Before the summer recess the German Bundesrat approved in its meeting of 25 June 2021 the Act on the Modernisation of Corporation Tax Law (abbreviated as: KöMoG).
The core element of the KöMoG is the introduction of an option for certain partnerships to be taxed as a corporation under corporation tax law. The idea of an option for partnerships had already been formulated 22 years ago as part of the “Brühler recommendations for the reform of corporate taxation“. Against this backdrop the speed at which the law was entered into force by the legislator is surprising: The partnerships that benefit from this option (general partnerships (OHG), limited partnerships (KG), registered partnerships) may leave the transparent tax regime with effect from the 2022 assessment period and be subject to non-transparent taxation. The application regarding this must be filed with the competent tax office by 30 November 2021 at the latest.
The partners of the “opting partnership“ (legal definition) are treated in the same ways as shareholders in a corporation and the opting partnership is treated substantively and procedurally in the same way as a corporation. The option also applies to the following German laws: Foreign Tax Act (Aussensteuergesetz), Trade Tax Act (Gewerbesteuergesetz), Transformation Act (Umwandlungsgesetz) and Investment Tax Act (Investmentsteuergesetz). However, the option does not have an impact on the German Inheritance Tax Act (Erbschaftssteuergesetz) and the Gift Tax Act nor on the Real Estate Transfer Tax Act (with the exception of the abuse regulations regarding Sections 5 and 6 of the Real Estate Transfer Tax Act). An opting partnership is therefore a hybrid tax subject, whose procedural classification varies depending on the law and/or facts.
The short time remaining until the expiry of the deadline for the first-time application on 30 November should be used by businesses to examine together with their adviser the impact of the reform. Despite the numerous open issues, which may make it difficult to undertake a comprehensive review of the option by November, it is not anticipated that the fiscal authorities will issue comments on the remaining open questions until then.
In particular, those businesses, which have made use of the benefits of retaining profits in the past, should consider the possibility of submitting an application to exercise the option despite the threat of subsequent taxation of retained profits. The same applies to asset management partnerships with property that has been owned by the partners and/or partnership for at least ten years.
Photo: Adobe Stock, joda
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