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Insight

COVID-19 and German tax

Please note: The following is an updated version, last updated on 23 March 2020. Further updates will follow due to the dynamic developments.

The current COVID-19 pandemic will have serious negative effects on many individuals, businesses and the real economy as a whole in a number of ways. Government support measures for German companies have already been announced on a larger scale. The German government is working in parallel on a number of initiatives.

In the area of tax law, the first step is to take measures to preserve liquidity with regard to tax payments (see section I below). The initial announcement was made by the German federal government, in particular through the joint Protective Shield for Employees and Companies Declaration (“Protective Shield Declaration”) of the German Federal Ministers of Finance and Economics, which also included first measures for German taxpayers.Various tax/finance ministries of the German federal states have issued further guidance.

Now the new Decree of the German Federal Ministry of Finance (Bundesministerium der Finanzen (BMF)) on Tax measures to take account of the effects of coronavirus of 19 March 2020 (“BMF Decree”) tries to specify the requirements further under which tax support measures shall be granted.

A key point is that measures should ease the situation of those taxpayers “directly and not inconsiderably” hit rather than those impacted “indirectly” (for details see below).

In the following we summarise the announced relief. In addition, we also provide further information on possible other effects of the COVID-19 crisis and the circumstances caused by it, e.g. with regard to financing (see IV), the implementation of profit and loss transfer agreements (see V), tax effects of other specific laws (see VI) and, if applicable, tax residence (VII).

I. Specific liquidity support on the occasion of COVID-19

In order to improve the liquidity of companies, the possibilities for deferral of tax payments (Stundung), reduction of advance payments (Vorauszahlungen) and stop of enforcement (Vollstreckung) shall be improved. Overall, tax deferrals should be made possible "in the billions".

Since many taxes are administered by the German federal states (Länder), the BMF has already initiated a coordination with the federal states. In some cases (like in Bavaria or North Rhine-Westphalia) simple application forms are already available on the websites of the tax authorities. In detail:

  1. Deferral of tax payments (Stundung), sec.222 German Fiscal Code (GFC)

    The tax authorities generally may defer due taxes if the collection would be a “considerable hardship” (erhebliche Härte) for the taxpayer. The tax authorities were instructed not to impose strict requirements in the current crisis.

    In principle, an application for deferral must be filed. It is not yet foreseeable that there would be any procedural relief in this respect (e.g. in particularly and generally affected sectors).

    By its Decree of 19 March 2020, the BMF has now clarified that eligibility for “easier deferral” of taxes due to the current crisis requires that the taxpayer be “demonstrably directly and not inconsiderably affected”, while those only “indirectly affected”, the general principles shall apply (i.e. which seems to indicate that the taxpayer needs to demonstrate the “considerable hardship” situation in more detail). However, no guidance has been given so far on where the dividing line lies, in particular between “directly” and “indirectly” affected businesses. For example, does “directly affected” only mean businesses hit by administrative restrictions (e.g. forced closures of businesses) or also those hit by significantly reduced (but still possible) consumer demand? Furthermore, is the “considerable” effect to be determined by absolute or relative figures or only looking at liquidity impact or other figures? Accordingly, this “clarification” does not yet provide sufficient clarity. The above so far only applies to taxes due until 31 December 2020.

    It is not made clear which level of proof is required by the taxpayers. The Decree only states that applications are not to be rejected solely because the applicants cannot prove the magnitude of the damages incurred in detail. This should imply that applicants are still required to set out to some extent why/how they are affected by the COVID-19 crisis and to a certain extent the magnitude.

    However, if the above-mentioned requirements are met, the usual deferral interest (Stundungszinsen, still legally 6 per cent per annum) should “regularly” also be dropped.

    Applications: Bavaria (German), Hamburg (German), North Rhine-Westphalia (German)

  2. Enforcement relief (Verzicht auf Vollstreckungsmaßnahmen)

    If it becomes known to the tax office (whether upon application of the tax debtor or not), that the tax debtor is “directly and not only insignificantly affected” (see 1 above), enforcement measures with regard to taxes due until 31 December 2020 should be waived.

  3. No late payment fines (Säumniszuschläge)

    Under the same preconditions as described under 2, late payment fines are to be "waived" until the end of 2020. As these are basically accrued by law (sec.240 GFC), an equity remission seems to become possible. This can be done by “general order” (Allgemeinverfügung) issued by the individual tax offices, being a real procedural facilitation.

