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 deregulation: Taxes on the departure of business assets abroad (this contribution)

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

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

Tax deregulation is a taxation of business assets triggered by the elimination of tax liability in the country. There are two different cases. On the one hand, this can include a personal component on the part of a shareholder of a corporation. This then leads to exit taxation. In this context, the silent reserve in the company in which the shareholder holds a share is used pro rata as a notional capital gain. On the other hand, a factual tax easing takes place if operating assets are transferred from Germany abroad. In this case, too, a tax is payable on the hidden reserve. This is called the de-industrialisation tax. However, by creating offsets, immediate tax easing can be avoided. However, this is only possible if operating assets are relocated within the EU. On the other hand, current assets are excluded. In this case, the balance must be established in the year in which the asset enters abroad. In addition, the balance sheet shall be wound up within the next four years.

1.1. Exit tax as a personal tax deregulation

If an entrepreneur who holds at least 1% of a share capital company moves from Germany abroad, then he is subject to the so-called exit taxation. This tax is due on the common value of the company in proportion to participation, in other words, what is understood by the term hidden reserves.

In fact, the exit tax has been part of German tax law in various versions for a long time. Even towards the end of the First World War, it was recognized that the move of a shareholder to another country (with lower taxes) could basically be equivalent to tax evasion. Finally, the State forgoes the tax which the shareholder would normally pay on the sale of his shares if he remained in Germany. So you untangle him for tax before he moves abroad. Therefore, in this case, one speaks of personal tax easing.

1.2. The objective tax easing

Now, of course, it is also possible that a company would like to take plants of its company abroad in order to use them in another company that also belongs to the company. This also means that assets that would make a profit if sold in Germany escape taxation abroad. In essence, therefore, this situation corresponds to what should be regarded as the basis for the exit taxation. Here, too, there is the potential that hidden reserves, which would be taxable in the event of a possible sale of a potential taxation in Germany, would not allow taxes to flow into the German treasury if sold abroad. For this reason, tax easing has also been introduced. Because here instead of a personal matter a thing is involved, in this case one also speaks of the factual unengagement. It is now the subject of this contribution.

2. legal framework for tax easing

If you would like to read how the legislature regulates the factual tax easing, the § 4 (1) sentence 3 EStG or § 12 (1) KStG is recommended as an introductory reading. But we will also be happy to explain it to you in the following.

2.1. Tax deregulation in income tax law

In the Income Tax Act, the requirement that leads to tax easing is generally stated. Basically, it is assumed that as soon as business assets, which could lead to a taxable profit for example in a sale in Germany, leave the domestic tax liability, must be taxed. This applies both to a previously existing unlimited tax liability and to a limited tax liability. In jargon, this is also called fiction of extraction for private purposes.

2.2. Tax deregulation in corporate tax law

At first glance, this regulation has simply been extended to corporations. For example, if an asset of a GmbH is transferred from Germany to abroad, the Federal Republic of Germany loses tax sovereignty over the profit that the sale of the asset would provide in this country. But the wording in the Corporate Tax Act deviates from that in the Income Tax Act in a small detail. Admittedly, it is insignificant for the deregulation tax, but let us also explain this briefly. While income tax law determines the fiction of withdrawal for private purposes as the starting point for tax easing, this is anchored in corporate tax law as a fiction of a sale. The difference is that a corporation is a separate legal entity. As such, however, it is not able to extract economic goods from the operation. So instead, the acceptance of a sale was included as an event. In fact, however, there is no difference in the application and outcome of these two processes.

Whether a sole proprietorship, a partnership or a corporation is affected is irrelevant for tax easing. Until a few years ago, the mere fact that tax easing is linked to the disappearance of tax sovereignty underpinned the legal theory of final withdrawal. This argued that the tax is immediately incurred. However, with the ruling made by the Bundesfinanzhof in 2008 in this regard, there is now the view that a de-tricken tax can in principle also be deferred. While there were also concerns about compliance with EU standards, the European Court of Justice ruled in 2015 that the territoriality principle applies. Thus, the tax easing in German tax law is also compatible with EU standards.

