follow if directly related thereto. The same applies to services ancillary to such pre-carriage and post-carriage (loading, unloading, and transhipment).
c) Input VAT recovery procedures
Under the old law, the recovery of input VAT by entrepreneurs not resident within the country is possible under sec. 59 ff. UStDV irrespective of whether the entrepreneur in question is resident in another EU member country or not.
As a result of the 1996 Tax Act, German VAT will be recoverable by entrepreneurs resident outside the Union only if no tax comparable to VAT is levied in the country in which the foreign entrepreneur has his registered office or if the comparable tax levied in the country of the applicant is also refunded to German entrepreneurs (reciprocity).
Furthermore, the recovery of input VAT on flat rate travelling expenses and the purchase of motor fuel is abolished for all entrepreneurs who are not resident within the EU.
It should be noted that these new rules are retroactive to 3 June 1995.
Besides the tense budgetary situation, the main reason for the restriction of the recovery procedures is the sharp increase in the number of forged invoices, particularly from eastern Europe.
6. Investment Subsidy Act (Investitionszulagengesetz)
Under the current Investment Subsidy Act, capital expenditure for new moveable fixed assets in the New German States can qualify for subsidies if the investments are completed by the end of 1996. It is a condition of all subsidies that the subsidised asset be used in a permanent establishment in the New German States for at least three years after acquisition. Cars and aeroplanes do no qualify, nor since 1993 does fixed asset investment by banks, insurance companies, electricity and gas utilities, wholesalers, and retailers. Furthermore, investments in West Berlin have not been eligible since 1992.
The subsidy currently amounts to 8% if the investment was commenced prior to 1 July 1994 and 5% on investments commenced after 30 June 1994. Small and medium-sized undertakings in the manufacturing sector and the craft trades receive an increased investment grant of 10%, subject to additional conditions.
The 1996 Tax Act has resulted in the following changes to the Investment Subsidy Act:
Basic 8% subsidy: The deadline for completion, but not commencement, of investments qualifying for this subsidy has been extended for a further two years. Investments commenced before 1 July 1994 will therefore be subsidised provided they are completed by the end of 1998.
Basic 5% subsidy: This grant currently applies to investments commenced after 30 June 1994 and completed by the end of 1996. For manufacturing businesses only, it has been extended to investments completed by the end of 1998. Investments in other branches of the economy will only be subsidised if the investment is completed by the end of 1996.
Increased 10 % subsidy: This investment subsidy is available under two different sets of conditions.
-- Firstly, manufacturing businesses and craft/artisanal businesses with not more than 250 employees qualify up to a limit of DM 5 million per year on investments commenced after 30 June 1994 and completed by the end of 1998 (previous deadline 1996). This subsidy is also available to businesses in West Berlin from 1996 on. For West Berlin, however, a limit of 50 employees applies (instead of 250). Subsidies are otherwise unavailable to businesses in West Berlin. (Previously, West Berlin was excluded entirely.)
-- Secondly, small wholesalers and retailers with not more than 50 employees qualify up to a limit of DM 250,000 per year on investments commenced after 31 December 1995 and completed by the end of 1998 provided the business is not located in an area zoned for commerce or industry (Industriegebiet, Gewerbegebiet, Sondergebiet). This basically limits such subsidies to wholesalers and retailers in urban residential areas. Wholesalers and retailers were previously excluded from all subsidies.
7. Development Areas Act (Foerdergebietsgesetz)
a) Current rules
The current version of the Development Areas Act provides for three basic types of investment subsidies within a subsidy period expiring at the end of 1996:
-- Special depreciation on depreciable moveable and immovable property of up to 50% in the first five years in addition to the straight-line depreciation normally allocable to such years;
-- A deduction from profits of up to DM 4,000 for farmers and foresters;
-- Special deduction of up to DM 40,000 for construction and repair costs on owner-occupied residential buildings.
The above benefits all require acquisition or improvement of qualifying assets for use in the New German States. Acquisition may be by purchase or self-production. If an existing asset is improved, the taxpayer may do the work himself ("self-improvement") or pay for it to be done. An asset is acquired when delivered (if purchased) or when production is complete (if self-produced). Payments on account within the subsidy period are sufficient to qualify to the extent thereof, as is the incurrence of expense with respect to self-produced assets. Payments on account and expense incurred in connection with the improvement of assets is treated analogously.
