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21 December 2018

What’s new in 2019

The beginning of a new year is generally a time when regulatory changes are introduced that can impact citizens and companies in a number of ways. Here is an overview of the most important new developments in German tax law.

Die Jahreszahl 2019.
Source:  iStock

Reducing the tax burden on families

Parents raise, educate, care for and provide financial support to their children. In this way, they make a crucial contribution to society, and Germany’s income tax system takes this into account. This includes, for example, ensuring that the income needed to maintain minimum subsistence levels for taxpayers and their children is not subject to income tax. In addition, income tax rates must take the effects of bracket creep into account: otherwise wage and salary increases that simply aim to offset inflation would lead to higher levels of personal taxation.

As tax-related benefits that take the role of families into account, the tax allowance for children and child benefit ensure fair levels of taxation for families. Starting on 1 July 2019, monthly child benefit payments will be increased by 10 euros per child. In addition, the tax allowance for children will increase to €7,620 (up €192 from €7,428) as of 1 January 2019 and then to €7,812 as of 1 January 2020 (up an additional €192).

Furthermore, the basic personal allowance that is incorporated into the income tax scale will be raised by €168 from €9,000 to €9,168 as of 1 January 2019, and then by an additional €240 from €9,168 to €9,408 as of 1 January 2020. To offset bracket creep, tax rate thresholds will be raised for the 2019 and 2020 assessment periods: by 1.84% starting on 1 January 2019 and by an additional 1.95% starting on 1 January 2020. The maximum deduction is also being raised for maintenance payments made to legal dependents.

Tax exemption for employer-sponsored public transport passes

To date, employer-paid benefits for travel by employees between residence and workplace, to worksites covering large areas (such as forests), or to fixed drop-off points determined by the employer (such as bus stations or ferry terminals) have been treated as taxable income. Such benefits were not subject to tax only if their monetary value did not exceed the tax-exempt threshold of €44 per month. However, it is not just transport-related benefits that count towards this tax-exempt threshold of €44 per month, but all other non-monetary benefits as well. As soon as this threshold is exceeded, all benefits are subject to tax.

In the future, supplements and benefits that employers provide to employees for the use of regular public transport services between residence and workplace, to worksites covering large areas (such as forests), or to fixed drop-off points determined by the employer (such as bus stations or ferry terminals), and that are paid in addition to regular wages, will be exempt from tax. In addition, tax relief for private travel using public transport will be expanded as well. These benefits will no longer count towards the tax-exempt threshold of €44 per month. These tax-exempt benefits will be deducted from the commuter allowance in order to prevent workers who receive such benefits from obtaining an inequitable advantage compared with workers who pay equivalent transport expenses out of their own pocket.

Tax relief for the use of electric vehicles and externally chargeable hybrid electric vehicles as business cars

Taxpayers are granted tax relief if they use electric vehicles or externally chargeable hybrid electric vehicles for private transport. In general, when an employee uses a business car for private purposes, an amount equalling 1% of the car’s domestic list price is treated as non-cash benefits that are subject to tax on a monthly basis. For electric vehicles and externally chargeable hybrid electric vehicles purchased or leased between 1 January 2019 and 31 December 2021, this percentage will be cut in half to 0.5%, thus providing a tax incentive for the use of such vehicles.

Tax-exempt personal use of business bikes and electric bikes

To promote electric transport and environment-friendly mobility, Germany’s Income Tax Act already grants tax exemptions for certain employer-provided benefits such as charging equipment and the electricity used to charge vehicles. In the future, tax exemptions will also be provided for non-cash benefits derived from the free or low-cost use of business bikes or electric bikes that employers place at the disposal of their employees. If an electric bike is classified as a motor vehicle under traffic law (this is the case, for example, with electric bikes capable of travelling faster than 25km/h), then the tax rules governing business vehicles are used to determine the value of these non-cash benefits. If a business owner uses a business bike for private purposes, this is not treated as a withdrawal under tax law.

