date | theme

05. June 2020 | Anti-Tax Avoidance Directive (ATAD): Critical analysis of early taxation in cases of departure and tax easing

06. June 2020 | European law-compliant interpretation and European law inconsistencies in cases of departure and tax easing

04. January 2021 | Tax easing: Taxes on the departure of business assets abroad

09. February 2021 | Tax de-engagement & deferral: period and time of payment

25. February 2021 | Tax assessment & tax collection at the German tax easing (this contribution)

Tax unbundling involves the discovery of hidden reserves and their taxation. However, it is based on a legal fiction. After all, there is no taxation of profits actually realised. Rather, the legislature has introduced tax easing as an instrument to secure a last opportunity to tax the hidden reserves in the event of a threat of loss of tax sovereignty, such as a transfer of assets or the departure of a GmbH shareholder. However, since there is no actual financial increase of the taxpayer, the law currently allows a deferral of the tax over a period of 5 years. When referring to an EU or EEA country, the deferral is free of interest and unlimited. It is considered to comply with European law. However, the imposition of the tax associated with the determination of the tax already constitutes a significant disadvantage for the taxpayer in the case of tax easing. In principle, the determination of the tax base is sufficient to announce the associated potential tax claim.

Note: this article is based on an obsolete legal situation with regard to the Exit Tax from 2022. This article informs you about the new rules on the exit tax.

Taxation Right: No Loss on Conversions

1st reason for a tax easing

Tax easing is an instrument that allows a state to levy a tax on potential profits (silent reserves) before this potential comes from its jurisdiction. This can be done, for example, by a transfer of an economic good in the context of a cross-border conversion. Another classic example of the loss of taxation rights is the departure of a shareholder of a limited liability company. In order to tax these hidden reserves despite the transfer abroad, the legislature uses the legal fiction of a sale at the time of the imminent loss of the taxation right. So you calculate the value of the hidden reserves by following the assumption that the assets are sold under normal market conditions.

It is quite understandable that the state wants to protect its interest in the potential tax before the tax object leaves its jurisdiction. Therefore, a tax determination and tax collection takes place in the case of tax easing in Germany. Nevertheless, we now want to examine to what extent the current legal situation in this country is in accordance with European law and whether it may be possible to improve it.

2nd expiry of tax easing: Tax assessment & tax collection

First of all, the taxpayer is obliged to notify the tax authority of any facts that involve the deduction of a tax substrate from Germany. Both the scope and the circumstances for this are included in his tax return. Thereafter, a tax assessment by the tax office takes place. Thus, the corresponding adjustment notice is notified to the taxpayer. This is regularly accompanied by a tax levy on the tax set. Tax determination and tax collection thus always form one unit in the control unbundling. Furthermore, according to the European Court of Justice (ECJ), this practice is also compatible with European law, provided that the legislature takes a condition into account.

Because, on the one hand, the taxpayer does not accrue any real financial profit and he is nevertheless obliged to pay the tax, this constitutes a disadvantage for him. It is important to compare this aspect. Thus, the same process (for example a conversion, a relocation of a GmbH shareholder) can on the one hand remain tax-free if it takes place at purely national level, and on the other hand cause a tax if it has an international reference. Therefore, the case-law of the ECJ requires that the taxpayer should have the opportunity to defer the tax. Otherwise, tax exemption through tax assessment and collection is a disproportionate measure.

3.2. Framework conditions for granting tax deferral

Thus, German tax law also offers the possibility of deferring the tax amount in the case of tax deregulation. The prerequisite for this, however, is that the payment of the tax means unreasonable hardship. For this purpose, there is a legal requirement that the taxpayer must deposit a security. The deferral takes place in up to five equal amounts over a period of as many years. However, the taxable person receives this option only on request. In addition, the tax administration only approves the taxpayer’s application if it sees no danger that the tax could be omitted. Of course, then there are also deferral interest. However, if a sale of the asset transferred abroad takes place during the deferral period, the deferral is revoked. Then there is a regular taxation of the actually realized profit.

