Many tax incentives for businesses

In line with the words of the German Federal Minister of Finance "We want to come out of the crisis with vigour", the tax benefits are stepped up again in the new fiscal package. On 3 June 2010, Germany’s governing coalition adopted a comprehensive "stimulus package". The package also encompasses income tax measures which may have far-reaching consequences on a case-by-case basis and which may in part bring about lasting changes. Even if the legislative procedure – at least for the measures to be taken in the short term – will start in the course of next week only (and will be completed by the end of June): It is important to have a look at the planned measures at this stage to identify requirement for action in each specific case.

Loss carrybacks will be increased to a maximum of €5 million (or €10 million in the case of joint assessments) for 2020 and 2021. Currently, loss carrybacks are limited to €1 million (or €2 million in the case of joint assessments). As an accompanying measure, a mechanism will be introduced to allow the direct application of 2020 loss carrybacks to 2019 tax returns. Presumably, the creation of a "COVID-19 reserve" will be chosen as the related instrument. These reserves could be formed in 2019 with a tax-reducing effect and need to be reversed by the end of 2022 at the latest. As a result, the expected loss for 2020 can then be applied to the 2019 tax returns, which will lead to a reduction in the tax burden in the short term and thus has an effect on liquidity.

As a tax investment incentive, accelerated depreciation applying a factor of 2.5 in relation to the currently applicable depreciation and a depreciation allowance of maximally 25% annually for movable assets in the 2020 and 2021 tax years will be introduced. Currently, only straight-line deprecation is allowed for tax purposes. These accelerated depreciation options will reduce the tax burden in the short term. Obviously, this should be applicable to acquisitions as from 1 January 2018; however, we have to wait and see what the legal text says. Attention is drawn to the fact that the application of accelerated depreciation will be made without affecting the financial statements; there is no (mutual) dependence.

The tax reduction for income from trade or business under section 35 German Income Tax Act [Einkommensteuergesetz - EStG] is planned to be increased by adjusting the tax credit factor to 4.0 (at present 3.8). This will have an effect for partnerships and sole proprietors. It is to compensate for the increased trade tax multipliers. In accordance with the target of legislation, the tax reduction currently leads to a tax relief for trade tax multipliers of up to 400 %. However, in the meantime this threshold has been exceeded, in part significantly, in many municipalities. The planned tax credit factor of 4.0 now leads to a tax relief for trade tax multipliers of up to 422%.

It should also be borne in mind, however, that this change will increase the danger of further excess tax credits. They may occur for high trade tax add-backs, for losses from other sources of income or significant profits/losses from special or supplementary balance sheets. These cases require thorough tax planning measures; structuring may be necessary.

Corporation tax legislation will be "updated". One of the measures will be an option that allows non-corporate entities to be treated as corporations for tax purposes. This is a model which has been discussed for quite some time and would bring major relief to mostly larger partnerships retaining profits. Currently, the problem is that the profits of partnerships are generally subject to trade tax and income tax, independent of the appropriation of profits, which entails a tax burden of approx. 48 %. In contrast to this, corporations retaining profits within their equity, i.e. which do not distribute them, are charged 30 % only. Even if this advantage of corporations with profit retention is not final, it will have a considerable plow-back effect, especially for medium-sized companies.

This will now be allowed also for partnerships by permitting them to opt for corporate income tax which actually applies to corporations only. Partnerships would then be subject to corporate income tax like corporations and may profit from the lower corporate income tax rate if the profits are retained in their equity.

The conditions applicable to the option remain to be seen. They will become apparent in the short term in the legislative process. Medium-sized partnerships should deal with this far-reaching legislative changes already at this stage to find out what their options are in their specific case. We will be pleased to support you.

Furthermore, the tax allowance for research will be increased retroactively from 1 January 2020 to the end of 2025 to a maximum permissible amount used to determine the allowance of €4 million per company (currently: €2 million). This increases the attractiveness of the newly introduced tax allowance for research. We will be pleased to show you how you can profit from these measures.

The conditions for the issue of employee shares should also be improved. However, how this will be put into practice is still unclear.