Germany: Special Corporate Income Tax Regimes

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Provision for Insurance Fluctuation

Insurance companies can set off against current profits contributions to a fund to cover future liabilities. The fund can cover liabilities that will arise between 15-30 years in the future. Actuarial principles are used to determine the liability and the fund can only cover those classes of losses which insurance industry experience shows fluctuate unpredictably, and that cannot be covered by retrospective contributions or re-insurance. This provision has the effect of considerably reducing taxable profits and therefore the amount of corporate tax payable.

• Shipping Tax

  Shipping companies resident in Germany and who have most of their ships registered in the German shipping registry may elect to be taxed under a tonnage system of rules rather than on trading income. The measure was introduced on January 1, 2000, and once a ship submits to this regime of alternative taxation it is bound by its election for a period of 10 years. Clearly a company would not elect this system of taxation and be bound by its election for 10 years unless it represented a significant fiscal incentive. The ships so taxed must be engaged in international transport.

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  Tax Free Investment Grants in West Berlin & former East Germany

  Manufacturing firms, craft industries and urban wholesale & retail businesses may be entitled to a tax free investment grant in respect of "qualifying" new movable fixed assets subject to wear and tear and purchased or manufactured in West Berlin or the former East Germany. The qualifying goods must remain in former East Germany or West Berlin for at least 3 years after their purchase or manufacture. The concession now also applies to companies involved in providing services to and in close contact with both manufacturing production and newly built business premises. The amount of the grant depends on the time of the investment the size of the business, the economic sector to which the business belongs and the type of investment. For the years 1997-1998 the grant stood at 5-10% of the cost of the purchase whereas in 1999-2004 it stood at 10%-20%. In 1997 the cost to the exchequer was 1.76 billion DEM whereas in 1998 it stood at 1.26 billion DEM.
  
  In 2004 the government introduced the Investment Grant Act 2005 to continue the regime. Grants under the new rules are limited to first-time
  investments and, unlike under old rules, replacement investments will no longer qualify for grants. The Act defines "first-time investments" as (i) the creation of a new permanent establishment (PE); (ii) enlargement of an existing PE; (iii) fundamental redesign of a product or manufacturing
  process; and (iv) continuation of an entity which had been shut down or was to be shut down had the new investor not taken over its activities. The new rules offer grants of between 10% and 15% of the total investment, depending on the location and type of investment (i.e. first time, enlargement etc.).

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  Real Estate Capital Gains Roll-Over Relief

  In Germany roll over relief has the following characteristics:

  • Land & Real Estate: As of the year 2000 it was limited to land and real estate purchases and sales.
  • 6 year holding period: The relief only applies if the assets have been held for a minimum period of 6 years.
  • Level of Relief: 100% of any capital gains made on profitable sale of land & buildings may be deducted from the replacement cost of "qualifying replacement assets" meaning that no capital gains tax is payable on land and real estate re-sold at a profit. If the gain is not used immediately it may be carried forward for 4 years as a tax free reserve until such time as it can be debited from the cost of replacement assets. For depreciation purposes the replacement asset is deemed to be valued at its replacement cost less any untaxed capital gain. This is in fact quite a considerable fiscal concession especially given the appreciations in land values. Where funds are not used to obtain a replacement asset there is a sanction by which taxable business profits must be increased by 6% for each year the tax-free reserve has existed.

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