Strengthening online marketplace operators’ liability for sellers

The rapid expansion of the internet has gone hand-in-hand with tremendous growth in online sales of goods. Many of these sales are conducted on electronic marketplaces. This trend is likely to continue for the foreseeable future. For some time now, however, there have been growing indications that VAT evasion is occurring with increasing frequency in connection with online sales of goods using electronic marketplaces. To safeguard the collection of VAT revenue, and to protect and ensure the competitiveness of tax-compliant businesses, Germany’s lawmakers have added a provision to VAT law that strengthens the liability of online marketplace operators. According to the new rules, operators may be held liable under certain conditions for VAT that is incurred but not paid on sales that are transacted on their marketplaces, particularly if such marketplaces allow sellers who are not registered with German tax authorities to make sales that are subject to tax in Germany. Furthermore, operators will be required to collect certain data from their sellers whose sales in Germany may be subject to tax. The new rules enter into force on 1 January 2019.

Pre-set standard tax base and tax pre-payments on earnings from investment funds

People who invest in investment funds must pay tax on any distributions they receive from such funds. In many cases, however, investment funds may distribute little or none of their earnings in a particular year because they often retain such earnings and reinvest them. In order to ensure that investments via investment funds are not treated more favourably than direct investments, the German government has introduced the Vorabpauschale, which is basically a standard tax base that is set in advance on an annual basis and that is then subject to tax pre-payments.

The amount of this pre-set tax base is based on interest rates for risk-free investments, i.e., the amount that an investor would earn on a risk-free investment in a particular year. Distributions that are actually paid out by a fund (and hence taxed) in a particular year reduce the pre-set standard tax base for that year (and can reduce it to zero depending on the amount distributed). Furthermore, the pre-set standard tax base applies only to the actual increase in value of a taxpayer’s investment in an investment fund, which means that no such tax base is applied in the case of a loss.

For 2018, calculations of an individual taxpayer’s Vorabpauschale will be based on an interest rate of 0.609% applied to the value of that taxpayer’s share in an investment fund. For example, if the value of a taxpayer’s share in an investment fund was €100 at the beginning of 2018, this would result in a pre-set tax base of €0.61 (0.609% of €100), as long as the value of the taxpayer’s share in the fund had increased by at least this amount by the end of 2018. A pre-set tax base of €0.61 would then be subject to €0.15 in capital income tax plus solidarity surcharge and, if applicable, church tax.

The pre-set standard tax base for 2018 will be applied at the start of 2019, which will allow it to be offset against the standard tax allowance for savers (Sparer-Pauschbetrag); the latter is usually still available in full at that point in the year. If the standard tax allowance for savers does not fully cover the pre-set standard tax base, or if a taxpayer has not filed an exemption order with their custodian bank, the bank will deduct the capital income tax due on the pre-set tax base from the taxpayer’s account and remit the tax to the tax authorities.

Reinforcing the legal framework for securitisation

Securitisation – that is, the process of repackaging debt into tradable securities – can play a key role in business refinancing. Of course, inscrutable securitised products in the US played an infamous role in the 2008 financial crisis. In the lead-up to that crisis, securitised products became too complex. As a result, their risks could not be assessed accurately, and this led in turn to a major loss of confidence. Starting in 2019, a new legal framework for securitisation will apply throughout Europe. In particular, the new rules will introduce what are called STS securitisations. STS stands for “simple, transparent and standardised”. The objective here is to establish a framework which ensures that securitised products are simple, transparent, standardised and properly supervised, and in this way to revive confidence in such products. The new European rules will be implemented to the letter in Germany.

Occupational pension schemes: better protection, greater certainty

Germany’s pension system is based on three pillars: the first and central pillar is the statutory pension insurance system, which is supplemented by occupational pensions (second pillar) and private pension plans (third pillar). Occupational pension schemes are commitments made by employers to provide their employees with old-age, disability and survivors’ benefits. Employees’ claims to occupational pension benefits are protected by multiple security mechanisms, depending on the commitment made by the employer and the type of pension plan. The EU recently adopted a directive dealing with occupational pension schemes. Germany’s implementation of this directive will advance and update practices for the supervision of institutions that provide occupational pensions. In particular, these institutions will be required to make their risk assessment practices more rigorous. In other words, they will have to look closer at the risks to which they are or may be exposed and how they intend to manage these risks. The EU directive provides important input for dealing with challenges such as the ongoing low interest rate environment and demographic change. In this way, people who are paying into or receiving benefits from occupational pension schemes will be assured of better protection and greater certainty.

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