Some changes apply for EU/EEA related issues. Thus, the deferral in these cases is so far interest-free and without the provision of a security possible. Furthermore, deferral is possible in such a case for an unlimited period of time. However, certain conditions must be met. On the one hand, the respective EU/EEA country must have agreed on a tax exchange of information with Germany. Secondly, it must also be possible to provide administrative assistance to collect the tax with the country concerned in order to obtain these privileges.

3.3. ATAD Directive: planned changes to the tax deregulation in Germany

As far as the current legal situation in Germany is concerned. However, the implementation of the ATAD (Anti Tax Avoidance Directive) adopted in the EU; Directive (EU) 2016/1164 by the Federal Government, as provided for in the current draft of the ATADUmsG, now provides for a deferral over a period of seven instead of five years. The instalments shall be paid in the same amount.

More serious, however, is the removal of the deferral option for a reference to a third country. If the tax assessment and tax collection for tax easing is related to a country outside the EU or the EEA, then the possibility of deferral should be eliminated altogether. Also significant is the change that in the future the possibility of unlimited deferral within the EU or the EEA is completely eliminated. In addition, default on payment of a deferral instalment causes the entire amount to be due. The same applies if the taxpayer fails to comply with the reporting obligations imposed by law or to cooperate in any other way as required.

Tax Neutral Types of Conversions & Repercussions

We explain which conversion methods exist and how to make them tax-neutral and take advantage of retroactive effects.

4. Are tax assessment and tax collection in tax easing compliant with EU law?

So now that we have become familiar with the framework conditions for tax determination and tax collection in tax easing, let us now examine another related question: Are tax determination and tax collection in the context of tax easing in German tax law compliant with European law?

4.1. Determination of the tax base and tax determination for tax deregulation

First of all, it deals with the tax determination in situations relating to tax easing. To achieve this, a taxpayer must file a tax corresponding to the facts with the tax administration. The tax administration checks whether and to what extent an event for taxation exists. The taxable person shall then be determined by separate determination. In addition, the taxpayer can form a tax offset according to § 4g EStG on request. Based on this, the tax is then determined by the tax office. As a result, the taxpayer learns to what extent he is subject to taxation in the case of tax easing.

If the tax determination in Germany is now carried out in the case of tax easing, then one must also check whether this is in accordance with the relevant EU standards. In fact, it is important that the taxpayer is not at a significant disadvantage. According to the ECJ, the tax assessment itself does not constitute a disadvantage on the part of the taxable person. As long as he is not yet subject to a payment obligation, the tax assessment is to be seen only as information without an obligation to act.

4.2. Tax collection for tax derailment

More exciting is the question of what the tax collection now has for the taxpayer. Here, too, the ECJ examined whether this constitutes a disadvantage. So far, however, it has been considered that the taxpayer does not suffer any significant disadvantages in the tax easing process, provided that the tax can be paid later. But is that really the case?

Due to the tax collection, the taxpayer's obligation to pay for tax easing becomes effective. Thus, it is basically also irrelevant whether there is a deferral that defers the payment. The only important aspect here is that a tax liability is valid. As a result, the taxpayer is also bound by it and must list the tax accordingly in his books. More serious, however, is the impact of tax collection on the company’s external impact. Because with the identification of the tax in the books also a potential loss of creditworthiness. For example, this can be a disadvantage associated with tax collection in credit negotiations with banks. Thus, there is a significant influence on the assets, financial and earnings situation of the company. We therefore believe that, unlike tax assessment, tax collection in the context of tax easing may well be accompanied by discrimination against the taxable person.

But how could this disadvantage be eliminated without affecting tax easing in general? In this regard, we propose that instead of collecting the tax, only a determination of the taxable person's tax base should be made. In this way, too, the taxpayer becomes aware of the potential taxation in the context of tax easing, but without being at a disadvantage.