article banner
Corporate Tax

New law provides for expansion of tax loss carryback options

Tax law is ever changing like hardly any other matter. This is true all the more so in turbulent times as the current COVID-19 crisis. In consideration of the foregoing, we will inform you with a series of articles on the "hot topic" COVID-19 losses and keep you up to date with all developments and legislative changes. We are very pleased that we were able to bring a proven expert for national and international corporate tax law on board, Mr Volker Schmidt-Fehrenbacher.

Mr Schmidt-Fehrenbacher is Diplom-Kaufmann [Graduate in Business Administration] and was head of national tax department in the Mannesmann Group. From 2000 until he retired in 2019 he was head of the tax division at Vodafone Germany. During this time he collected a broad range of in-depth experience in the field of corporate tax.

Read part 3 of the "COVID-19 losses" series below:

The negative impact of the COVID-19 pandemic on the economic situation keeps the German economy in suspense. One of the most important objectives of German legislature is therefore still to improve the liquidity situation of affected businesses by appropriate fiscal measures. The first COVID-19 tax relief act was adopted by the Bundesrat [German parliament] on 5 June 2020 and has been promulgated in the meantime (Federal Gazette [BGBl.] I 2020, p. 1385). Its core regulations are the reduced VAT rate in restaurants, (payroll) tax exemptions for extra amounts that an employer pays on top of the short-time working benefit and the extension of the retroactive effect on taxation under the Reorganisation Tax Act [Umwandlungsteuergesetz]. Improvements in relation to the offsetting of losses, however, have not yet been included. Until now, accelerated deduction of losses has been possible only as loss deduction at a flat rate in accordance with the public notice of the Federal Ministry of Finance [BMF] dated 24 April 2020. We reported on this subject in Part I of our series of articles on 26 May 2020.

As a result of the stimulus package adopted by Germany’s governing coalition, the Second COVID-19 Tax Relief Act was adopted by the Bundestag and Bundesrat [German parliament] on 29 June 2020 (published in the Federal Gazette [BGBl.] I on 30 June 2020), which now for the first time provides for the extension of the options to deduct losses. Two central regulations are to be distinguished here:

Temporary increase of the amount of for offsetting losses against the previous year’s profits from currently €1 million as a maximum (or €2 million in the case of joint filing) to €5 million as a maximum (or €10 million in the case of joint filing).

Direct effect on liquidity with applications for loss deduction at a flat rate for expected losses

Increase of the amount of loss deduction under section 10d EStG

The provisions in the Income Tax Act [Einkommensteuergesetz - EStG] relating to loss deduction are expanded by the Second COVID-19 Tax Relief Act by increasing the amounts such that loss carrybacks not exceeding €5 million or €10 million for joint filing are possible. As under the previous regulations, losses were deducted "automatically", i.e. without the need to file a separate application in the assessment procedure and without other conditions to be met. Should the loss deduction turn out to be a disadvantage for the taxable person, it is still possible to omit the loss carryback on application or not to deduct all losses. The increase in the amount of the loss carryback is temporary and valid for the 2020 and 2021 tax periods only.

The amounts eligible for deduction are determined in the process of tax assessment for 2020 (and later on for 2021), i.e. exact amounts of increased loss carrybacks can be deducted as from mid 2021 at the earliest. So as to achieve a quick effect on the liquidity of the businesses concerned, the Second COVID-19 Tax Relief Act therefore contains certain accompanying regulations which allow the accelerated deduction of the loss carryback from 2020 to 2019 (for the moment) in an estimated amount.

Adjustment of the prepayments for 2019

If the 2019 taxes have not yet been assessed, it is possible to reduce the prepayments made for 2019 on application by deducting losses at a flat rate of 30% of the relevant 2019 retained earnings.

This is the implementation in law of a regulation established in the public notice of the BMF dated 24 April 2020. In addition to the doubling of the rate from 15% to 30%, the Second COVID-19 Tax Relief Act provides for more relief such that claiming loss deduction at a flat rate alone is under reserve that the 2020 prepayments were previously reduced to €0. In contrast to the public notice of the BMF, the condition that the taxable persons were directly affected by the COVID-19 crisis and to a considerable extent does no longer apply.

It is still possible, as in the public notice of the BMF, to prove a higher loss carryback than the fictitious 30% by submitting detailed supporting documents. However, the loss deduction at a flat rate is capped at €5 million or €10 million for joint filing.

Preliminary loss carryback from 2020

To prevent that the effect on liquidity described above is absorbed by the initial assessment for 2019 in 2020 (the 2020 loss amount is not yet final), the Second COVID-19 Tax Relief Act furthermore offers an option to deduct losses from 2020 at a flat rate of 30% also in connection with the tax assessment for 2019.

The content of this regulation is largely the same as the loss deduction at a flat rate for purposes of adjustment of the prepayments for 2019 (see above). The only condition for claiming it is also that the 2020 prepayments were previously reduced to €0. Furthermore, if detailed supporting documents or proofs are submitted, loss deduction exceeding the flat rate of 30% is possible, again with a cap at €5 million or €10 million for joint filing to be observed. The regulation is to be applied to the 2019 and 2020 tax periods; therefore it does not apply to 2021. This concerns taxable persons whose financial year ends e.g. on 31 March 2020 and whose COVID-19-related losses will be incurred in the 2021 tax period only.

If the reduction of prepayments for the 2019 tax period results in higher taxes being assessed due to the loss deduction at a flat rate, an interest-free deferment may be granted on separate application of the taxable person within one month after the last day of the month in which the 2020 tax assessment was issued. In the 2020 tax assessment the amount of the losses carried back to 2019 will be finally determined; instead of the 30% flat rate (or the higher amount on the basis of a proved individual loss expectation) the final amount will be used.

Outlook

In the Second COVID-19 Tax Relief Act, first steps towards extended options for offsetting losses are laid down in law. In the light of the currently prevailing situation of crisis the focus of legislation has been on measures increasing liquidity in the short term only. In how far this will lead to a preparedness in politics to bring about further improvements and relief for taxable persons within a short time, such as the non-application of the minimum taxation regulations at least if COVID-19-related losses from 2020 are incurred, is currently not foreseeable. A first step towards structural improvements in company taxation is the announcement of the "option model for partnerships" as part of the stimulus package: Partnerships shall have an option to be taxed as a corporation. Its implementation in law is planned in the short term in the context of an "Act to modernise corporate income tax law". We will keep you current and up to date with all developments with our series of articles.

Practice note

The experts from Warth & Klein Grant Thornton will be pleased to advise you on the extended options for loss deduction and the drafting of applications with the goal of optimised liquidity planning.