Proposals By The Mediation Committee Regarding The Annual Tax Act 2013

Author:Dr. Thomas Töben, Andreas Richter, Hardy Fischer, Pia Dorfmueller, Michael Best and Stephan Viskorf
Profession:P+P Pöllath + Partners

On 5 June 2013 the Mediation Committee of the German Bundestag and Bundesrat has proposed important changes in German tax law. The changes had been discussed for nearly one year. It is expected that the Bundestag and Bundesrat will consent to the proposals shortly. Some of the most important changes are summarized below.

  1. Business Partnerships / Exit Taxation

    To avoid German exit taxation on hidden reserves in corporate shares (section 6 Foreign Tax Act) those shares were often transferred before the taxpayer's move to a foreign jurisdiction into a German partnership, which as such was not necessarily actively engaged in business but, due to very specific German rules, treated as being engaged in business (deemed/ tainted business partnership).

    Thereby, shares should have remained subject to German tax and, thus, prevent German exit taxation. According to the Federal Tax Court's permanent case law, however, the mere deemed / tainted business of a partnership is held not relevant under tax treaty law. Following the move to a foreign jurisdiction, only the new residence state has the right to tax hidden reserves in the corporate shares.

    The new section 50i Income Tax Act (ITA) particularly relates to those structures. Despite tax treaty rules Germany should keep the right to tax, if shares were transferred before the official announcement of the new law into a mere deemed / tainted business partnership ("Old Cases") and will be sold with profit following the taxpayer's move.

    The new rule only relates to "old cases". Especially because of this it raises many questions. The new rule may also have implications for other structures, in particular in the private equity business with domestic or foreign partnerships interposed, which as such are not actively engaged in business but, according to German tax law, are (respectively: were) treated as only deemed / tainted business partnerships.

    Because of the new rule, at least with regard to the future, German tax administration may not be able to adhere to its former position according to which deemed / tainted business partnerships generate business income under tax treaty law.

  2. Taxation of hybrid Capital Instruments

    The principle of corresponding taxation will be extended to so-called hybrid capital instruments for Corporate Income Tax purposes.

    Hybrid capital instruments are - due to their terms and conditions - qualified as debt in a foreign state and as equity in Germany, since Germany and...

To continue reading