10.06.2019

Update on tax relief for income from business activities

The provision under Section 35 of the Income Tax Act (Einkommenssteuergesetz, EStG) makes it possible to partially offset trade tax credits against income tax in order to reduce the double burden of taxation of commercial income with respect to income tax and trade tax. Nevertheless, there are restrictions on the tax credits that can be offset that should be taken into account.


Restrictions on tax credits that can be offset

Under Section 35(1) EStG the offsetting of tax credits is limited to

  • a maximum amount of reduction –
  • 3.8 times the trade tax base value and
  • the actual amount of trade tax that has to be paid –

whereby the lowest value will be applicable in each case. To-date, if a taxpayer owned several business enterprises or held commercial partnership stakes or a stake in a multi-level commercial partnership it was disputed whether or not the comparison between the actual amount of trade tax that had to be paid and 3.8 times the trade tax base value (and thus the corresponding limit to the amount that could be offset) had to be determined

  • separately for each enterprise (business-related approach), or
  • jointly for all the taxpayer’s enterprises and partnership stakes (company-specific approach). This question is particularly important if the taxpayer owns several enterprises or holds partnerships stakes that are based partly in municipalities where the trade tax multiplier is < 400% and partly in municipalities where the trade tax multiplier is > 400%.

The Federal Fiscal Court (Bundesfinanzhof, BFH), in two rulings from 20.3.2017 (case references: X 12/15 and X R 62/14) decided in favour of the business-related approach. As a consequence of this the tax authority updated the Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) circular on tax relief for income from business activities, from 3.12.2016, (published in the German Federal Tax Gazette (Bundessteuerblatt, BStBl) I p. 1187) in the BMF circular from 17.4.2019, where it took account of the above rulings that are unfavourable for taxpayers.

 

Please note: By contrast, the maximum amount of reduction under Section 35(1) clause 2 EStG is not a business-related factor but instead a personal one (cf. BFH ruling from 23.6.2015, case reference: III R 7/14).


Business-related approach in the case of multilevel partnerships

In the case of multi-level partnerships, the reduction in the amount of tax is restricted to the actual amount of trade tax that has to be paid as determined under the business-related approach and separately for the controlling company and each controlled company.


Example: A holds a 100%-stake in A-KG [German limited partnership] and, in turn, it holds a 100%-stake in B-KG. The latter generates a trade tax base value of 100 and pays trade tax of 350 (multiplier: 350%). A-KG likewise generates a trade tax base value of 100 and pays trade tax of 450 (multiplier: 450%). This means that,

  • at the level of B-KG, 3.8 times the trade tax base value is 380, which is greater than the 350 of trade tax that was actually incurred. The amount that can be offset is 350.
  • At the level of A-KG, 3.8 times the trade tax base value is likewise 380, which is less than the 450 of trade tax that was actually incurred. The amount that can be offset is 380.
  • The total amount that A is able to offset will thus be 730.

Please note: Under the company-specific approach, 3.8 times the cumulative trade tax base value of 200 (100 + 100) would thus be 760 compared with the cumulative trade tax of 800 (350 + 450). Consequently, the amount that could be offset here would be 760 and would thus be greater than the amount calculated under the business-related approach.


Procedure for multi-level partnerships

Procedurally, the trade tax base values and the actual amount of trade tax that has to be paid have to be determined separately at each shareholding level as well in a standard way and have to pass through to the top to the ultimate shareholder. In the course of this, the amounts that originate from the subordinated shareholdings have to be included in the amounts that have to be determined at each next level. In the above example, for A, at the level of A-KG a (cumulative) trade tax base value of 200 and trade tax of 800 would have been bindingly determined. The amounts, determined in a standard way, only then have to be split up again into their individual elements within the scope of a tax assessment for A. The BMF circular from 17.4.2019 should generally be applied as of the 2020 assessment period, although it was not clear from the previous BMF circular, from 3.12.2016, whether or not the business-related approach for multi-level partnerships had already constituted the administrative opinion up to now. At any rate, in the case of several commercial units “side by side” (e.g. direct stakes in two partnerships) the tax authorities had hitherto advocated a business-related approach.

 

Please note: The BMF circular from 17.4.2019 should generally be applied as of the 2020 assessment period, although it was not clear from the previous BMF circular, from 3.12.2016, whether or not the business-related approach for multi-level partnerships had already constituted the administrative opinion up to now. At any rate, in the case of several commercial units “side by side” (e.g. direct stakes in two partnerships) the tax authorities had hitherto advocated a business-related approach.

 

StB [German tax consultant] Steffen Heft

From: PKF newsletter 06/2019