Germany proposes substantial VAT rate reduction, tax loss carryback expansion

By Ninja-Antonia Reggelin

The German finance ministry last week circulated a draft law addressing tax policy measures relevant for businesses that were agreed to by German coalition parties in a stimulus package earlier this month.

The law is expected to pass the cabinet on June 12 and the federal parliament and assembly in the coming two weeks.

The German tax package temporarily reduces the value-added tax rates from July 1, 2020, to December 31, 2020. The 19 percent VAT rate is replaced with a 16 percent rate; the 7 percent VAT rate is reduced to 5 percent.

The German finance ministry estimates that this reduction will lead to a tax revenue loss of almost EUR 20 million to be shouldered by the federal government. Though the finance ministry did not estimate the cost of the VAT reduction for business, due to the short notice, the ministry acknowledged that “the temporary reduction in value-added tax rates leads to considerable additional expenditure.”

While the German coalition had also agreed to modernize corporate income tax laws by, among others, introducing an optional right for tax transparent entities to be taxed as corporations, increasing of the factor for the trade tax credit, and improve depreciation for digital assets, these are not addressed in the draft law.

The package does delay the due date of import value-added tax postponed to the 26th of the second month following the import.

Also, under the proposal, tax loss carrybacks are expanded in 2020 from EUR 1 million to EUR 5 million, or EUR 10 million in the case of a joint assessment. A mechanism will be introduced to make the loss carryforward immediately effective for tax return 2019.

During the 2020 and 2021 financial years, an option to elect the reducing balance method of depreciation can be applied to movable assets that were acquired or manufactured after December 31, 2019, and before January 1, 2022. They can, therefore, be capped at 2.5% instead of in the same annual amounts (linear depreciation) with a fixed percentage of the book value of 25%, capped at 2.5 times the current depreciation method.

When taxing the private use of company cars that have no carbon dioxide emissions per kilometer driven, the maximum gross list price is increased from EUR 40,000 to EUR 60,000.

The allowance for determining the trade tax additional amount for existing additional items, according to para 8 No. 1 lit. a to f GewStG (German trade tax law), is increased from EUR 100,000 to EUR 200,000. This extension will apply indefinitely.

The maximum tax assessment basis for expenses incurred for the research and development allowance is doubled to EUR T4 million from 2020 through 2025.

With no reference to the stimulus package, the draft law surprisingly also contains tax criminal law measures.

This includes an extension of the final year of prosecution to 25 years. A new paragraph allows the collection of tax in tax evasion cases, even if the claim has already expired.