A new law concerning the taxation of portfolio dividends has been introduced in Germany. Also, some amendments to the tax procedure rules have been proposed.

According to the new law, portfolio dividends for shareholdings of less than 10%, measured as of the beginning of the calendar year, received by corporate entities which are subject to corporate income tax will be no longer exempt from tax under Germany’s participation exemption regime (effective 95% exemption).

Also, a proposal for reducing the 10-year retention periods for accounting and tax records has been considered by the Bundestag. This has been challenged in the Bundesrat (upper house of parliament) and has currently been referred to a conciliation committee for further consideration.

When a merger takes place the assets and liabilities of the transferring entity must be transferred at their closing balance sheet values. The surviving entity must therefore record these at their balance sheet values as at the last balance sheet and this is likely to give rise to a merger-related gain or loss. In a recent German Federal Tax Court decision with respect to upstream mergers, it was found that  the merger-related gain or loss must be recognized also in mergers, demergers, or spin- off when the transferee did not have an ownership interest in the transferring entity prior to the reorganization. Therefore a tax exempt gain or non-deductible loss has to be recognized in these circumstances. A consequence of this decision is that the transaction costs of the merger cannot be deducted as business expenses for tax purposes but will be treated as part of the merger-related gain or loss.  The transaction costs will therefore not be tax deductible.