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The 2020 Annual Tax Act – Important changes trelating to various types of tax and the tightening of criminal law for tax offences

On 18.12.2020, the Bundesrat (upper house of the German parliament) approved the 2020 Annual Tax Act. Its aim is to continue to alleviate the burdens due to coronavirus by using tax measures. Following our report in a previous article, in the subsequent sections we discuss further details relating to income tax and payroll tax, important changes to other types of tax as well as the significant tightening of criminal law for tax offences..

Income tax and payroll tax

Home office blanket deduction

Tax breaks for working from a so-called home office (HO) are completely new. Section 4(5) sentence 1 no. 6b sentence 4 of the Income Tax Act (Einkommenssteuergesetz, EStG) grants an HO blanket deduction of € 5 per calendar day on which work was carried out solely at home. However, the blanket deduction is limited to 120 days in the HO or a maximum of € 600 for a financial or calendar year and will initially apply to 2020 and 2021.

On closer examination, the HO blanket deduction reveals more style than substance. First of all, the HO blanket deduction has to be included in the general work-related costs deduction of € 1,000 and does not augment it. Therefore, the HO blanket deduction will only actually have an effect if and to the extent that the work-related costs together with other itemised expenses come to more than € 1,000. Secondly, you should bear in mind that you will not be able to claim the so-called commuters’ tax allowance (Pendlerpauschale) – for journeys between the home and the place of work (30 cents for each kilometre of distance; in 2021 increased to 35 cents as of the 21st km) – for the days that your work was carried out in an HO. Starting from a simple distance of 17km between the home and the place of work the HO deduction would be less than the km effect.

Please note: In the course of setting up an HO, if expenses were incurred for an office chair or desk, monitor, keyboard, mouse, printer and paper then these can also be deducted as work-related costs on the basis of itemisation like the commuters’ tax allowance for days spent in the office and the HO blanket deduction for days worked in the home office. Moreover, despite the HO blanket deduction it should still be possible to claim 20% of the telephone and internet costs (max. € 240 p.a.) in addition.

Coronavirus special payments

Up to € 1,500 may be paid out to employees tax-free as financial assistance and support because of the coronavirus crisis. The period previously applicable for this benefit has been extended to 30.6.2021.

Payments by employers to top-up the short-time working allowance

The remuneration periods during which employers are able to make tax-exempt payments to top-up the shorttime working allowance, in accordance with the Coronavirus Tax-Related Assistance Act, have been extended to the end of 2021. These top-up payments and the shorttime working allowance together may not exceed 80% of the difference between the usual gross remuneration and the remuneration that is actually paid.

Advice and guidance for exiting employees

In future, employers will be able to provide outplacement services tax-free to employees who will be given their notice or who will exit. Section 3 no. 19 EStG was amended for the purpose of clarification in this respect.

Tax exemption limit for benefits in kind

From 2022, the monthly tax exemption limit for benefits in kind will be raised from previously € 44 to € 50.

Please note: For other important changes to German income tax law please see the report in our previous article. The topics covered there were, in particular, investment allowances and special depreciation.

Value Added Tax

VAT digital package

As of 1.7.2021 significant changes will come into force with respect to mail order selling to private individuals. The key elements of the news rules (for detailed explanations cf. this article) include:

  • central reporting of intra-Community distance sales via the so-called ‘One Stop Shop’ as well as
  • tax liability for marketplace participants (e.g., Amazon) in many cases of goods deliveries from countries outside of the EU.

Reverse charge mechanism for telecommunication services

The liability of the recipient of a service to pay (value added) tax (the so-called reverse charge mechanism) has been extended to include telecommunication services. Germany has thus followed the example of many EU member states.

The background is that in the area of retailing using voice over IP (VOIP) there are VAT fraud models that lead to losses in VAT revenues. Those involved who appear in the background are predominantly persons not domiciled in Germany and, as a result, they evade the actions of the fiscal and law enforcement authorities. Moreover, the fiscal authority frequently has no access to servers installed in a third country on which call minutes could be tracked. The losses in tax revenues arise when the tax charged for the services described is deducted as input tax but is not paid by the service provider to the tax office. This can be avoided if the recipient of the service is liable to pay the tax.

