For example, the tax position of an English LLP with its administrative headquarters in Germany remains unclear. The future legal relationship between the UK and Germany also remains completely open.
Taxpayers should also be prepared and check their German tax position for Brexit resilience. For example, UK relationships that are currently protected by existing European tax rules, such as the European Parent-Subsidiary Directive and the VAT Directive, must be checked for their post-Brexit tax implications.
Germany's parliament, the Bundestag, passed the Brexit Tax Accompanying Act, a law on tax-related regulations accompanying the withdrawal of the UK from the EU, on 21 February 2019. The law, which is due to come into force on 29 March 2019, is intended to prevent certain legal consequences of the UK becoming a 'third country' for tax purposes in Germany, either if it exits the EU without a negotiated withdrawal agreement in place or in the event of a withdrawal agreement with an implementation period.
As things currently stand, the UK's membership of the EU will come to an end on 30 March 2019. Under the terms of a withdrawal agreement negotiated between the UK and the EU the UK would still be treated as an EU member in respect of certain important EU rights for a transitional period, which is due to run until December 2020. However, the UK parliament has yet to give its consent to this agreement. The German legislature has already implemented a Brexit Transitional Act, which will allow Germany to treat the UK as an EU member during the transitional period if the withdrawal agreement is accepted.
In the event of a no-deal Brexit, and with a possible withdrawal agreement after a transitional period, the UK would no longer be treated as an EU member state but as a third country for tax purposes. In Germany, there are certain tax conversion privileges for companies that have a legal form according to the regulations of an EU member state. These tax privileges would no longer be available to UK companies. Existing qualifying periods for maintaining the tax benefits would also be partially infringed by Brexit, if they had not already expired by that date.
Among the effects of the new legislation are:
- no mandatory dissolution of a formed adjustment item under section 4g (1) EStG (German Income Tax Act) for assets of a German corporation assigned to an EU permanent establishment located in the UK after Brexit;
- no interest on a tax deferral under section 6b (2a) EStG on reinvestments in the EU, for a timely reinvestment in the UK after Brexit;
- no fictitious dissolution and taxation in accordance with section 11 KStG (Corporation Tax Act) in the event of departure of a corporation through transfer of management or registered office, and the associated exit from unlimited tax liability in an EU member state, as a result of Brexit;
- no consequences for existing real estate transfer tax periods under section 4 resp. 6a GrEStG due to an automatic change of legal form as a result of Brexit;
- no interruption of the lock-up periods for contribution cases under the German Transformation Tax Act, covering contribution in kind or exchange of shares below the fair market value, relating to the UK, provided that the conversion resolution was passed before the date of Brexit or the contribution agreement was concluded before that date;
- no revocation of deferments of payment according to section 6 (5) AStG (German Foreign Tax Act) for cases of withdrawal before the date of Brexit;
- no 'detrimental use' under section 93 (1) EStG in certain defined old cases and preventing unreasonable hardship in connection with pension investment 'Riester' subsidies;
- continued application of certain inheritance tax privileges on acquisitions of assets in the UK after Brexit.
Werner Geisselmeier and Veit Kachelmann are German tax experts at Pinsent Masons, the law firm behind Out-Law.com.