Accordingly, one of the following events must occur within the subsidy period to qualify for the benefit:
-- Delivery of the asset, following purchase or improvements commissioned;
-- Completion of self-production or self-improvement;
-- Payments on account of purchase or improvements commissioned;
-- Incurrence of expense for self-production or self-improvement.
Hereinafter, the first two of the above events will be referred to as "completion" of the investment and the latter two as "partial completion".
Qualifying assets are as follows:
-- Depreciable moveable property (tangible personal property, e.g. equipment), other than aeroplanes, constituting a fixed asset for the owner. To be a fixed asset, the property must be part of a business (commercial business, independent profession, or agriculture/forestry).
-- Depreciable immoveable property (essentially, buildings). If benefits are claimed by reason of purchase (i.e. not by reason of production or improvement), the building must either be new (purchased in its year of completion) or the building must be actively used in the purchaser's business for five years following the purchase.
With regard to special depreciation, the economically most important of the benefits, it goes without saying that this is only available on property used to produce income either in a business, or through rental to third persons ("rental property").
b) Changes resulting from the 1996 Tax Act
The subsidy period for the above benefits has been extended by two years from the end of 1996 to the end of 1998.
The amount of special depreciation has, however, been reduced starting in 1997 from 50 % to 40 %, 25 %, or 20 % depending on the type of investment.
50 % rate: On investments completed or partially completed by the end of 1996.
40 % rate: On investments completed or partially completed in the years 1997 and 1998 relating to the following:
-- Acquisition or improvement of qualifying moveable assets;
-- Acquisition of buildings actively used in a manufacturing business for at least five years following acquisition; and
-- Improvements to all buildings, including improvements by the seller of a building after conclusion of contract of purchase (treated as if improved by the buyer after purchase).
25 % rate: For investments completed or partially completed in the years 1997 and 1998 involving acquisition of residential rental buildings, provided the building is used for residential purposes in the five years following the acquisition.
20 % rate: For investments completed or partially completed in the years 1997 and 1998 involving acquisition of all other buildings, i.e. buildings which fail to qualify for the 40 % or 25 % special depreciation rate because of the type of use (e.g. in non-manufacturing business) and/or the insufficient duration thereof (i.e. less than the required five years).
Like the Investment Subsidy Act, the Development Areas Act contains special, more restrictive provisions for West Berlin. Under the present law, benefits for West Berlin expired at the end of 1994 except for residential rental property (conditional on use as such for five years following acquisition). The new law extends the benefits for such property through 1998. In addition, special depreciation on investments in West Berlin has been reintroduced for the following property:
-- Moveable assets purchased or produced which belong for at least three years to the business of a taxpayer who is registered in the craftsmen's roll or in the register of businesses similar in nature to the craft trades;
-- Moveable assets purchased or produced which belong to a manufacturing enterprise and remain in such business belonging to the taxpayer for at least a three year period;
-- Immoveable assets which are actively used for at least five years following their acquisition in a manufacturing enterprise.
The preceding three benefits are conditional on the company not having more than 50 employees. The applicable special depreciation rate follows the general rules set forth above. Please note that, as regards West Berlin, improvements to assets do not qualify for benefits.
The deduction from profits for farmers and foresters and the special deduction for owner-occupied residential property have also been extended for an additional two years until the end of 1998.
c) Development Areas loans
Lastly, a new provision has been added to the Development Areas Act for persons making loans strengthening the risk capital of small and medium-sized enterprises. The tax subsidy consists in a reduction of the lender's income tax, in the year in which the loan is granted, by 12% of the amount of the loan, or a maximum of 50% of the income tax owing. Only resident individuals (individuals subject to tax in Germany on their worldwide income) may qualify. Such individuals must make a loan at a low rate of interest in the years 1996 through 1998 to one of two institutions (Kreditanstalt fuer Wiederaufbau or Deutsche Ausgleichsbank). Development Area loans have a term of at least 10 years, are repayable at term in a single amount, and are not subject to prior termination.
We hope that you have found our summary of the most important changes resulting from the 1996 Tax Act to be clear and informative and would of course be pleased to discuss any aspect with you in greater depth.
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. 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.
