Up Again Germany: Government Relief and Tax

Restructuring

1. Legislative changes: are there any additional processes or support which have been introduced as a response to the pandemic which I may not have considered previously?

The main legislative change is the CovInsAG (or the COVID-19 Law), which suspends the obligation to file for insolvency until 30 September 2020 under certain conditions (see above).

Further, the availability of the short-term work scheme (Kurzarbeit) was facilitated. This allows companies to reduce working hours and work force and thereby salaries by up to 100% without laying-off employees. The federal labour agency will cover 60% or 67% of the net salary for employees. The federal government has recently decided on a phased increase of the short-term work payments to cover up to 80% or 87% of the net salaries. See also question 3 in the tax section below.

For more information on COVID-19 support measures, please see our client alert on German Government Assistance in Response to COVID-19.

2. Is there anything else I should look out for?

German federal government and states have introduced for a vast catalogue of COVID-19 support measures, which are being updated constantly – companies in distress should apply for this support to preserve liquidity as far as possible.

  • The government has introduced new and altered existing funding schemes through the state-owned bank KfW. Businesses may apply for such schemes through their local bank. The degree of risk-assessment carried out by the local bank and the KfW and corresponding documentation that needs to be provided by the business depends on the credit volume and the specific aid scheme (see also below).
  • The government introduced a quick-loan scheme (Schnellkredit) designed for small and medium-sized businesses, providing loans of up to EUR800,000. The state-owned bank KfW takes over 100% of the credit risk. No in-depth risk assessment by the local bank or the KfW is required. However, the applicant needs to meet certain benchmarks to qualify for the program:
    • more than 10 employees
    • active on the market at least since January 2019
    • the business was overall profitable between 2017-2019

Contributions to social security and tax payments may be deferred on application with the competent authorities. See also question 3 in the tax section below.

For more information on COVID-19 support measures please see our client alert on German Government Assistance in Response to COVID-19.

Tax

3. What is the position with respect to the applicability of emergency tax measures , including

a. what they are and apply to;

b. when they are expected to be phased out on or following a return to business; and

c. whether any transitional periods are likely to apply.

  • No emergency tax legislation changes implemented

    Germany has not introduced emergency tax measures in the sense of reducing tax rates or exempting certain taxable income.

  • Tax payments deferred

    However, Germany has permitted postponement/deferment tax payments. Deferrals can be requested for all income based taxes and VAT (ESt, KSt, GewSt, USt). Wage tax cannot be deferred.

    The decision on the period of deferral is at the discretion of the responsible tax office in each individual case. In principle, deferrals are initially granted for a period of three months. Applications for longer deferral periods will regularly not be successful.. Information on possible payment modalities (e.g. payment by instalments) should be presented in the deferral application.

    Until 31 December 2020, follow-up deferrals are possible, taking into account the special features described above.

  • Short-time work benefits top-offs are tax free

    The German government has introduced simplified rules on short-time work benefits. Short-time work benefits are used across all industries. Generally, employees would receive 60% (or 67%) of their last net salary from the state. This amount has been increased to up to 80% (or 87%) if the period of entitlement is longer. However, many employers top up their employees' short-time working allowance; some on the basis of a collective agreement, others voluntarily.

    The federal cabinet decided on 6 May that such top-ups remain tax-free up to 80% of salary and shall no longer be considered taxable income. Additionally, no social security contributions have to be paid on top-ups up to 80% of gross salary. The rules for taxation will be adapted to this. This measure applies until 31 December 2020.

  • Customs

    The EU has stated that during the crisis, and until further notice, the presentation of a non-original proof of preferential treatment for the granting of preferential treatment should also be accepted by way of exception (e.g. scanned paper copy or e-mail). In the case of a customs declaration made in Germany, only the copy of a proof of preferential treatment can be accepted for granting preferential treatment. However, incomplete preference certificates or preference certificates that have a digital signature instead of a stamp imprint and a signature cannot be recognised.

    The customs measures described above apply retroactively to all formal preference certificates issued from 1 March 2020 (movement certificates EUR.1/EUR-MED and A.TR). With regard to movement certificates issued in Turkey, since 24 April 2020 these are temporarily no longer signed by hand. As such, in agreement with the European Commission, such movement certificates can, until further notice, therefore also be accepted for a requested preferential treatment.

    Additional guidance from the EU is available here.

4. Are there specific steps that businesses should take to prepare for these tax measures being phased out – for example new timing of

a. payment obligations (and therefore likely pressure on cash flow); and/or

b. filing of returns?

