interest deduction and loss deduction – new rules in germany tanja neef and ralf krüger cfh...
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Interest deduction and loss deduction –new rules in Germany
Tanja Neef and Ralf KrügerCFH Cordes + Partner
Hamburg
Nexia ETG Meeting Malta
February 5, 2010
1 © NEXIA 2010
1. Growth Acceleration Act
(„Wachstumsbeschleunigungsgesetz“)
Reason:
Slump of economic growth caused by financial crisis
Objective:
Encouraging economic growth through tax reliefs
General rule:(unchanged) interest expenses
- interest income
= net interest expenses
- 30% of EBITDA
= nondeductible interest expenseto be added back to income
2 © NEXIA 2010
2. Changes interest deduction (Sec. 4h Income Tax Act)
deductible
interest
expense
capital ratio until 1% below capital ratio of group not harmful
Exceptions to limitation:
1) tax-exempt threshold EUR 1 million
3 © NEXIA 2010
2. Changes Interest deduction (Sec. 4h Income Tax Act)
Capital ratio of company
Capital ratio of group≥
New: 2%
New: EUR 3 million
2) not part of an affiliated group and no harmful sharholder debt financing (acc. Sec. 8a Corporation Income Tax Act)
3) Part of an affiliated group and
4 © NEXIA 2010
Further changes:
EBITDA carryforward- Carryforward of not fully deducted or utilized EBITDA over
the next 5 financial years (Fifo-method)
- Not applicable for cases of exceptions• Tax-exempt threshold of EUR 3 million• Not part of an affiliated group• Part of affiliated group and equity ratio ≥ equity ratio of
group
2. Changes Interest deduction (Sec. 4h Income Tax Act)
5 © NEXIA 2010
- Fictitious EBITDA carryforward 2007, 2008 and 2009
- Total or partial loss of EBITDA carryforward in case of• Sale or termination of business• Departure of a partner
2. Changes Interest deduction (Sec. 4h Income Tax Act)
6 © NEXIA 2010
Conclusion:Advantages:
- Relief of interest deduction (esp. small and medium-sized companies)
- EBITDA carry forward
Disadvantages:
- Increase of complexity
- Insecurity
2. Changes Interest deduction (Sec. 4h Income Tax Act)
Total or partial limitation of loss deduction (for corporate income tax and trade tax purposes)
7 © NEXIA 2010
Limitation of loss deduction if:- Transfer of shares, voting rights or comparable issues- more than 25%- within 5 years- to be directly or indirectly held by
• one single shareholder• Related parties• Several shareholders with parallel interests
3. Changes loss deduction (Sec. 8c Corporate Income Tax Act)
8 © NEXIA 2010
• Transfer of more than 25% up to 50% of shares:
=> partial loss of accumulated loss carryforward in proportion to transferred shares
• Transfer of more than 50% of shares:
=> complete loss of accumulated loss carryforward
3. Changes loss deduction (Sec. 8c Corporate Income Tax Act)
Example: Loss carryforward EUR 100.000
Year 01: harmful transfer of 30% of shares => 30% of loss (-)
Year 04: transfer of additional 40% of shares => 100% of loss (-)
9 © NEXIA 2010
1. Exception for affiliated groups
• Harmful transfers within a group
• Same shareholder participating 100% in both legal entities (transferring and aquiring company/legal successor)
Not supported:
- transfers of legal entities with several shareholders
- Prolongation or abbreviation of participation chain
- Partnerships as legal entities
3. Changes loss deduction (Sec. 8c Corporate Income Tax Act)
10 © NEXIA 2010
2. Hidden reserves
Loss deductible as far as amount of taxable hidden reserves included in the shares which are subject to a harmful transfer
Example: transfer 40% of shares, loss carryforward EUR 500.000 hidden reserves (taxable in Germany) EUR 300.000
Loss EUR 500.000 x 40% = EUR 200.000
Hidden reserves EUR 300.000 x 40% = EUR 120.000 deductible
3. Changes loss deduction (Sec. 8c Corporate Income Tax Act)
11 © NEXIA 2010
3. Recapitalization
- no limitation of loss deduction if transfer of shares due to recapitalization of a business
- Precondition: maintenance of essential business property
Previously: limited until December 31, 2009
3. Changes loss deduction (Sec. 8c Corporate Income Tax Act)
New: without any time restrictions
12 © NEXIA 2010
Conclusion
• Tax relief for companies regarding limitation of loss deduction
• Reasonable operational reorganizations within groups are not prevented due to tax reasons
3. Changes loss deduction (Sec. 8c Corporate Income Tax Act)
© NEXIA 2010
Thank you for your attention
Tanja Neef and Ralf KrügerCFH Cordes + Partner
Hamburg