DAC 6, Country-by-Country Reporting, Common Reporting Standard, FATCA & Co. – The need (or even the desire) of tax administrations in many countries for tax-relevant data has increased further in recent years. At the same time, the efforts and also the legal uncertainty of taxpayers have increased significantly in order to comply with these notification obligations for shareholdings, which are usually subject to fines or even penalties and are often formulated very broadly (or at least interpreted very broadly by the tax administration). Due to frequent amendments to Section 138 (2) of the German Fiscal Code (“AO”) (most recently by the Annual Tax Act 2020) as well as the opinion of the tax authorities, the question arises once again as to what must be reported.
Notification obligations for shareholdings according to Sec. 138 para. 2 AO
Part of the canon of notification obligations is also Section 138 (2) AO, which obliges domestic taxpayers to inform the German tax authorities of the commencement or change of a foreign engagement or a foreign relationship. Since these engagements are always subject to structural changes, the provision must be observed, not least because of the penalty.
The provision, which was already introduced in 1972, has been subject to numerous amendments in the meantime; most recently, significant amendments to Section 138 (2) AO resulted from the 2017 Anti-Circumvention of Taxes Act (Steuerumgehungsbekämpfungsgesetz 2017). The Federal Ministry of Finance published a circular dated 5 February 2018 to share its view with regard to these extensions, which has been supplemented three times in the meantime. The following transactions, among others, are or were previously subject to the notification obligation:
- the acquisition, relinquishment or change of an interest in foreign partnerships (section 138(2) sentence 1 no. 2 AO), as well as
- the acquisition or disposal of participations in a corporation, association of persons or estate with its registered office and management outside Germany (“foreign company”), if this results in a participation of at least 10% in the capital or assets of the foreign company or if the sum of the acquisition costs of all participations exceeds EUR 150,000 (direct and indirect participations are to be added together; section 138 (2) sentence 1, no. 3 and sentence 2 AO).
Changes by the Annual Tax Act 2020
With the Annual Tax Act 2020, section 138 (2) sentence 1 no. 3 letter b AO was supplemented by a so-called stock exchange clause. According to this clause, no notification of an acquisition or disposal of an interest of less than 1% in the capital or assets of a foreign company has to be made if substantial and regular trading in the main class of shares of the foreign company takes place on a stock exchange (in the EU/EEA or in a third country if authorised by BaFin). While all shareholdings held are to be taken into account for the determination of the aforementioned amount of shareholding, acquisitions or disposals not subject to notification are to be disregarded when determining the sum of acquisition costs of € 150,000. The tax authorities have already been applying the stock exchange clause in a largely identical version since 2018 (cf. Circular of the Federal Ministry of Finance dated 18 July 2018) – but so far without a legal basis.
In addition, declarations of assessment are now also to be used for notification (cf. section 138 (5) AO). According to the explanatory memorandum, the previous administrative opinion held by the Federal Ministry of Finance (circular dated 5 February 2018, para. 1.2), is to be legally anchored, so that, among other things, a partnership can also be considered a taxpayer subject to notification.
Changes due to the further circular dated 28 December 2020
The view of the tax authorities that the notification obligation also encompassed the acquisition of indirect shareholdings in corporations, associations of persons and asset funds, was restricted but not eliminated by the previous circular dated 18 September 2020. This view had already been rightly criticised – in my opinion it was not even covered by the wording of the law! Accordingly, it was ruled that participations in foreign companies acquired or sold indirectly via foreign investment funds were not subject to notification. Conversely, however, it could also be concluded from this that participations in foreign companies acquired or sold indirectly in other ways were subject to the notification obligation.
By publishing the circular dated 28 December 2020, the tax authorities now substantiated their view on indirect acquisitions and indirect disposals of shareholdings in foreign companies (section 138(2) sentence 1 no. 3 and sentence 2 AO).
