The federal cabinet adopted the draft Act Updating Corporate Tax Law (Gesetz zur Modernisierung des Körperschaftsteuerrechts) on 24 March 2021. With this bill, the German federal government is improving the tax framework especially for small and medium-sized partnerships and family businesses. In addition, it makes German corporate tax law better suited for international business in a globalised economy.
The bill’s main feature is the introduction of an option permitting certain types of partnership to be treated like a corporation for tax purposes.
“We are supporting the SMEs that drive Germany’s economic success. We are enhancing the international competitiveness of family businesses and small and medium-sized partnerships. It is important to me that they be given the option of being assessed like a corporation. In addition, we are updating reorganisation tax law for the global age and facilitating tax-neutral reorganisations.” German Finance Minister Olaf Scholz
The bill contains the following provisions:
Introduction of rules giving Personenhandelsgesellschaften (commercial partnerships) and Partnerschaftsgesellschaften (special partnerships) the option to be subject to corporation tax
The new option especially for limited and general partnerships (those that have the legal form of a Kommanditgesellschaft (limited partnership) or offene Handelsgesellschaft (general partnership)) to be treated like a corporation for income tax purposes is another important measure to enhance the competitiveness of the many family businesses in Germany that are successful players on international markets. The law will provide an option to eliminate the systematic and procedural differences which, in some cases, can cause significant differences in terms of the tax burden and red tape.
Relevant sections of the Reorganisation Tax Act (Umwandlungssteuergesetz) updated to facilitate the reorganisation of corporations in a globalised economy
The draft legislation expands the types of persons covered by the rules for reorganisations under the Reorganisation Tax Act. This step will make German reorganisation tax law even better suited to a globalised economy. In future, tax-neutral mergers, divisions and changes in legal form will be possible for corporations with connections to third countries. This significantly increases the possibilities available to German companies and their foreign subsidiaries to restructure their companies to suit their operational needs.
Simplified system to replace use of balancing items for profit transfers below/over taxable income
The bill reduces red tape for fiscal units that have been set up for corporate tax purposes between a parent group and its subsidiaries. The system whereby differences between the tax balance sheet and the commercial balance sheet were taxed by means of a balancing item will be replaced by a simplified system, whereby profit transfers below/over taxable income due to differences between the respective balance sheets are either treated as deposits or returns of deposits to the subsidiary (the so-called Einlagelösung).
Removal of the non-deductibility rule for reduced profits caused by exchange rate fluctuations
The bill will exempt profit reductions caused by exchange rate fluctuations from the non-deductibility rule, thereby adjusting the tax treatment of profits and losses occurring in connection with shareholder loans that are caused by exchange rate fluctuations. This means that, when taxable income is determined, profits and losses caused by exchange rate fluctuations will now be treated equally.