Government wants to improve options for offsetting losses

The COVID-19 crisis and the continuing restrictions for businesses as well as the reluctant customer behaviour – although restrictions have been eased in the meantime and fiscal policy measures have been planned – still entail considerable economic consequences. Therefore, COVID-19-related losses and how they are dealt with in fiscal policy will continue to be one of the central subjects in 2020. Quick financial support for businesses is the goal of the fiscal policy measures and first steps towards improved options for offsetting losses have been initiated.

In this connection, the public notice of the Federal Ministry of Finance (BMF) dated 24 April 2020 is to be mentioned which provides for the option of a "flat-rate loss carryback" in the amount of 15% of the retained earnings of 2019 (maximally €1 million or €2 million in the case of joint assessments). We reported on this subject in Part I of our series of articles on 26 May 2020. These regulations continue to apply, and the possibility of proving a higher than expected (fictitious 15%) loss carryback by submitting detailed supporting documents remains unchanged.

Package of Germany’s governing coalition of 3 June 2020

To date, German legislature has not taken any measures towards improved or extended options for offsetting losses. On 5 June 2020, the German Bundesrat adopted the "Act on tax-related assistance to overcome the COVID-19 crisis" (COVID-19 Tax Relief Act); however, it does not contain any regulations for offsetting losses.

A first step towards relevant legislative measures for extended options for offsetting losses was made in the stimulus package adopted by a committee of representatives from Germany’s governing coalition on 3 June 2020.

Section A.5 of the action paper contains the following regulation:

Loss carrybacks will be increased – by law – to a maximum of €5 million or €10 million (in the case of joint assessments) for 2020 and 2021. A mechanism for applying loss carrybacks with a direct financial effect to 2019 tax returns will be introduced, e.g. by creating a COVID-19 reserve for tax purposes. This will create the necessary liquidity today and can be managed with little bureaucracy. The reserve must be reversed by no later than the end of the 2020 financial year."

The stimulus package will be subject of a related legislative procedure in the short term; the new law is planned to be adopted by the end of June.

Implementation of the extended options for offsetting losses

The decision does not yet contain any details as to the technical implementation of the extended options for offsetting losses.

For financial years which are identical with the calendar year they could be taken into account such that the currently existing regulations for loss carrybacks not exceeding €1 million for individual assessment or €2 million in the case of joint assessment – applying to income tax and corporate income tax only – will be increased to €5 million / €10 million. For an immediate effect on liquidity – after it has become law – this should be permitted on application as a "preliminary loss carryback" in the 2019 tax prepayment procedure. Here the loss of a business would have to be claimed using a flat rate in accordance with the procedure described in the public notice of the BMF dated 24 April 2020. The wording of the draft bill of the coalition government indicates a possible doubling of the flat-rate loss carryback to 30% (currently 15%) – but with a cap at €5 million / €10 million.

In the 2020 tax assessment, the actual loss would then have to be determined and the previous loss deduction at a flat rate would have to be replaced by the actual loss carried back from 2020 to 2019 – with a higher cap at €5 million or €10 million. Should the actual loss carryback be lower than the previously used flat amount, back taxes would be charged and the taxpayers concerned may also have to pay interest.

The effect of these "off-balance sheet" measures would be equal to a COVID-19 reserve in tax accounting, but with the difference that the measures relating to the tax balance sheet will – initially – affect trade tax, which is unlikely to be intended in consideration of the financial situation of the municipalities. Here legislature would have to apply the additional instruments of add-backs and trade tax relief. The reserve would have to be reversed with effect on income by 2022 at the latest; this would give the taxpayers concerned some more flexibility over time.

Conditions of extended options for offsetting losses

Not only the specific technical implementation but also the conditions for claiming the extended options for offsetting losses or creating a COVID-19 reserve are currently still unclear.

It remains to be seen whether the draft will contain the same or at least similar conditions as those published in the public notice of the BMF on flat-rate loss carrybacks dated 24 April 2020. In any case, one condition to be met is that the income tax/corporate income tax prepayments for 2020 are fixed at €0 (since a loss is expected for 2020).

Should the new law supersede the public notice of the BMF, this might lead to conflicts of law in isolated cases for which it is unclear how to deal with them.

If the loss carrybacks would furthermore be conditional on the completed initial assessment for 2019, this should, in general, be unproblematic for implementation purposes.

It is currently completely unclear whether there will be additional regulations for taxpayers whose financial year is different from the calendar year; frequently 31 March is the last day of a financial year. For these taxpayers the COVID-19 losses will affect the 2021 tax assessment so that only a higher loss carryback from 2021 to 2020 would help.

Practice note

Whatever the specific legal regulations for the extended options for offsetting losses or the COVID-19 reserve will be – having optimum liquidity planning in mind it is necessary to examine in detail at what time and in what amount an application for a flat-rate loss carryback after 2019 should be filed or a reserve should be created and at what time and in what amount it has to be reversed with an effect on income. In this context also the potential effects on the interest deduction ceiling and deferred tax liabilities in the financial statements should be considered. The experts from Warth & Klein Grant Thornton will be pleased to assist you with the potential offsetting of losses and can examine the associated tax and accounting issues.

Outlook

The developments regarding the fiscal policy measures in connection with the COVID-19 pandemic continue to be highly dynamic. This applies in particular to the treatment of COVID-19 losses and the related expansion of the existing options for offsetting losses. We will keep the legislative procedure under review relating to the stimulus package and in particular the implementation in law of the planned expansion of options for offsetting losses and share more guidance and information in this series of articles as soon as it becomes available.