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Withholding capital gains tax – Plans to simplify procedures

On 20.1.2021, the German Federal Cabinet adopted the draft bill on the Modernisation of Withholding Tax Relief and the Certification of Capital Gains Tax Act (Gesetz zur Modernisierung der Entlastung von Abzugsteuern und der Bescheinigung von Kapitalertragsteuer, AbzStEntModG). The aim of this is to optimally streamline the procedure for providing relief from capital gains tax and withholding tax for taxpayers with restricted tax liability, under Section 50a of the Income Tax Act (Einkommenssteuergesetz, EStG), at the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt) and to provide protection, to the greatest extent possible, against abuses and fraud. Furthermore, ECJ rulings had made it necessary to revise Section 50d(3) EStG in the area of withholding tax relief.

Digitalisation of the procedure ...

The BZSt is responsible for, among other things, capital gains tax relief for capital gains recipients based in a foreign country. To this end, data is already being collected at the BZSt on “declarations for exemption from withholding tax” that have been issued. From 2024 onwards, it will basically be mandatory to file applications electronically and to retrieve assessment notices electronically as well as to transmit the data electronically for the tax certificates issued for capital gains. 

... with a database for capital gains tax

Generally, electronic reporting requirements would expand the withholding procedure for capital gains tax; by centralising the collection of reports at the BZSt the aim is to make it easier to identify arrangements that attempt to circumvent the taxation of dividends. This comes in response to the schemes that became known under the terms cum-ex, cum-cum and cum-fake. The information will be used by the fiscal authority – and in this case, in particular, the special unit set up at the BZSt – for the purpose of analysing and monitoring. 

Tougher liability for tax certificates

In the future, issuers of incorrect tax certificates will be held liable for all the information that should be included on a tax certificate. Furthermore, they would also be liable in the event of a faulty transmission of data. The required data will provide important information for uncovering the truth in the case of share transactions that are particularly susceptible to the creation of “constructs” around the dividend record date.

In particular, in the event of incorrect information from the capital gains debtor or by means of a statement from the issuer of the tax certificate to the tax office that the issuer had not got back an incorrect tax certificate, up to now, it had been possible to avoid a liability claim against the issuer of the tax certificate. In future this will cease to apply.

Section 50d EStG will be updated and “divided up“

The intention is to transfer the current provisions under Section 50d EStG – which relate to relief from capital gains tax or from withholding tax for those with restricted tax lia-bility in the case of royalties, or similar, on the basis of the EStG or a DTA – to a (new) Section 50c EStG. There would be no change in the requirement for tax to be withheld for the above-mentioned income. 

Two procedures would be available for capital gains tax relief, namely, exemption in the course of the withholding procedure on the basis of an existing exemption certificate, or a refund of the tax that was withheld on the basis of an exemption notice. Remuneration for a debtor of up to € 5,000 annually (e.g., for royalties under a DTA) may be paid out without, or with a reduced tax deduction. The hitherto applicable recording procedure (Kontrollmeldeverfahren) will be abolished.

A certificate of exemption would, in the future, no longer have a retroactive effect. In the future, a certificate of exemption would only be effective from the date of its issue and, moreover, would be valid for a maximum of 3 years. Only creditors of the capital gains may apply at the BZSt for a certificate of exemption.

If the tax has already been paid then relief could only be claimed through a refunding procedure. 

Please note: In any case, the debtor has to submit a withholding tax return even if, because of an exemption, no taxes have been withheld and paid.

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