November 4:  Legislative proposals in Germany would, if enacted, limit cross-border hybrid financing arrangements, amend the rules for intra-group transfers, and revise the rules for the participation exemption for capital gains on portfolio shareholding.

The Finance Committee of the German Bundesrat on 24 October 2014 proposed a number of amendments to an ongoing legislative process (known in English as: “Law regarding the Alignment of the General Tax Code to the European Customs Codex and other Measures”).

New anti-hybrid rule

Proposed § 4 (5)(a) S. 1 of the German Income Tax Act (EStG) would deny a deduction of a particular business expense (e.g., an interest expense) in Germany if the direct or indirect recipient is either not taxed on the corresponding income or does not include the income in its tax base and the reason for such non-taxation is because under the law of the recipient’s country of residence, the instrument is not recognized as a debt instrument—i.e., an “anti-hybrid rule”.

Further, proposed § 4(5)(a) S. 2 EStG would deny a deduction of a particular item of expense in Germany, if the same expense item also would be deductible from the tax base in another jurisdiction.

The changes are proposed to be effective in the year when the law is enacted—i.e., if the proposed law is passed and enacted in 2014, the proposals could be effective this year.

BEPS Action 2

The proposed changes follow the OECD’s base erosion and profit shifting (BEPS) project and specifically BEPS Action 2, Hybrid Mismatches.

Although the final OECD report on BEPS Action 2 has not been issued, the German legislative materials note that the OECD has completed substantial work in this area and, therefore, there is no reason to further delay unilateral measures.

In contrast, the coalition agreement of the governing parties in Germany stated that it is the intention of the government to wait with unilateral actions until the final OECD report on BEPS is available. Accordingly, it is uncertain whether the government would adopt the proposed rules as part of the ongoing legislative process.

KPMG observation

The current wording of the “anti-hybrid rule” legislative proposal would not limit the rule to related parties as direct or indirect recipients of the payment that is claimed as a business expense in Germany. It is uncertain how German taxpayers would demonstrate compliance with the proposed measures if unrelated recipients are not willing to disclose relevant information.


In addition, the term “indirect recipients” is an unfamiliar concept in German tax laws. Based on related legislative guidance, the intension behind the proposal to include indirect recipients is so that application of the anti-hybrid rules could not be avoided with the interposition of entities. However, neither the wording of the legislative proposal nor legislative guidance clarifies under which principles would an indirect recipient be considered (e.g., beneficial ownership, etc.).


Regarding the potential double deduction of a business expense in two jurisdictions, the legislative guidance specifically mentions German partnerships and the ability to deduct, at the partnership level, business expenses incurred at the partner level for German tax purposes (so-called ”special business expense”). As this concept is not known in many jurisdictions, German partnership structures have been frequently used to deduct business expenses in two jurisdictions. The purpose of the proposed rule would be intended to stop this practice.

Extension of intra-group exemption under the German change-of-control rules (§ 8c KStG)

Under the German change-of-control rules, the carryover of tax attribute—e.g., loss and excess interest carryforwards—may be limited in the event of a more-than-25% direct or indirect change of ownership within any given five-year period.

Because the change-of-control rules apply to transfers within a controlled group companies, there is an exception to the change-of-control rules for intra-group transfers. However, the exception for intra-group transfers does not apply if the ultimate parent company is involved as either a transferor or transferee in the transaction that is subject to the change-of-control rules.

The German Bundesrat proposes a retroactive amendment to the intra-group exemption under the German change-of-control rules and specifically to include transfers involving the ultimate parent company. If the proposal is implemented, the amended rules would apply to all ownership transfers after 31 December 2009.

Capital gains from portfolio shareholdings

The German Bundesrat has requested that the government review whether the capital gains exemption (i.e., effective 95% exemption) is to be maintained for shareholdings of less than 10% (i.e., portfolio shareholding).

The German Bundesrat has justified a proposed change to these rules in light of the full taxation of dividends from portfolio shareholdings and because of a concern that inconsistent tax treatment between dividends and capital gains may result in unwanted strategies used by taxpayers to reduce or mitigate the full taxation of dividends on portfolio shareholdings.

Source: Romy Stoll, KPMG.