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 (this contribution)

25. February 2021 | Tax assessment & tax collection at the German tax easing

Tax derailment is an instrument for the final taxation of tax substrate, in which the loss of taxation rights threatens. This can be the case, for example, in the case of a cross-border conversion or the departure of a GmbH shareholder. However, tax unencumberment can mean a particular hardship towards the taxpayer. This is why tax de-entanglement is often accompanied by the option of deferral. The deferral period is currently set at five years, although permanent deferral is possible in connection with the EU or the EEA. However, we think that deferral by type and value of the asset abroad should be used in the transfer. Equally exciting is the related question of in which rates the deferral should take place. In our opinion, fixed assets can either be deferred over five equally high annual instalments or after five years and taxed directly on working capital.

No loss of German tax law in cross-border conversions with DTA countries

1. background to tax de-engagement and deferral

Tax de-engagement takes place in transactions in which assets are generally transferred from Germany to abroad. Tax de-entanglement is of particular relevance in the cross-border conversion, through which assets of a German company are transferred abroad. But also the departure, for example, of a GmbH shareholder leads to the tax unbundling of his GmbH shares. Tax de-involvement applies here because the country from which the property is transferred abroad normally loses its right to taxation. In other words, fiscal de-involvement is a measure which is prevented by a fictitious taxation of the potential tax base, the loss of national taxation rights. But since this is done without an actual inflow of financial resources from the taxpayer, this can mean unreasonable hardship towards him. Therefore, § 6 AStG stipulates that tax unencumberment may be accompanied by a deferral under certain conditions.

2nd tax deregulation: previous legal situation for the period of deferral

For the duration of a deferral in the context of a tax de-engagement, a period of five years generally applies. In addition, lawyers consider this to be in line with European law. Accompanying this, however, there is also an interest on the tax. In addition, the taxable person must fulfil other obligations. So he has to deposit a security and apply for the deferment at the competent tax office. The tax office then checks whether the payment of the tax may seem endangered. This is the case, for example, if the taxpayer was noticed in the past by arrears in the payment of his taxes. In addition, the taxpayer is obliged to cooperate with the tax administration. In particular, the regular obligation to provide information about the property of the relevant assets should be observed.

However, there are easements in the deferral of tax unencumberment if there is a connection with an EU or EEA state. Thus, even an indefinite deferral is possible. Furthermore, this is then interest-free. The taxpayer does not need to provide any security.

Now to the question of how long a deferral of tax unencumberment should be set. So far, a period of five years is considered appropriate. In essence, however, it seems that this period is merely an arbitrary assessment. So let's see if there could be other alternatives.

3.1. Tax de-entanglement – deferral over the period of use

Our approach is based on the consideration that when deferred for tax de-entangling, it should be assumed that the useful life of an asset has an impact. After all, the useful life also determines the depreciation rate, but also the common value, which in turn influences the hidden reserves. For this purpose, one can assume an average useful life of five years for assets of fixed assets.

3.2. Tax de-engagement & deferral – book value approach

When transferring an asset from a German establishment to a foreign one in the context of a cross-border conversion, however, it also depends on the value approach used to transfer the asset. If a book value approach is used, then the deferral should be designed in such a way that the actual maturity of the tax occurs only at the time of its fictitious sale, i.e. within an average of five years. This therefore precludes payment of instalments, because in practice no sale of the transferred asset would take place in five annual instalments.

3.3 Tax de-engagement & deferral – common value approach

However, if the economic good is transferred abroad at the common value, then this must be taken into account in the design of the deferral. Finally, you can then use the higher common value for depreciation abroad in annual installments as a tax advantage. This must then also be counterbalanced by a corresponding deferral of the de-entangling tax. In this case, an annual deferral of 20% of the hidden reserve is therefore quite appropriate. However, this also depends on the respective tax framework conditions abroad.

There is a good reason for applying the latest deferral procedure for tax de-engagement in connection with cross-border conversion with EU/EEA countries. The fact that in the context of the implementation of Directive (EU) 2016/1164 ATAD (Anti Tax Avoidance Directive) the common value approach has been adopted for cross-border conversions from 2020 onwards now speaks in favour.

15 years without paying taxes – Special design after returning from abroad

4. Tax derailment: deferral of current assets

In contrast to fixed assets, the dwell time of working capital is geared towards selling it as quickly and profitably as possible. As a rule, one can assume an average residence time in a company of one year. Thus, in the case of the transfer of working capital with an international connection, it is quite possible to demand immediate tax de-engagement of the hidden reserves without deferral. Taxation and collection within the framework of fiscal de-engagement therefore seems appropriate to us.

5. Tax derailment: deferral of the exit tax

We want to examine one last aspect. First of all, tax unencumberment in the context of the departure of a shareholder of a limited liability company constitutes a restriction on the freedom of establishment. This has already been confirmed by the ECJ in the case of Lasteyrie du Saillant of 11.03.2004 – Az. C-9/02. But does the exit tax also avoid tax evasion? Surely this can be accepted. Then we have to see whether the measure, with which tax de-involvement is intended to prevent tax evasion, also meets the criterion of proportionality.

And this is exactly where the deferral comes into the spotlight. Because if a tax de-engagement without deferral takes place, then in many cases this is certainly equivalent to an undue hardship. Thus, the period of deferral determines the degree of proportionality in the case of tax de-engagement. Are five years sufficient for the deferral to comply with the principle of proportionality? Or is it seven or even ten years? Since this decision depends in particular on the respective facts, an answer is anything but easy. On the other hand, an individual regulation is hardly enforceable under administrative law. For this reason, it can be assumed that flat-rate regulations relating to the period will continue to apply to deferrals for tax de-entangling.