A requirement for the reversal of the liability for the payment of VAT is that the business receiving the service is a so-called reseller and thus performs telecommunications services as the main activity.

Please note: With immediate effect, the tax office will issue certificates attesting to the reseller status of a business. The validity of the certificate should be limited to no longer than three years.

Inheritance tax

Equalisation claim for a community of accrued gains

Under section 5(1) of the Inheritance Tax Act (Erbschaftsteuergesetz, ErbStG), in the event of the death of a spouse the surviving spouse is granted tax exemption in the amount of the equalisation claim that s/he would have been able to claim in order to equalise the accrued gains in accordance with Section 1371(2) of the German Civil Code if s/he had not become the legal heir. The current structure of this provision results in an unjustified double concession for the surviving spouse. On the one hand, the value of the estate is calculated using tax exemptions and concessions. On the other hand, the deduction to equalise the accrued gains is made on the basis of market values regardless of the valuation for inheritance tax. In order to rule out this double concession a new clause 6 has been added that reduces the notional equalisation claim that can be deducted. For this purpose, the tax exemptions (T) are deducted from the value of the final assets (F – T) and shown in relation to the value of the final assets (F – T / F).

Income tax liabilities and refund claims in the case of inheritance tax

According to the case-law of the Federal Fiscal Court (Bundesfinanzhof, BFH), income tax refund claims that relate to the year in which a testator died do not fall under a taxable acquisition under Section 10(1) ErbStG because they only arise after the end of the year in which a testator died (cf. BFH ruling from 16.1.2008, case reference: II R 30/06). For acquisitions, the current rule is that tax refund claims may only be considered if they have arisen legally. This unequal treatment has been redressed via an amended version of Section 10(1) sentence 3 ErbStG. The amended version means that both the tax refund claims that relate to the year in which a testator died have to be applied and the tax liabilities also have to be deducted.

German Fiscal Code – Running of interest in the case of provisional loss carry-backs from 2020

Under an addendum to Section 111 EStG, the general provision in Section 233a(2a) of the Fiscal Code (Abgabenordnung, AO) on adding interest in the case of loss carry-backs has to be applied to the provisional loss carry-back to 2019 that is based on the new regulations that formed part of the coronavirus legislation. If the tax assessment for 2019 was based on taking into consideration a provisional loss carry-back for the first time then the interest on tax arrears and/or tax refunds may only be assessed from the time when the loss is carried back plus a grace period of 15 months. The assumption underpinning this is that a loss deduction could not yet have been taken into consideration in the original tax assessment and, therefore, prior to the occurrence of the loss, neither the taxpayer nor the tax office would have sustained a liquidity advantage/disadvantage that the adding of interest aims to compensate. The rule has to be applied both to the original loss carry-back as well as to subsequent add-backs in the context of the 2020 tax assessment.

Criminal Law for Tax Offences

Extended limitation period for cases of especially serious tax evasion

The limitation period in Section 376(1) AO has been increased for cases of especially serious tax evasion from 10 to 15 years. This applies to all acts that had not yet been barred by the statute of limitations on the date of the entry into force of this legislation.

Unlimited forfeiture of criminal gains

There will be no limit on the possibility to confiscate the proceeds of crime, e.g., from tax offences, if the entitlement to the restitution of gains has expired merely because of the statute of limitations. This provision is applicable to the proceeds of crime

  • from offences as of the date of the entry into force of the legislation (one day after the promulgation of the legislation) and
  • from offences prior to the entry into force of the legislation where the confiscation was ordered after the entry into force of the new provision (this, particularly, if it is a case of a tax offence where the offender avoided tax on a large scale or had obtained unjustified tax benefits – cases for Section 370(3) sentence 2 no. 1 AO).
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