From a tax point of view, the exit of the United Kingdom of Great Britain leads to a number of issues that are of considerable importance to those concerned. While the Double Taxation Convention between Germany and the United Kingdom of Great Britain and Ireland will continue to apply in the future, there is nevertheless a need to adapt numerous tax regulations that link tax benefits to EU or EEA membership. The German Tax Act relating to Brexit, which entered into force on March 29, 2019, now prevents negative tax consequences in key areas.
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1. Changes affecting natural persons
1.1 Retirement provisions
In the event of death, retirement provision assets can generally be transferred tax-free to the spouse’s retirement provision contract. This only applies, however, if the couple does not live separated from each other at that time and is subject to unlimited taxation in the EU/EEA. The Tax Act relating to Brexit now makes this possible even if the retirement provision contract was concluded prior to the Brexit referendum (June 23, 2016) and the couple was subject to unlimited tax liability in the UK prior to Brexit (Section 3(55c) sentence 2 lit. c German Income Tax Act -new-).
1.2 Exit taxation
If a shareholder holding at least 1% of a corporation moves abroad, this leads to a fictitious taxable sale (Section 6(1) sentence 1 German Foreign Tax Act). When moving to an EU/EEA Member State, however, immediate taxation of the hidden reserves is avoided and deferred without interest until the shares are actually sold. The Tax Act relating to Brexit clarifies that Brexit will not have the effect of revoking the deferment (Section 6(8) Foreign Tax Act -new-).
1.3 Transfer of assets
If assets (such as machines) are transferred to a foreign company, the German State loses its tax sovereignty, which therefore generally leads to taxation of the hidden reserves in the assets (Section 4(1) sentences 3, 4 Income Tax Act and Section 12(1) German Corporation Tax Act). If this occurs within the EU/EEA, however, immediate taxation can be avoided by recognizing a reserve as business expenses (Section 4g Income Tax Act). Section 4g(6) Income Tax Act (new) ensures that in the case of assets transferred to the UK prior to Brexit, the entry of these reserves will not have to be reversed and the transferred assets are not subject to immediate taxation.
1.4 Inheritance and donations
The German Inheritance Tax Act includes numerous provisions on preferential treatment, including for business assets, even in the event of the free transfer of foreign business assets within the EU/EEA. The free transfer of a holding of at least 25% in a corporation domiciled in the EU/EEA is also treated preferentially. Under Section 37(17) Inheritance Tax Act (new), these benefits will continue to apply to all inheritances and donations prior to Brexit.
2. Consequences for corporations
2.1 Relocation of headquarters
If a corporation transfers its registered office to a country outside the EU/EEA, it will be subject to fictitious liquidation with the consequence of taxation of the hidden reserves (Section 12(3) Corporation Tax Act). The Tax Act relating to Brexit clarifies that Brexit will not lead to any tax liability, but only the move of the corporation to a third country (Section 12(3) sentence 4 Corporation Tax Act -new-).
2.2 Corporations with administrative headquarters in Germany
British Limited companies and PLCs are recognized as corporations in Germany even if their actual administrative headquarters are not in the UK but in Germany (principle of freedom of establishment). With Brexit, these legal forms are set to lose legal capacity in Germany with the consequence of being treated as a partnership under civil law or a general partnership.
The Tax Act relating to Brexit enables these corporations to continue to generate corporation tax income after Brexit, even if they are to be treated as partnerships under corporate law (Section 12(4) Corporation Tax Act -new-).
Under Section 1(2) sentence 3 German Transformation Tax Act, the provisions of the Transformation Tax Act will continue to apply to transformations of English Limited companies and PLCs with registered office in Germany, provided that a notarial merger plan has been drawn up prior to Brexit and the transformation is entered in the Commercial Register no later than two years after Brexit. This applies for tax purposes, although the company’s registered office will be outside the EU after the exit of the UK.
3.2 No retroactive taxation of transfer income
Under certain conditions, the Transformation Tax Act favors the transfer of shares in corporations to corporations if performed at a value below the fair market value. If the transferred shares are sold within seven years, however, retroactive taxation will apply. The Tax Act relating to Brexit provides legal certainty insofar as the seven-year retention period will not be interrupted by Brexit if the transformation resolution was passed prior to Brexit.