Systematic non-application fields of the flat rate withholding tax


Presentation (Elaboration), 2011
13 Pages

Excerpt

Inhaltsverzeichnis

Abstract

Introduction and methods

Results and discussion

1. Principle of subsidiarity

2.
2.2 Exceptions from the flat rate withholding tax according to § 32d Par. 2 EStG
2.2.1 Exceptions for capital investments within the meaning of § 20 Par. 1 No. 4 and 7 EStG
2.2.2 Exceptions for capital investments within the meaning of § 20 Par. 1 No. 6 EStG
2.2.3 Exceptions for capital investments within the meaning of § 20 Par. 1 No. 1 and 2 EStG
2.3 Assessment according to § 32d Par. 3 EStG
2.4 Assessment according to § 32d Par. 4 EStG
2.5 Assessment according to § 32d Par. 6 EStG

Summary

References

Abstract

Since the assessment period 2009 the treatment of private capital gains with regard to income tax in Germany has been newly regulated by the flat rate withholding tax. However, the regulation in the income tax law envisages numerous exceptions which are to be observed with the taxation. The fields of application of the flat rate withholding tax are systematically delimited. The numerous individual questions relating to the flat rate withholding tax will not be looked into.

Key words: Flat rate withholding tax, § 32d EStG [Income Tax Act], capital gains, income tax assessment

Introduction and methods

The taxation of capital gains is of substantial significance in international capital transactions. Germany decided to apply the 25% flat rate withholding tax since the 1.1.2009. The Federal Ministry of Finance describes the flat rate withholding tax as follows[1]: “With the corporate tax reform law 2008 of 14 August 2007 (Federal Law Gazette I p. 1912) the flat rate withholding tax was introduced as of 1 January 2009 as a new levy technique for taxes on capital income. It replaced the previous method according to which the taxpayer must enter his capital gains in the income tax return. So far the tax on capital gains (withholding tax on interest and capital gains tax) which was in particular retained by banks, Sparkasse banks [local German banks], insurance companies and joint stock companies merely had the character of an advance payment on the income tax which was to be determined by the Inland Revenue Office. With the flat rate withholding tax a so-called deduction at source method was thus applied to capital gains, similar to the method with the income tax. The debtors of the capital gains or the paying agencies (e.g. banks, financial services providers) retain the tax and remit it directly to the Inland Revenue Office.” With the letters dated 18 December 2009, 22 December 2009 and 16 November 2010 the Federal Ministry looks into numerous and partly complex individual questions relating to the flat rate withholding tax.[2]

Due to the many individual questions there is the risk of losing track of this issue which is important for international capital transactions. Therefore, the aim in the following analysis is to determine the sub-areas for which the flat rate withholding tax systematically does not apply. The research method is the analysis of law and literature with accordingly references.

Results and discussion

1. Principle of subsidiarity

Capital gains do not fall in the field of application of the flat rate withholding tax, to which income from agriculture and forestry, from trade enterprise, from self-employed work or from rental and leasing are to be attributed (§ 32d Par. 1 S. 1 EStG [Income Tax Act]). In these cases the income from the capital investments also remain capital gains; they are merely attributed to the prior-ranking type of income. According to § 43 Par. 4 EStG the capital gains tax is still to be retained and remitted. However, this tax deduction has no withholding effect according to § 43 Par. 5 S. 2 EStG as the tax deducted at source only has an advance payment function as the income according to § 25 Par. 1 EStG are to be included in the assessment and are to be subjected to the individual income tax rate of the taxpayer.

2.

2.2 Exceptions from the flat rate withholding tax according to § 32d Par. 2 EStG

2.2.1 Exceptions for capital investments within the meaning of § 20 Par. 1 No. 4 and 7 EStG

Possible structural abuses for interest income and for profit shares of the dormant shareholder are to be avoided by § 32d Par. 2 No. 1 EStG.[3] The investor should not be able to specifically use the existing differences in tax rate levels between his individual income tax rate and the withholding tax rate of 25 % to reduce his tax burden.

Income from dormant participations and profit participating loans also fall under § 32d Par. 2 No. 1 EStG as well as the income from other capital claims of all kinds (e.g. interest from loans to spouses, shareholder loans, bank deposits). These also include income from the sale, redemption or assignment of the capital claim or the dormant share.

Such capital gains must be included in the income tax assessment. The withholding effect of the tax deduction is to be refused accordingly, if first of all creditors and debtors are closely associated persons, secondly if the capital provider holds at least 10% of the shares in the paying joint stock company or cooperative; this also applies if the creditor of the capital gains is a person who is closely associated with the shareholders, who holds at least 10% of the shares, or if thirdly a third party owes the capital gains, who on his part handed over capital to a plant of the investor – so-called Back-to-back financings.

