Tax Profressional usually responds in minutes

Our tax advisers are all verified

Unlimited follow-up questions

  • Sign in
  • Tag Archive: German tax

    1. Cologne Tax Court Adapts German VAT Law

      Leave a Comment

      Cologne Tax Court Adapts German VAT Law – Introduction

      In December 2022, the Court of Justice of the European Union (CJEU) made a significant ruling (C-378/21 P GmbH) that VAT incorrectly displayed on an invoice does not inherently result in a tax liability, provided that tax revenue is not at risk.

      This interpretation of Art. 203 of the VAT Directive has been echoed in Germany for the first time by the Cologne Tax Court in a judgement dated May 27, 2023 (8 K 2452/21), applying it to Section 14c para. 1 of the German VAT Act.

      This decision marks a shift in addressing VAT liabilities and showcases the evolving landscape of tax law in the European Union and its member states.

      The Essence of the Ruling

      The Cologne Tax Court’s decision expands the scope of Section 14c para. 1 of the German VAT Act beyond its traditional application.

      Historically, this section was interpreted to possibly implicate a broader range of entities, including those not eligible for input VAT deduction, in tax liabilities.

      However, the court’s recent judgement clarifies that if an invoicing party acts in good faith, Section 14c (1) of the German VAT Act does not apply, aligning with the CJEU’s stance on safeguarding tax revenue without unduly penalizing companies.

      This judicial interpretation is significant for companies, indicating that invoices need not be corrected in the absence of a tax risk, a principle now supported by both EU and German court decisions.

      However, companies must demonstrate the absence of tax risk, particularly challenging when the services involve VAT-exempt entities, such as public authorities and courts, as highlighted in the Advocate General Kokott’s Opinion.

      Background and Implications

      The CJEU ruling and the subsequent Cologne Tax Court decision stem from a case involving a provider of indoor playground services in Austria, where VAT was incorrectly applied at a standard rate for services that qualified for a reduced tax rate.

      The correction of these mistakes raised questions about tax liabilities when the tax revenue was not jeopardized, primarily because the end consumers were not entitled to input VAT deductions.

      In Germany, the Cologne Tax Court’s judgement directly addresses how Section 14c of the German VAT Act should be interpreted in light of EU directives, emphasizing the need for tax law to protect companies acting in good faith without risking tax revenue.

      This decision not only reflects a harmonization of EU and German tax law but also offers a clearer path for companies navigating VAT compliance and potential liabilities.

      Looking Forward

      While the Cologne Tax Court’s decision marks a significant development in the interpretation of VAT law in Germany, it is important to note that an appeal against this judgement is pending before the Federal Tax Court (case no. V R 16/23).

      The appeal will not challenge the interpretation of Section 14c of the German VAT Act per se but will focus on the applicability of tax exemptions under specific conditions, indicating the ongoing evolution of tax law interpretation in response to EU directives.

      Cologne Tax Court Adapts German VAT Law – Conclusion

      The recent decisions by the CJEU and the Cologne Tax Court highlight the dynamic nature of tax law in the European Union, emphasizing the importance of aligning national laws with EU directives.

      Final thoughts

      If you have any queries about this article or any other general German tax matters then please get in touch.

    2. New minimum tax law in Germany

      Leave a Comment

      New Minimum tax law in Germany – Introduction

      On December 27, 2023, the Implementation Act for the Minimum Tax Directive (Minimum Tax Act for short) was promulgated.

      The Bundestag had previously passed the law on November 10, 2023 and the Bundesrat subsequently gave its approval on December 15, 2023.

      The new Minimum Taxation Act serves to implement the EU Minimum Taxation Directive, which the EU member states were obliged to implement by the end of 2023.

      Content of the new minimum tax law

      The core of the transposition law – which in its full name is the “Law on the implementation of the Directive to ensure global minimum taxation for multinational enterprise groups and large domestic groups in the Union” – is the regulation of effective minimum taxation at a global level.

      It is intended to counteract threats to competition and aggressive tax planning.

      To this end, the international community (G20 countries in cooperation with the OECD) has taken certain measures to combat profit reduction and profit shifting.

      The new minimum tax law applies to all financial years beginning after December 31, 2023, with the exception of the secondary supplementary tax regulation.

      The secondary supplementary tax regulation only applies to financial years beginning after December 30, 2024.

      The two-pillar solution

      The Minimum Taxation Act is part of the so-called two-pillar solution and is aimed in particular at implementing the second pillar (“Pillar Two”).

      The first of these two pillars (“Pillar One”) of the international agreements on which this is based provides for new tax nexus points and regulations for the distribution of profits between several countries.

      Particularly due to advancing digitalization, companies would otherwise often operate in other countries without having a physical presence in that country.

      As a result, profits could be taxed in a place where they were not generated. In this respect, the first pillar affects the question of the “where” of taxation. The first pillar is currently still the subject of political debate.

      The second pillar concerns regulations for the introduction of effective minimum taxation at a global level and therefore the question of how high taxation should be. Corresponding regulations are intended to counteract aggressive tax planning and harmful competition.

      Irrespective of how an individual state structures tax liability and the extent to which tax concessions are to be granted, for example, a general minimum threshold for taxation should apply. This should make tax planning less risky. In order to close gaps in taxation, certain options for subsequent taxation should apply.

