Increased amount of loss carry-back under Section 10d of the German Income Tax Act
The loss carry-backs previously deductible under Section 10d of the Income Tax Act [Einkommensteuergesetz, EStG] were raised in the 2nd Tax-Related Assistance Act for the assessment periods 2020 and 2021 to € 5,000,000 in the case of corporations and to € 5,000,000/10,000,000 in the case of natural persons filing separately and jointly respectively; the carry-back possibilities have thus been considerably expanded.
Prepayments for 2020 reduced to zero
As “first aid” to safeguard liquidity, besides the many tax deferrals that have been granted, the fiscal authority has provided for an application to reduce prepayments of profit tax for 2020 to € 0.00. With this companies demonstrate that they are not anticipating any taxable income for 2020.
Provisional loss carry-back as a new instrument
Under the hitherto applicable law, when the tax assessment (assessment notice) is being produced for the loss year, then deducting the amount of the loss carry-back from the taxable prior year profit results in a tax refund for the previous year. In principle, businesses could thus expect a refund from such loss carry-backs from 2020 into the 2019 assessment period, at the earliest, in spring 2021.
The Tax-Related Assistance Act brings forward the date of the refund even though the loss year of 2020 is not even over yet. To this end, an additional instrument, namely, the “provisional loss carry-back” has been made available for income tax and corporation tax (not however for trade tax).
Please note: The conditions for a provisional loss carry-back no longer include – unlike in the original relevant Federal Ministry of Finance circular from 24.4.2020 – a direct and material burden on the taxpayer due to the coronavirus crisis.
(1) Retroactive reduction in prepayments for 2019 – Through a “provisional loss carry-back” it is possible to achieve liquidity relief. An application can be made to reduce the overall amount of income for 2019, which is used as the basis to calculate the prepayments for 2019, either by a flat rate of 30% or by a “provisional loss carry-back” for 2020 of a higher amount for which proof would have to be provided. Prepayments for 2019 can still be modified up to 31.3.2021.
(2) Provisional loss carry-back in the tax return for 2019 – Upon application, when the tax assessment for 2019 is being produced, the overall amount of income for 2019 can either be reduced by a flat rate of 30% or by a higher amount of “provisional loss carry-back” from 2020 for which proof has to be provided. This application can be made in the tax return for 2019 or even separately in the course of the assessment procedure.
(3) Amendment of tax assessment notices for 2019 that have already been issued – Up to 1.8.2020, lawmakers were allowing retroactive applications for the deduction of a “provisional loss carry-back” if tax assessment notices for 2019 had already been issued and had become definitive prior to 15.7.2020.
(4) Deferral for 2019 – Additional payments for 2019 – e.g. if, in the course of the prepayment procedure, it had been possible to demonstrate that there was a (higher) provisional loss carry-back, but within the framework of the tax assessment the (lower) flat rate provisional loss carry-back was claimed – will be deferred, upon application, by up to one month after the assessment of the tax for 2020.
Outlook: The mitigating measures described above will end once the tax assessment notice for 2020 has been issued. The “provisional loss carry-back” will then, if applicable, be replaced by the actual one – in this respect the previous legal situation remains unchanged here.