German draft tax law to avoid disadvantageous tax consequences resulting from Brexit

The German Ministry of Finance has put forward draft provisions to ensure that Brexit does not have unintended adverse tax consequences for certain pre-Brexit cross-border reorganisations.
  • Submitted 18 October 2018
  • Applicable Law Germany , European Union
  • Topic Tax > Corporate

The German Ministry of Finance has presented a draft law, the “Draft Act amending Tax Provisions due to Brexit”, to introduce tax measures in order to protect taxpayers from certain potentially negative consequences arising from Brexit.

The draft Act should be seen in the context of the expected withdrawal of the UK from the EU on 29 March 2019 and the current uncertainties over whether such withdrawal date will be extended. The draft Act will come into force on 29 March 2019, if it is approved in the legislative procedure.

Under general German tax law, Brexit will result in the UK belonging to the group of so-called “third countries” and certain German tax reliefs, which are only available to persons tax resident in an EU member state, would no longer be available. This loss of tax relief could, in particular, impact on certain tax-neutral reorganisations that are implemented before Brexit, where it is necessary to maintain EU resident companies or permanent establishments in the EU for a specified period after the reorganisation. Brexit could result in a failure to meet these post-reorganisation requirements, and trigger retrospective tax liabilities. The draft Act aims to protect taxpayers from such detrimental tax consequences, which, under the current wording of the law, could result from Brexit and it aims to clarify that Brexit alone will not be treated as a “detrimental event” for these purposes.

In particular, the draft Act contains the following relevant measures in this context:

  • Where an asset is transferred by a taxpayer cross-border to its permanent establishment in another EU Member State, generally capital gains resulting from any such transfer can be spread over a five-year period. An exception, however, applies, if the asset ceases to be part of an EU permanent establishment, eg if after such cross-border transfer a second transfer occurs. In this case, the capital gain becomes taxable immediately. Under the draft Act, Brexit will not give rise to such a detrimental second transfer and, therefore, would not trigger the detrimental tax consequences.

  • In addition, under current German tax law, tax neutral reorganisations can be implemented by share-for-share exchanges and asset contributions in exchange for newly issued shares, if the acquiring entity is resident in an EU Member State. However, the shares received in this context will be so-called “tainted shares” for seven years and, in particular, during such seven-year-period, the acquiring entity must continue to qualify as an EU resident entity. In relation to the latter requirement, the draft law confirms that Brexit itself will not result in a detrimental event that would require retroactive claw-back of taxation where a tax neutral reorganisation has taken place.

  • Finally, in the context of the German CFC rules, which allow the deferral of exit taxation in the case of certain EU-reorganisations and in the context of the liquidation rules in the German Corporation Tax Act, the reasoning of the draft Act explains that Brexit alone will not result in a detrimental event, which would otherwise trigger a tax liability.

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