3.2. Compensation items: Conditions and conditions for tax deregulation

In order to dress this deferment in a legal norm, a so-called compensation post has been devised. With its help, it is possible to extend the immediately applicable de-knitting tax for several years. Certain conditions are now required to make use of this option.

First of all, it should be noted that the balance can only be formed if the foreign country is within the EU. Next, it should be noted that the balance sheet is formed in accounting. Each asset transferred to another EU country must be recorded as an independent booking. A blanket registration of several assets is therefore unquestionable. In addition, only assets of fixed assets are eligible for consideration. On the other hand, current assets are excluded when they are included in the balance sheet. Thus, for example, anyone who intends to relocate his warehouse from Germany to France will only be able to apply the use of the compensation item to the furnishings of his warehouse. However, the goods themselves are immediately taxable.

Furthermore, an application must be submitted to the tax office. This is irrevocable. Once the application has been submitted, the balance must then be applied to all assets, regardless of which assets are actually transferred to which country. However, you can reapply annually, so this is only an option.

In addition, a register and records of the assets included in the balance sheet shall be kept. Thus, the balance is only part of the tax balance. Trade balances, on the other hand, do not have such a balance because they are only of fiscal importance.

Finally, the rules for dissolving the balance sheet: In the year of education and in the following four years, one-fifth of the set value is regularly recorded as income. This then naturally leads to the successive de-knitting tax of the fictitious profit.

With this question, we are approaching the effects that come with the compensation item in addition to the deferral of the de-entangling tax in practice. In the event of a sale of the asset in the balance sheet, the balance sheet must also be dissolved. But this is basically hardly different than if the sale of the operating assets would take place in Germany. Because the resulting profit is then taxable. However, a certain amount of advance payment has already been made on the deregulation tax by means of amounts cancelled in previous years. It goes without saying that accounting must also be taken into account. Therefore, the liquidation of the balance sheet at that time also takes place in full.

3.3.2. What happens if assets are transferred out of EU territory?

But of course the subsequent relocation of the economic asset from abroad to another establishment outside the EU is also conceivable. If this occurs within the period in which the offsetting item must be wound up, the offsetting item must also be wound up immediately. All amounts already taken into account shall be taken into account.

3.3.3. Transfer of assets back to Germany

The reverse case occurs when an asset for which an accounting item has been formed pursuant to § 4g EStG and which still exists is returned to a permanent establishment of the company in Germany. Then there is also a dissolution of the balance. However, this has no impact on profit. The continued acquisition costs form the basis for the booking in the fixed assets of the German company. All amounts already cancelled and any interim estimates relating to the taxation of this operation in other EU countries are included. This is the difference between the tax value recognised therein and the book value. The law speaks of the repatriation value.

In addition to personal de-engagement, objective de-engagement is a tool with which the Federal Republic of Germany wants to retain tax sovereignty when transferring assets that are potentially taxable in Germany abroad. If the sale of assets in Germany leads to a taxable profit, from the point of view of the legislator a transfer abroad is to be regarded as a potential tax avoidance. In order to reduce this potential, and thus to defend one’s own tax sovereignty, tax easing is now part of German tax law.

Globalization has become an important factor for entrepreneurs as an engine for such economic decisions as the relocation of economic goods from a domestic to a foreign establishment. In this respect, tax easing may even be very useful on the basis of national considerations. But from a global point of view, i.e. from the point of view of internationally active entrepreneurs, tax easing is a hurdle, in which even the deferral by creating a balance sheet offers little advantage. If one also includes the restriction to EU member states in these considerations, then one may wonder how far the member states are prepared to put EU interests before national interests. In the common economic area of the EU, it should also be in the general economic interest to regard the deregulation tax as what it is, a relic of the past. The only question is what a contemporary, adequate replacement should look like.