    As a rule, it should make more sense, in the first place, to apply for a deferral in the case of due taxes rather than relying on a later remission of late payment fines.

  4. Equity remission of taxes (Billigkeitserlass, sec.227 GFC)?

    So far there is no special announcement for possible tax remissions. In principle, however, this general procedural option remains applicable in addition to the relief now ordered. For the time being, the tax authorities seem to assume that deferral of tax payments otherwise due (see above) and enforcement relief (see below) are sufficient.

  5. Adjustments of tax advance payments (Vorauszahlungen)

    Under the same preconditions as described under 1, advance payments of taxes can now be adjusted "more easily". If and to the extent it becomes clear that a taxpayer's taxable profit/income is likely to be lower in the current year, an adjustment of advance payments can be made. It is expected that the requirements for proof will be lower compared to the regular adjustment procedure. 

    The liquidity situation can be improved for the entire assessment year by submitting a corresponding application to the respective tax office.

    With regard to adjustments of German Trade Tax (Gewerbesteuer) payments, a separate Common Decree of the German States on Trade Tax measures to take account of the effects of coronavirus has been issued on 19 March 2020

    Applications: Bavaria (German)Hamburg (German)North Rhine-Westphalia (German)

II. Accessibility and working capacity of the financial authorities

The tax authorities ask to refrain from personal contact, inquiries should be made in writing or by telephone; some tax offices are already closed to visitors and are trying to switch to home office to the extent possible (see for example Baden-Wuerttemberg).

Due to shortage of staff (including quarantine and increased demand for personal childcare), delays in the processing of applications and inquiries are to be expected in the tax authorities throughout Germany (see for example Baden-Wuerttemberg).  To be on the safe side, applications should therefore always be made in writing.

III. General options

  1. Deadline extension (Fristverlängerung, sec.109 GFC):

    Periods for the submission of tax returns and officially set periods can be extended under the conditions of sec.109 GFC. The authorities are likely to handle such applications more generously with regard to the above special instructions by the Federal Ministry of Finance, especially since many companies will now be faced with work difficulties.

    General suspensions or extensions of submission deadlines etc. have not yet been announced, in contrast to, for example, Austria where key deadlines are generally suspended until 1 May 2020.

  2. Application for reinstatement (Antrag auf Wiedereinsetzung, sec.110 GFC):

    If someone was prevented through no fault of his or her own (ohne Verschulden) from complying with a statutory deadline (e.g. filing an objection in due time), he or she must be granted reinstatement to the previous status upon application.

    It seems obvious to see a reason for reinstatement in a not insignificant course of disease of COVID-19 or even in ordered quarantine. In general, an extension of the deadline should be attempted in the first place, so that an application for reinstatement may not become necessary (also because the interpretation regarding the "non-fault" of the failure to meet the time limit was so far relatively strict). However, if the deadline is missed, this request should be made, and then as soon as possible, making up for the missed action.

  3. Treatment of home offices

    For employers, costs arising from the purchase of additional hardware or other investments are in principle normal operating expenses (Betriebsausgaben).

    If the corresponding expenses are incurred by the employee, they are basically income-related expenses (Werbungskosten).

    Anyone who has no other workplace available for his or her business or professional activities can, under certain conditions, claim expenses for a tax-recognised home office (häusliches Arbeitszimmer) as income-related expenses/business expenses up to a maximum of 1,250 euros in the assessment year. It is currently unclear whether a COVID-19 conditional temporary closure of the employer's premises would be recognised as a temporary "working place not otherwise available". If no administrative instructions follow, it might be worth considering the possibility of claiming the costs for the home office on a time-specified basis as part of the 2020 tax return.

IV. Tax pitfalls in connection with financing in the context of the COVID-19 crisis

In addition to labour policy and tax policy measures, the joint shield declaration of the Federal Ministers of Finance and Economics (Protective Shield for Employees and Companies) contains a billion-euro aid programme to protect companies with liquidity bottlenecks from insolvency through no fault of their own. Through their house banks, companies shall get access to cheap loans and guarantees from the state-owned KfW banking group.