      The second pillar and the associated provisions of the Minimum Tax Act are intended to remedy this. The new Minimum Tax Act obliges larger companies to pay tax on profits in certain cases. Any negative difference to the specified minimum tax rate must be retaxed in the home country.

      Adjustment of income and foreign tax regulations

      The adjustment of income tax and foreign tax must be accompanied by the introduction of the Minimum Tax Act.

      Who is affected by the Minimum Taxation Act?

      The new minimum taxation law binds large nationally or internationally active companies or groups of companies with a turnover of at least EUR 750 million in at least two of the last four financial years. The legal form of the company or group of companies is irrelevant.

      There is an exception to this in accordance with Section 83 of the Minimum Taxation Act if the company’s international activities are subordinate. This is the case if the company has business units in no more than 6 tax jurisdictions and the total assets of these business units do not exceed EUR 50 million. In this case, these are not taxable business units.

      The provisions of the new minimum tax law pose major challenges for the companies concerned with regard to the necessary procurement and evaluation of the extensive data. The prescribed calculation system can only be complied with if these large volumes of data are comprehensively evaluated. Companies often lack this data, have not collected it in the past or it is not or not fully stored in the relevant IT systems.

      However, the new minimum tax law provides for certain simplifications and transitional regulations for the first three years. Specifically, this relates to the simplified materiality test, the simplified effective tax rate test and the substance test.

      There are also other simplifications without time limits, such as in Section 80 of the Minimum Tax Act for immaterial business units upon application.

      Concept of minimum tax

      General

      The minimum tax applicable under the new implementation law is made up of three factors:

      • the primary,
      • the secondary; and
      • the national supplementary tax amount.

      Primary and secondary

      The primary and secondary supplementary tax amounts relate to the difference in the event of under-taxation of a business unit.

      The parent companies of the corporate group are generally subject to the primary supplementary tax regulation.

      The secondary supplementary tax regulation serves as a subsidiary catch-all provision for cases that are not already covered by the primary supplementary tax amount.

      National Supplementary Tax

      The national supplementary tax amount is the increase amount determined in the Federal Republic of Germany for the respective business unit.

      The tax increase amount is calculated on the basis of a minimum tax rate of 15 percent.

      Overall, the minimum tax is a separate tax that applies in addition to the income and corporation tax that is due anyway, irrespective of income and legal form.

      New Minimum tax law in Germany – Conclusion

      Germany’s enactment of the Minimum Tax Act marks a significant step towards aligning with the EU’s directive for global minimum taxation, aiming to curb aggressive tax planning and ensure fair competition.

      Effective from the fiscal year beginning after December 31, 2023, this legislation targets large multinational and domestic corporations, setting a minimum tax rate of 15% to prevent profit shifting and reduce tax evasion.

      With its comprehensive approach and inclusion of transitional simplifications, the law represents an important shift in international tax policy, reinforcing Germany’s commitment to the OECD and G20’s two-pillar solution for global tax reform.

      Final thoughts

      if you have any queries about this article on the New Minimum tax law in Germany, or German tax matters in general, then please get in touch.

    3. Payments of cryptocurrency as earnings

      Leave a Comment

      Introduction

      This article considers the tax implications of an employer making payments to its employees in cryptocurrencies such as bitcoin and Ethereum.

      The German authorities have determined that cryptocurrency is not any of the following:

      • a foreign currency;
      • legal tender; or
      • property

      Is crypto non-cash compensation?

      If cryptocurrencies are given to employees for nil, or under market, consideration in exchange for providing their services then this is likely to be taxable earnings.

      This ‘remuneration’ could be:

      • a cash payment within the meaning of Section 8 (1) of the German Income Tax Act (EStG); or
      • a payment in kind within the meaning of Section 8 (2) sentence 1 of the EStG. Pursuant to Section 107 (2) of the Trade, Commerce and Industry Regulation Act (GewO)

      What is the tax position on such payments?

      First of all, payments of emuneration in cryptocurrencies is taxable This is the case regardless of whether it is a cash benefit and as a benefit in kind.

      The tax is levied on employees as wage tax in accordance with Section 38 of the German Income Tax Act (EStG). The tax point is at the time of the ‘inflow’ of the cryptoassets.

      The tax authority will only accept euros for the payment of payroll taxes.

      As such, where remuneration is paid wholly (or the majority is paid) in cryptocurrency, then some of it will need to be sold or exchanged for immediately for fiat in order to pay the tax.

      How will the tax authority ever know?

      This must be the most asked question to tax advisers around the world!

      However, the tax office learns about cryptocurrencies through various sources, including the reporting obligations that are imposed on employers.

      In addition, many crypto intermediaries require identification in order to use their marketplaces so cryptocurrencies are not as anonymous as many might believe. Indeed, transactions on the blockchain are immutable and, by and large, fully traceable.

      Further, the tax authorities can also make targeted inquiries in accordance with Section 93 of the German Fiscal Code (AO) in order to obtain information.

      If you have any queries about cryptocurrency or the cryptoassets in Germany, or German tax more generally, then please do not hesitate to get in touch.

      The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.