Complicated business

Recent changes in the German tax law

International taxation is not only of importance for Germans with economic interests abroad. Foreigners with economic interests in Germany, or those foreigners who live and work in Germany, are also affected by changes in the German tax law. In my daily work, I see myself constantly confronted with changes in legislation, rulings of the fiscal courts, and decrees of the tax authorities. Below are three topics that may be of interest for expatriates living and working, or companies doing business, in Germany.

Option of a partnership to be taxed as a corporation

In a lot of countries, partnerships are not used to carry out trade and business activities. By contrast, in Germany partnerships are widely used to do business. The German taxation of partnerships is very different from the taxation of corporations. Partnerships treated as transparent entities: The profits will not be taxed by the partnership but are levied at the level of its shareholders. Germany has now introduced a regulation that allows partnerships to be treated as a corporation. The corporation is subject to German corporation tax, the solidarity surplus charge, and also trade and business tax. Distributions will be taxed at the level of the shareholders. Starting in 2022, a partnership can opt to be taxed as a corporation. Foreign partnerships are also entitled to opt for the treatment as a corporation. However, this only applies if the partnership is subject to corporation tax in its home country. Therefore, in most cases, foreign partnerships cannot opt for treatment as a corporation in Germany.

Capital participation of employees

It is a taxable fringe benefit if a business entity grants shares or capital participation to its employees without charging a price or using a price below market value. Until the end of 2020, a benefit of up to 360 euros per year was tax-free. From January 1, 2021, the tax-free amount increased to 1,440 euros. If a small or medium-sized company grants shares or participation more than the above-mentioned tax-free amounts, the income taxation can be deferred up to 12 years. The fringe benefit must be taxed before this deadline if the employee sells the shares or participation or if the employment terminates. A major problem is that the deferment of taxes does not apply to social security contributions. This results in the inconsistent situation that the fringe benefit is not taxed at the grant date, but social security contributions are due immediately when the benefit is granted.

Salaries and other remunerations paid to employees who are performing their work predominantly in Germany are subject to German income tax. This also applies if the employee is working for a foreign employer remotely in Germany. These payments are also subject to German social security contributions if the employee is not working on an assignment contract in Germany. The tax-free amount of 1,440 Euro can also be used by an employee working in Germany if a foreign employer grants shares or participation.

However, whether the employee can use the 12-year deferral is questionable. This is because a foreign company cannot withhold the income tax of its employees if it has no permanent establishment or permanent representative in Germany. Therefore, the employee must declare salaries and fringe benefits in his or her income tax return. The German law however disallows the deferral if the application of the employee is carried out in his or her income tax return.

Losses of capital assets

Losses from capital investments up to 10,000 Euro per year could be credited previously against income from capital investment. From January 1, 2020, the deductible amount has been doubled to 20,000 Euro. Individuals who are tax residents in Germany have to pay tax on their dividends, interests, and capital gains in Germany. Whether the investments are held in a German, or a foreign bank is irrelevant. Therefore, expatriates who live in Germany can also use foreign losses from capital investments to offset against other income from capital investments.

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