June 5th, 2009 | Published in German Tax News
The “Zinsschranke” and “Mantelkauf” regulations, both created under the German Business Tax Reform of 2008, were intended to limit the misuse of tax saving possibilities. However, under the current economic crisis, these regulations are proving to be too negative for businesses. Several industry associations, which have criticized the regulations from the outset, have therefore been requesting a revision of the regulations for months.
The Citizen Relief Act (Bürgerentlastungsgesetz) currently going through parliament will include a revision of these regulations, but only on a temporary basis.
As contained in Section 4h EStG, the Zinsschranke regulation, which applies to corporations and partnerships, provides that only those interest payments which do not exceed 30 % of a company’s annual profit may be deducted in the year of payment and that the total amount of interest which may be deducted in a given year is EUR 1 million. Excess amounts may be carried forward to succeeding years. While certain exceptions are allowed – for example, for business entities which are not part of an affiliated group or which belong to such a group but have the same equity capital rate as the group — this regulation limits not only the use of shareholder loan financing but rather all types of loan capital.
Under the Citizen Relief Act, the EUR 1 million limit will be increased to EUR 3 million, thereby eliminating application of the limit for more than half of the businesses affected by the regulation. The planned increase will be effective for 2008 and 2009 after which the threshold will again fall to EUR 1 million.
The Mantelkauf regulation of Section 8c KStG provides that the losses of a corporation acquired within the scope of a share purchase transaction are only deductible by the new shareholders if not more than 25 % of the shares of the target corporation are acquired. If between 25 % and 50 % are acquired, the losses may only be deducted on a pro-rata basis. If more than 50 % of the shares are purchased, the loss deduction is completely denied. This regulation has made crisis–based restructurings difficult and unattractive for acquiring shareholders.
Under the Citizen Relief Act, a clause for restructurings will be inserted into the regulation, stating that all losses of a corporation will be deductible if the purpose of a share purchase is a restructuring of the acquired corporation. The application of the restructuring clause is subject to several conditions including the preservation of jobs and investments. This amendment will also be effective for 2008 and 2009 after which the former regulation will again apply.
The planned amendments are expected to provide businesses tax relief of around EUR 655 million.