When deferrals run out, taxes are due and need to be paid. As such, sufficient liquidity should be available at that time. On a case-by-case basis, the tax authorities may be approached for a stay of enforcement.

5. Should the impact of emergency tax measures be reconsidered by businesses – e.g. are there certain legal transactions (such as sales or reorganisations) that parties should preferably postpone or accelerate?

Tax-neutral transformation of corporate entities is in principle possible on the basis of the corporate accounts of the previous year until the end of August of the following year.

The Government has extended the civil law retroactive periods for transformations to one year. In addition, the tax retroactive periods in § 9 sentence 3 and § 20 sub-section 6 sentences 1 and 3 UmwStG have been temporarily extended to achieve parallelism with the extension of the retroactive period in § 17 sub-section 2 sentence 4 UmwG by the Act on the Mitigation of the Consequences of the COVID 19 Pandemic in Civil, Insolvency and Criminal Procedure Law (COVID 19 Act).

Accordingly, the period of eight months is to be replaced by a period of twelve months (so until 31 December 2020 for conversions on 1 January 2020). With this change, tax-neutral conversions would be possible in a retroactive period of 12 months and the tax regulation would be brought into line with the conversion law requirements.

As such, transformation of corporate entities can also be performed later during the year without any negative consequences. As such, taxpayers have more time to provide the necessary information, which might prove more difficult due to COVID-19 restrictions.

6. Are there any additional measures proposed, in particular any that are targeted at particular sectors (e.g. aviation)?

At this time no sector-specific regulation is proposed.

However, the VAT rate for restaurant and catering services provided after 30 June 2020 and before 1 July 2021, with the exception of the supply of beverages, will be reduced from 19% to 7%.

7. Are there any sectors or interest groups that are now putting forward, or may in the near future request, special tax measures?

The Federation of German Industries (BDI) is the leading organisation of German industry and industry-related service providers. In collaboration with its members, the BDI has published eight proposed tax measures:

1. Deferral of Wage Tax payments

2. Equitable treatment for failure to meet deadlines

3. Deferral of new Compliance Rules

4. Introduction of negative work-time (“Arbeitszeitkonto”)

5. Repayment of special advance VAT payments

6. Simplification of deductibility rules for charitable contributions

7. Improvement and simplification of loss carry-forward and carry-back regulation

8. Reintroduction of degressive depreciation and reduction of the overall CIT/trade tax rate to 25%.

Apart from these measures, no major changes have been proposed.

8. Which taxes might be increased to address the financial burden caused by the crisis, for example,

a. are there political commitments or policy trends that might indicate the likely focus of any tax increase in the future (e.g. to maintain low corporation tax, but to increases taxes on personal wealth)

b. measures to broaden the tax base, such as digital services taxation and a pre-emptive response to the OECD/ G20 Inclusive Framework on BEPS (“BEPS 2.0”)

Currently, no political decisions have been taken that would indicate rising tax rates or an increase in the tax base in Germany. Though the opposition (e.g. Die Linke) has advocated for a reintroduction of a wealth tax, the government has dismissed this.

Discussion is ongoing regarding revoking the repeal of the Solidarity surcharge (Solidaritätszuschlag) to use it to pay for coronavirus-related cost increases in the medical sector. However, government parties are not unanimous, with SPD advocating for a repeal, while CDU/CSU adhere to the original plan to repeal the surcharge.

Even before the coronavirus crisis and against the background of Directive (EU) 2016/1164 of 12 July 2016 (ATAD), amended by Directive (EU) 2017/952 (ATAD II) of 29 May 2017, the Federal Ministry of Finance proposed a draft bill for the implementation of the Directive.

The current draft bill is intended to implement the regulations on disentangling and exit taxation, as well as on hybrid arrangements of ATAD and to reform supplementary taxation. In addition, there will be adjustments in the area of arm's length transactions under Section 1 of the Foreign Tax Act (AStG).

9. Are there other actions that ought to be considered by businesses in your country e.g.

a. revisit past tax filings to claim carry back of losses;

b. revise or update preliminary tax assessments;

c. claim bad debt relief for VAT output tax

Taxpayers should:

  • revisit their 2019 tax filing (if already submitted) to be eligible for loss-carry-back
  • prepare preliminary tax returns for 2020, which have to be filed regularly by the end of June 2021 to be able to claim tax-loss carry-forwards and reduce their taxable income. Should the taxpayer need to make pre-payments for their income taxes, these payments can be reduced (see above);
  • Germany does not provide a bad debt relief for VAT.