However, it is unclear how the term “closely associated persons” is exactly to be interpreted. To be taken into consideration could be an interpretation according to § 1 Par. 2 Foreign Transaction Tax Act or according to § 15 Fiscal Code; a statutory clarification is desirable.[4]

The legislator excludes the cases of the so-called recourse financing (Back-to-back financings) from the flat rate withholding tax. This way the structural abuse by involving third parties is to be prevented. Back-to-back financings are typically so-called single-bank cases in which the investor maintains a deposit at one bank and the same bank at the same time grants a loan to his business. Covered are however also so-called double bank cases, for example if a financing bank can take recourse to deposits of a shareholder, who holds at least 10 % of the shares, at another credit institution as collateral in order to service a corporate loan. However, a Back-to-back financing only exists if the capital investment is connected with a provision of capital to a business of the investor. When specifying this pre-requisite the legislator intended to comply with the house bank principle: Entrepreneurs should not be forced to process their private capital investments and their company loans at different banks.

A connection between private capital investment and borrowing of capital by a company can be assumed according to § 32d Par. 2 No. 1 lit. c S. 3 EStG if the capital investment and the provision of capital are based on a so-called standard plan. This is in particular to be assumed if there is a close time connection or the respective interest agreements are linked with each other. A connection which is detrimental to tax is on the other hand not to be assumed according to § 32d Par. 2 No. 1 lit. c S. 5 EStG if the interest agreements which were reached are customary for the market or no benefit results for the taxpayer from the application of the flat rate withholding tax of 25%. In these cases the flat rate withholding tax on the capital gains continues to apply.

If the pre-requisites of § 32d Par. 2 No. 1 EStG exist this will result in the legal consequence that firstly the corresponding capital gains are to be taxed with the individual tax rate of the investor, secondly the income from capital assets are included in the general computation base of the income tax, thirdly in this respect income-related expenses in connection with the capital investment and losses from the capital investments can be asserted according to general principles [5] and fourthly the savers flat rate amount will not be applied on the other hand.

2.2.2 Exceptions for capital investments within the meaning of § 20 Par. 1 No. 6 EStG

Income from life insurances is also principally subject to the flat rate withholding tax from 1.1.2009. One exception exists however especially for the event that the insurance benefit is paid out after attaining the age of 60 and after the expiry of twelve years after conclusion of the contract, § 32d Par. 2 No. 2 EStG. In this case only half of the difference between the insurance benefit and the paid premiums is liable to tax, §20 Par. 1 No. 6 S. 2 EStG.

As a legal consequence the capital gains is subject to the individual income tax tariff and will be included in the general computation base of the income tax. Actual income-related expenses remain out of consideration; they are replaced by the savers flat rate amount.

2.2.3 Exceptions for capital investments within the meaning of § 20 Par. 1 No. 1 and 2 EStG

Dividends and payments due to the liquidation of a joint stock company or due to an effective capital reduction are not subject to the flat rate withholding tax at the application of the taxpayer if he holds at least 25 % of the shares in the distributing joint stock company or holds at least 1 % of the shares of the distributing joint stock company and works professionally for this company, e.g. as managing director, § 32d Par. 2 No. 3 S. 1 EStG.

[...]


[1] www.bundesfinanzministerium.de

[2] Published in the Federal Tax Gazette 2010 I p. 79 and Federal Tax Gazette I 2010 p. 91 or for download www.bundesfinanzministerium.de. With regard to individual questions relating to the flat rate withholding tax cf. Loy, Hartmut, The Taxation of Capital Gains, Seminar of the Beck Academy AWS, Oberursel 2009. critical with regard the BMF letter dated 22 December 2009 cf. Reislhuber, Andre and Friedrich Bacmeister, Further selected aspects of the new BMF application letter concerning the flat rate withholding tax, German Tax Law 2010, p. 684.

[3] Cf. Behrens/Renner, restrictions to the field of application of the flat rate withholding tax in order to avoid abuse according to § 32 d EStG, The Business Consultant 2008, p.2319

[4] cf. Fischer, Carola, Problem fields with the flat rate withholding tax, German tax law 2007, p.1898.

[5] An income-related expenses deduction is excluded with the application of the flat rate withholding tax. With regard to misgivings under procedural law cf. Kämmerer, Bodo, flat rate withholding tax and the ban on income-related expenses deduction, German Tax Law 2010, p.27. cf. also proceedings pending at the Finance Court Münster (file no. 6 K 1847/10 E).

Excerpt out of 13 pages

Details

Title
Systematic non-application fields of the flat rate withholding tax
Author
Year
2011
Pages
13
Catalog Number
V184878
ISBN (eBook)
9783656100645
ISBN (Book)
9783656100317
File size
358 KB
Language
English
Tags
systematic
Quote paper
Andreas Laux (Author), 2011, Systematic non-application fields of the flat rate withholding tax, Munich, GRIN Verlag, https://www.grin.com/document/184878

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