According to para. 1.3.1, the following also applies to acquisitions: “If the requirements are met, the notification obligation only applies to the participations that the domestic taxpayer himself has acquired for a consideration or free of charge. In the case of the acquisition of a direct participation in a corporation, association of persons or estate, the domestic taxpayer must also notify the indirect participations acquired at the same time, provided that the other requirements for this are met.“
According to para. 1.3.2, the following also applies in the case of disposals: “If these requirements are met, the notification obligation only applies to the direct participations that the taxpayer itself has disposed of and to the indirect participations that were simultaneously disposed of as a result.“
In view of the amendments made by the Annual Tax Act 2020, which anchored the stock exchange clause in Section 138 (2) sentence 1 no. 3 letter b AO, and which had not previously been regulated by law, it is surprising why the legislator did not also expressly regulate the notification obligation with regard to indirectly acquired or sold shareholdings. This is particularly the case since the interpretation of the norm by the tax authorities is clearly criticised by literature and practice and is ultimately not covered by the wording of the law. As a result, an attempt is being made to collect data “through the back door”, which taxpayers often do not have in full anyway (e.g. in the case of private equity structures or certain employee share ownership programmes) and therefore, for good reason, cannot be expected from the legislator (and also not from the tax administration!) without further ado. For this reason alone, the view of the tax authorities appears to be exaggerated.
Effects of the amendments on practice or “What is to be disclosed now?”
The codification of a stock exchange clause (and thus the given practice) is to be welcomed both in terms of legal certainty and procedural economy. According to the explanatory memorandum, this is intended to avoid a situation where a number of normal share transactions without any recognisable tax relevance would be subject to notification.
Furthermore, it is to be welcomed that, from the point of view of the tax authorities, the notification obligation is now to be limited to the effect that only those indirect shareholdings in corporations, associations of persons and asset funds are to be notified that exist at the time of a direct acquisition of a corporation, association of persons or asset fund. In other words: A notification of the acquisition or sale of indirectly held participations in foreign companies after a direct acquisition or before a direct sale is therefore not subject to notification. However, this should not obscure the fact that the notification obligation with regard to indirectly acquired or indirectly sold participations lacks a legal basis – for good reason! Otherwise – as already indicated – the legislator would always presuppose that the investor is aware of all indirectly held participations in foreign companies, e.g. in the case of co-investments within the framework of private equity transactions or employee participation programmes. These would have to be reported, for example, if – taking into account the stock exchange clause – the EUR 150,000 limit would not be breached by the direct acquisition (or prior acquisitions), but by the addition of the acquisition costs of the respective indirectly acquired participations. It also remains open whether, for example, an intermediary domestic corporation subject to self-reporting would break the chain of foreign companies to be reported. If the taxpayer did not comply with his obligation, he could be fined.
Unfortunately, the circular dated 28 December 2020 does not comment on the case of indirect acquisition or indirect disposal of participations in foreign companies through direct acquisition of a share in a foreign partnership, i.e. with seat of management and registered office outside Germany. However, it must be assumed that the foreign partnership has a shielding effect for its shareholders subject to notification as a domestic taxpayer. On the one hand, the wording of section 138, para. 2, sentence 1, no. 2 AO only considers participations, according to which, in general opinion, only direct participations are meant. On the other hand, not anything to the contrary does result from the wording of section 138, paragraph 2, sentence 2 AO, from which the tax authorities – in my opinion already incorrectly – would like to derive the notification obligation for indirect acquisitions of shareholdings. Moreover, according to its wording, this provision does not apply to cases of acquisition, relinquishment or change of an interest in foreign partnerships. Ultimately, with the amendments in the Annual Tax Act 2020, the legislator has recognised that partnerships themselves can also be (reportable) taxpayers within the meaning of section 138(2) AO. In view of the “procedural intransparency” of the partnership, this also seems logical. In the case of a multi-level partnership structure, declarations of assessment must ultimately be submitted at each level, which is precisely the focus of the new regulation under the Annual Tax Act 2020. Thus, only the participations in foreign companies directly acquired or sold by the respective partnership (subject to notification) must be reported.
Finally, there is a special treat that urges caution: The German law provides Corona-related extensions of the filing deadline for tax returns. In case of the year 2019, the filing need to take place until August 2021 at the latest. Unfortunately, the legislator has failed to extend the notification filing period (still 14-month deadline; section 138 (5) AO) accordingly. To summarize: The notification filing were to be submitted in accordance with the officially prescribed data set by February 2021 at the latest. Same goes for 2020! It remains exciting!
This article was first published in: Handelsblatt online, Steuerboard, 3 February 2021 (in German)