Businesses that have employees or management who are cross-border commuters and have introduced remote working as a response to the lockdown might have an increased risk of creating permanent establishments, if the lockdown and remote-work arrangement continue, this might constitute a fixed place of business. In that case, taxpayers face a risk of double taxation.

Finance

10. What do you need to consider in terms of your funding requirements for returning to business and are there any return to business financial assistance packages being made available by government?

The federal government provided the state-owned bank KfW with a guarantee framework of around EUR460 billlion, which can be increased by a further EUR93 billion. This framework was used to introduce new and altered existing funding schemes.

Companies can apply for support under these scheme through their (or any) local bank. The KfW will take over up to 90% of the credit risk vis-à-vis the local bank.

The main conditions for participation in these schemes:

  • the company was not in financial difficulties as of 31 December 2019
  • under the assumption that the overall economic situation returns to normal, the company will be fully financed until 31 December 2020 and there is a positive going-concern forecast

An economic stabilisation fund (Wirtschaftsstabilisierungsfonds) of EUR400 billion for guarantees (plus EUR100 billion for equity measures, and EUR100 billion to refinance existing KfW special programs) has been launched to provide alternative liquidity funding for companies to overcome liquidity shortages. These measures are available to companies fulfilling at least two of the following three requirements:

  • a balance sheet total of more than EUR43 million
  • revenues of more than EUR50 million
  • more than 249 employees on an annual average

Measures of the economic stabilisation fund are intended to be applicable only if there is no other way for a company for refinancing. Moreover, these businesses need to ensure a positive forecast perspective – considering the respective support measures – once the crisis is over.

The government also launched a support program specifically tailored to startups with a value of EUR2 billion.

In addition, the government introduced a quick-loan scheme (Schnellkredit) designed for small and medium-sized businesses. This provides loans of up to EUR800,000. The state-owned bank KfW takes over 100% of the credit risk. No in-depth risk assessment by the local bank or the KfW is required. However, the applicant needs to meet the following conditions:

  • more than 10 employees
  • active on the market at least since January 2019
  • the business was overall profitable between 2017-2019

Several state aid programs have been launched by the German federal states (Bundesländer) directly or via federal state-funded banks.

For more information, see our Overview on German Government Assistance in Response to COVID-19.

11. How will funding a return to business, including taking on additional indebtedness, impact on your financial or other covenants?

This depends on the financing arrangements and should be assessed by reviewing the loan and other finance documents. If those contain (as is very likely for larger financings) financial and other covenants, waivers or consents by the existing lenders, or amendments to such finance documents, might be required.

12. Are there any remedies such as equity cure or margin ratchets that you should be checking on to provide liquidity to prevent a default or improve their financial position?

If such options are included in the financing documents, they could be used to prevent a financial covenant breach or other default scenarios. This should be assessed by reviewing the finance documents.

13. What practicalities do you need to consider in relation to audit requirements?

This should be discussed with the company’s auditor.

14. What is the process if I need any amendments made or waivers given under my loan documentation (including in respect of financial covenants)?

This depends on the existing financing arrangements and should be assessed by reviewing the loan and other finance documents. In the event of required amendments or waivers, the existing lenders (or the agent) need to be approached.

15. Dealing with creditors, including amendments and waivers – Bonds

a. If I can’t comply with the terms of my bond covenants who do I need to notify?

This depends on the existing arrangements and should be assessed by reviewing the bond documents.

b. If I need to ask for a waiver or amendment to the terms of bonds issued by my business what steps do I need to take?

This depends on the existing arrangements and should be assessed by reviewing the bond documents.

c. What is the process for contacting bondholders and holding meetings to agree changes in the terms of my bond documents?

This depends on the existing arrangements and should be assessed by reviewing the bond documents, which should contain the respective requirements (including the majority requirements).

16. Is the availability of any return to business funding or relief either (a) conditioned on the use of proceeds for green or social purposes or (b) linked to sustainability-related outcomes? If so, what are the applicable purposes or outcomes?

In general, the governmental financial aid schemes do not include conditions or require any commitments by the applicant regarding green/social/sustainability standards and efforts.

However, the KfW has issued a list of specific projects excluded or limited from access to the financial aid schemes. The list includes:

  • production or trade of products and activities that fall under national or international prohibition regulations or are subject to an international ban (e.g. certain pharmaceuticals);
  • weapons;
  • radioactive materials;
  • exploration and mining of coal;
  • destructive fishing methods; and
  • certain non-conventional forms of oil-exploration.

Certain projects are required to meet international standards to be eligible for financing, such as production of palm-oil and wood, large hydropower projects, and non-conventional exploration of gas.

The whole list is available here (in German).