The following tax pitfalls need to be taken into account in financing, especially in times of crisis:

  1. Discounting of interest-free liabilities (sec.6 para.1 no. 3 German Income Tax Act (GITA))

    Interest-free liabilities are generally discounted at 5.5 per cent in accordance with sec.6 para.1 no.3 GITA with an effect on taxable income. Liabilities with a term of less than 12 months (on the balance sheet date) and liabilities that are interest-bearing or based on an advance payment are excluded from discounting.

    The discounting rule is to be observed not only for interest-free credits or loans, but also for other liabilities which are made interest-free in the context of the current COVID-19 crisis (e.g. to landlords or suppliers).

    The taxable profit resulting from discounting at the level of the debtor company can be avoided, for example, by a low minimum interest rate or by granting only a short deferral (less than 12 months from the balance sheet date).

    However, it is also conceivable that the positive effect on earnings resulting from discounting is deliberately accepted. In particular this may be the case if the discounting profit does not lead to a tax payment due to a current tax loss of the debtor company in the crisis, whereas the accumulation of the initially discounted liability in the following years (after the crisis has been overcome) leads to deductible tax expenses (without, for example, limitations for loss carry forwards under the so-called “minimum taxation”.

  2. Collateral from shareholders or parent companies (sec.8b, para.3, sentence 4 German Corporate Tax Act (GCTA))

    Both the state-owned KfW and private banks will generally require appropriate collateral for loans. If these are provided by a shareholder (e.g. a foreign parent company) or a person closely related to the shareholder (including affiliates), sec.8b para.3 sentences 4 et seq. GCTA may apply.

    In practice, this can have the consequence that, for example, a (group) parent company cannot deduct losses for tax purposes if the KfW or other banks make use of the collateral previously provided. The same applies if financing is extended to affiliated companies within the group.

    To date, the legislator is considering lifting the subordination of shareholder claims under insolvency law in accordance with sec.39 para.1 no.5 German Insolvency Act (GIA) for shareholder loans granted in connection with the COVID-19 crisis. It would be desirable if the legislator were also to override the legal consequences for sec.8b para.3 sentence 4 GCTA in order not to sanction shareholder financing or the provision of collateral in the group even in times of crisis.

  3. Interest barrier (sec.4h GITA in conjunction with sec.8a GCTA)

    The so-called interest barrier of sec.4h GITA (for corporations in conjunction with sec.8a GCTA) restricts the deduction of operating expenses for interest expenses incurred at the level of the interest-paying entity under certain conditions. In case net interest expenses reach or exceed three million euros, a maximum of 30 per cent of the offsettable tax EBITDA (taxable earnings before interest and certain depreciation and amortization) is deductible as interest expenses.

    If, for example, a company takes out new interest-bearing loans from the state-owned KfW or other banks as part of the COVID-19 crisis, this increases the company's annual interest burden, which can ultimately lead to the 30 per cent EBITDA limit or the safe harbour of three million euros being exceeded. The raising of additional debt capital also means a reduction of the equity ratio, so that the so-called escape clause may no longer be applicable.

  4. Special tax considerations in the event of a subsequent restructuring

    In view of the far-reaching economic effects of the COVID-19 crisis, there will be an increasing number of reorganisation and restructuring measures despite the planned suspension of the obligation to file for insolvency for companies.

    In the context of restructurings, the problem regularly arises that debt remissions (e.g. waivers of loans) are tax-exempt only under the strict conditions of sec.3a GITA and sec.7b German Trade Tax Act (Gewerbesteuergesetz (GTTA)).

    Particularly in the case of intra-group financing during a crisis, it should therefore be examined in advance whether equity financing or financing via an equity-like instrument may be preferable.

V. Implementation of profit and loss transfer agreements (Ergebnisabführungsverträge) during the crisis

Numerous companies are part of an income tax group (Organschaft) through profit and loss transfer agreements. The proper execution of the profit and loss transfer agreement is mandatory for the recognition of an income tax group (sec.14 para.1 sentence 1, no.3 GCTA).

Especially in times of crisis, the problem often arises that a considerable loss is incurred at the level of the controlled company, which has to be compensated under the profit and loss transfer agreement. The common practice in groups of offsetting the parent company's obligation to compensate for losses in the context of a novation by means of a receivable of the controlled company to be placed in the cash pool is only recognised for tax purposes if the parent company would have been financially able to actually compensate the claim. This may be particularly critical in times of crisis and must be thoroughly examined.

