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Economic Growth Acceleration Act Brings Tax Relief for Corporates
The new governing coalition has announced comprehensive tax reliefs for companies, particularly in the fields of income tax, corporation tax and real estate transfer tax for the year 2010. Taxand Germany analyses how this will impact multinationals.
The first step of these tax reliefs is implemented in the Economic Growth Acceleration Act. The German Federal Council (Bundesrat) passed the bill on 18 December 2009. The following gives an overview of the most significant changes of tax law.
Loss Carry Forwards / Change of Ownership
Under the German rules for the utilisation of tax losses, current losses and carried-forward losses may be forfeited in the event of harmful shareholder changes without reasonable justification.
The rules have been slightly relaxed for the years 2008 and 2009 with the introduction of a relief in case of financial restructuring. This relief will also be applicable for future years without time limitation. Under this rule, carried forward losses and current year losses will not be forfeited unless the shareholder changes, the insolvency or bankruptcy of the company is avoided and the main structure of the business conserved.
In addition, from 2010, carried forward losses will also not be forfeited in the course of a harmful shareholder change up to an amount of the hidden reserves in the loss company.
Further, a relief for intra-group restructurings has been introduced, whereby losses carried forward will not be forfeited where the end-result of the share transfer results in the loss company being 100% owned by the same person (whether directly or indirectly).
In 2008, the German thin capitalisation rules were replaced by the interest barrier. Under the original wording of the interest barrier, net interest expenses were fully deductible up to a threshold of EUR 1 million. This threshold is now permanently increased to EUR 3 million from 2008 ongoing forward.
If the threshold is exceeded, the net interest expenses are generally only deductible up to 30% of the EBITDA. The Economic Growth Acceleration Act introduces a carry-forward for unused EBITDA to be used in future years (limited to five years).
Furthermore, from the beginning of 2010 the so called Escape clause will be relaxed, by allowing an unlimited interest deduction to be available provided the equity ratio of the business falls does not fall short of the group's equity by more than two percentage points.
Real Estate Transfer Tax (group restructuring exception)
Certain intra-group reorganisation measures (e.g. German/EU Merger, Spin-off, not the transfer of single assets) may be exempt from RETT after 31 December 2009.
The amendments introduced by the bill provide tax relief to companies and reduce tax barriers for restructuring measures. Reliefs have been enacted with regard to loss deduction, tax deductibility of interest expense and real estate transfer tax in the case of company reorganisations. However, in some cases the legislation falls significantly short of the expectations raised by the coalition agreement. While the general intention of the coalition to facilitate company reorganisations is to be supported, the impact of the new tax reliefs needs to be reviewed for every individual case.
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