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Act on Tax­a­tion-Re­lat­ed Pro­vi­sions con­cern­ing the With­draw­al of the Unit­ed King­dom of Great Britain and North­ern Ire­land from the Eu­ro­pean Union (Tax Act re­lat­ing to Brex­it)

The Act on Taxation-Related Provisions concerning the Withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union (Brexit-Steuerbegleitgesetz, Tax Act relating to Brexit) contains provisions within the Federal Finance Ministry’s area of responsibility that are necessary in connection with the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union.

  • 19 December 2018

The tax provisions of the Act apply both in the event of a “hard Brexit” (i.e. in a scenario with no withdrawal agreement) and in the event of a withdrawal agreement with an interim period. They are intended to prevent legal disadvantages arising solely as a result of Brexit for taxpayers who have completed all essential tax-relevant actions prior to Brexit.

These provisions prevent

  • the retroactive taxation of profits from contributions in cases where parts of a company or shares were transferred by a British taxpayer or by a British corporation below fair market value prior to Brexit or prior to the end of the agreed-upon interim period stipulated by a withdrawal agreement (section 22 (1) and (2) of the Reorganisation Tax Act (Umwandlungssteuergesetz));
  • the mandatory reversal of an adjustment item as set out in section 4g of the Income Tax Act (Einkommensteuergesetz) which was created prior to Brexit with the aim of distributing the taxation of hidden reserves – which is triggered, amongst other things, by the transfer of an asset to a British permanent establishment – over a maximum period of five years;
  • interest in cases of payments in instalments as set out in section 6b (2a) of the Income Tax Act for replacement purchases made in the United Kingdom after Brexit, providing the application to pay in instalments is submitted prior to the point in time at which the United Kingdom is no longer a member state of the EU and is no longer to be treated as such;
  • detrimental use (section 93 (1) of the Income Tax Act) in certain defined old cases and to avoid undue hardship in connection with “Riester” incentives.

At the same time, the Act contains legal clarification stating that Brexit by itself does not trigger the legal consequences pursuant to section 12 (3) of the Corporation Tax Act (Körperschaftsteuergesetz) (corporations deemed dissolved) or pursuant to section 6 (5), fourth sentence of the External Tax Relations Act (Außensteuergesetz) (withdrawal of a deferral for exit tax) and ensuring that any subsequent relocation of the registered office or subsequent exit from the United Kingdom and move to another third country following Brexit leads to taxation or to the withdrawal of the deferral.

In the area of financial markets, the Act allows the Federal Financial Supervisory Authority (BaFin) to take the necessary steps to avoid negative implications for the functioning or stability of financial markets or for insurance policy holders in case the United Kingdom withdraws from the EU without a withdrawal agreement. In this case, BaFin may allow UK-based companies in the banking, financial services and insurance sector which already carry out cross-border operations in Germany to continue their existing business for an interim period lasting until the end of 2020 at the latest. The exact scope, modalities and duration of the measures to be taken will be determined by BaFin. This will allow BaFin to apply the provisions in a targeted way to areas that are most affected in case of a withdrawal without an agreement, such as the area of derivatives and insurance. BaFin may also subject the application of the provisions to additional conditions.

Furthermore, in line with the coalition agreement, provisions will be put in place to minimise risks to major institutions in the financial sector that arise from the activities of natural persons, which may have a material impact on the overall risk profile of the institution. To this end, provisions have been included in the Act by which highly paid material risk takers (as defined in the Remuneration Ordinance for Institutions (Institutsvergütungsverordnung)) will, for the purposes of protection against dismissal, be treated as equivalent to persons in senior positions who are authorised to hire or dismiss employees independently. The corresponding changes to the Banking Act (Kreditwesengesetz) will affect only material risk takers in major institutions whose annual fixed remuneration is currently at least €234,000 (former West Germany) or approximately €208,000 (former East Germany) (as of 2019: €241,200 (former West Germany); €221,400 (former East Germany)). For other employees in the financial sector the rules on protection against dismissal remain unchanged.

Furthermore, grandfathering provisions have been included in the Pfandbrief Act (Pfandbriefgesetz) and the Bausparkassen Act (Bausparkassengesetz): the new provisions in the Pfandbrief Act create comprehensive grandfathering for claims secured by UK assets prior to the point in time when the United Kingdom withdraws from the EU. These claims may continue to be used as cover until they reach maturity and will not be counted towards the upper limit of 10% that is applicable to third countries. New provisions in the Bausparkassen Act allow for grandfathering for existing investments in the United Kingdom as well as for the enforcement of claims secured by real property.

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