VI. Tax effects of other legislative proposals

The Federal Government is working on various, in some cases very far-reaching, legislative projects, some of which may also have tax implications. Some of them are already mentioned here:

  1. Changes in German Reorganisation Law

    Among other things, very far-reaching changes in civil, insolvency and criminal procedure law are planned by the so-called draft law to mitigate the consequences of COVID-19, which (if passed, which is considered highly probable) will lead, among other things, to probably the most extensive direct state intervention in private-law contracts in post-war history, namely the suspension of main performance obligations in the case of corona-related impediments to contract performance for consumers and very small enterprises and in tenancy law (including commercial tenancy law in particular). In addition, a delay/suspension of the obligation to file for insolvency as well as measures relating to the virtual general meeting will be introduced and the longer interruption of main criminal proceedings will be made possible. An initial overview of the current background is given in this briefing.

    Among other things, it also aims to extend deadlines for reorganisations under the German Reorganisation Act (Umwandlungsgesetz (GRA)). Such conversions must be filed to the commercial register, together with a balance sheet of the transferring company in accordance with sec.17 para.2 GRA; under current law this balance sheet must have been no more than eight months old (i.e. drawn up to a balance sheet date which was no more than eight months in the past when the application was filed). This period shall be extended to 12 months.

    This period also has tax implications, namely for the retroactive effect of reorganisation measures under the German Reorganisation Tax Act (Umwandlungssteuergesetz (GRTA)). If the aforementioned extension in the GRA were to occur, this would have a direct effect on the retroactive effect of reorganisations also in tax law. This is because sec.2 para.1 GRTA is linked to the balance sheet date within the meaning of sec.17 para.2 GRA. Corresponding reorganisations would therefore also be possible retroactively for tax purposes for up to 12 months. However, sec.2, para.1 GRTA only applies to reorganisations within the meaning of sec.3 – 19 GRTA (in particular mergers and splits between corporations). It does not apply to contributions (Einbringungen) within the meaning of sec.20 et seq. GRTA; without further amendments, the change in the GRA would not affect them, as the wording of sec.20, para.6 GRTA contains its own explicit limitation to a maximum of eight months. The same applies to the change of legal form of a corporation into a partnership (cf. sec.9 sentence 3 GRTA). It remains to be seen whether there will be an adjustment in this respect.

  2. Economic Stabilisation Fund Act (Wirtschaftsstabilisierungsfondsgesetz (ESFA))

    Over the last weekend, the BMF presented a draft bill for an Economic Stabilisation Fund Act. It provides for the establishment of a federal Economic Stabilization Fund - ESF (Wirtschaftsstabilisierungsfonds – WSF) to support the real economy. For this purpose, the Financial Market Stabilisation Act (Finanzmarktstabilisierungsgesetz), which was generally enacted in the global financial crisis of 2008, shall be renamed Act on the Establishment of a Stabilisation Fund (Gesetz zur Errichtung eines Stabilisierungsfonds) and extended to include regulations for the ESF. As a result, the state could, among other things, acquire equity interests in companies as a shareholder or in the form of a debt obligation in addition to, for example, loans or guarantees in order to support threatened companies.

    If the ESF acquires an equity share or interest in a company, the company’s loss carryforwards do not forfeit given that sec.8c GCTA and sec.10a GTTA do not apply (same as under the Financial Market Stabilisation Act). Spin-offs in preparation for stabilisation measures should also not result in a pro-rata loss. 

    The ESF itself should be exempt from Trade Tax and Corporate Income Tax and not be subject to VAT. Payments to the ESF or from the ESF are not subject to withholding tax (WHT) without the need for a WHT exemption certificate. The ESF shall become entitled to benefits under Double Taxation Agreements.

    The above is to be achieved by a reference to sec.14, para.1, 2, 3, sentences 1 and 4 Financial Market Stabilisation Act.

VII. Impact of the travel restriction on the tax residence of companies?

The tax domicile of companies depends (at least generally in the case of Double Taxation Agreements) on the actual place of management. In the case of companies where the managing directors do not reside in the country of the desired domicile (e.g. holding companies or other companies with none of the minor day-to-day management activities), this generally requires regular travel, e.g. to board meetings. Due to the current border closures, this is not easily possible; a general curfew would exacerbate the problem. This would be even more so if such restrictions would last for a longer term. Caution should be exercised when conducting business outside the country of tax residence. Further (international) information can be found in this briefing.