How to protect your cash tax position during the COVID-19 pandemic

While headlines are dominated by the global drop in stocks, the debt market (i.e. loans, bonds) is now being exposed to great risks. The new coronavirus outbreak has almost shut down the markets for newly issued debts, meaning debt sources are being ever more depleted. This, while companies need cash injections more than ever.

For companies operating in Germany, the following 12 measures can protect their cash tax position during the COVID-19 pandemic:

Reduce and reclaim tax pre-payments

Taxpayers economically affected by the coronavirus crisis can reduce quarterly pre-payments for corporate income taxes and trade taxes by contacting their local tax office. A reduction can be based on new projections of taxable income up until 31 December 2020.

They can also request a refund of already paid tax pre-payments at the local tax office if pre-payments already paid seem to have been too high, based on new projections of the 2020 taxable income.

Defer tax payments

Taxpayers who can demonstrate that they are directly and not insignificantly affected by the coronavirus crisis can request a deferral of taxes until 31 December 2020. Such a deferral can be applied for in relation to corporate income taxes and VAT, which were already due or will be due by this date. As a rule, due to the coronavirus crisis, interest on deferral should not be charged. It is not expected for collateral to be requested.

By the same token, tax payments can also be deferred upon request by extending the filing deadline for tax returns at the local tax office.

Request an adjustment of enforcement measures

If taxpayers affected by a direct and not insignificant impact from the coronavirus crisis inform their local tax office about the issues they are facing, enforcement measures (Vollstreckungs­maßnahmen) will be waived until 31 December 2020. Late payment surcharges for these taxes will be also waived.

Reclaim withholding taxes

There are several kinds of payments, which can result in withholding taxes, in particular for dividends, royalties, interest and construction fees. First, one may consider deferring these payments. In cases of payments between related parties (such as a parent and its subsidiaries), however, transfer pricing rules must be considered.

Domestic dividends paid, for instance by a German subsidiary to its German parent in 2020, may trigger withholding taxes on the payment date if no income tax group (Organschaft) is in place. These withholding taxes will be offset only within the recipient’s regular tax return, and not before 2021. One should, therefore, consider deferring domestic dividends until the end of 2020.

In a cross-border context, withholding taxes normally concern dividends and royalties. The issuance of withholding tax exemption certificates by Germany’s Federal Central Tax Office should be requested if they have not yet been issued or are no longer up to date. This is in order to limit, or even avoid, any withholding taxes based on an applicable income tax treaty or EU law. Measures could be taken to accelerate the process of an already ongoing certification process.

If withholding taxes on, for instance, cross-border royalties or dividends have already been paid, one should consider immediately requesting a refund based on an applicable income tax treaty or EU law. In cases of already pending refund requests, measures could be taken to accelerate the process.

Limit penalties

One should check whether penalties have been assessed - or are expected to be assessed - by the German tax authorities. These penalties might be related to the late filings of tax returns, to the late provision of transfer pricing documentation, or to non-cooperative behavior during a tax audit. The reduction or waiver of those penalties should be requested based on the fallout of the coronavirus outbreak.

Carry back tax losses

Tax losses incurred in 2019 of up to €1m can be carried back to 2018 for corporate income tax purposes. This must be considered when filing tax returns for 2019.

Reclaim energy and electricity taxes

Companies pay energy and electricity taxes in Germany. However, reductions may apply to these taxes for businesses in 2020. To obtain these reductions, requests must be submitted by mid-2020.

Defer output VAT

Taxable persons may qualify as being in a VAT payment position if the VAT it has to pay (output VAT) on the goods and services supplied by it exceed the VAT it may claim (input VAT) on the goods and services it received to provide the supplies it offers. In such cases, a deferral of VAT can be applied if a taxable person is directly and not insignificantly affected by the coronavirus crisis (see section 2.).

Even if one is not directly or not significantly affected by the coronavirus crisis, one should consider deferring quarterly preliminary VAT returns and, as a result, VAT pre-payments for one month by a permanent extension (Dauerfristverlängerung). This must be requested at the local tax office, unless already applied.

If a taxable person has applied for a permanent filing extension for monthly VAT returns (Dauerfristverlängerung), it is required to make a VAT special pre-payment (Umsatzsteuer-Sondervorauszahlung), which is determined on the basis of a proportion of the expected annual turnover. However, due to the coronavirus crisis, such a VAT special pre-payment may be reduced/reimbursed upon request by the taxable person if turnover is lower than expected. This can be combined with the more general deferral of payable VAT.

Reduce output VAT

Accounts receivables should be reviewed as regards their irrecoverability to obtain a reduction of output VAT.

Recover input VAT

Taxable persons may qualify for a VAT refund if the VAT it has to pay (output VAT) on the goods and services supplied by it do not exceed the VAT it may claim (input VAT) on the goods and supplies it received in order to provide its services. In such cases, one should consider filing preliminary VAT returns some time before the deadline. For instance, one should consider to do so, even if one has obtained an one-month deferral on a continuous basis (Dauerfristverlängerung).

Moreover, the following measures should be taken to accelerate input VAT:

• Booking processes regarding purchase invoices should be reviewed to ensure the earliest possible recovery of input VAT.
• The methods for determining the recoverability of input VAT (pro rata and direct allocations) should be reviewed to increase input VAT recovery.
• Input VAT claims abroad should be requested at the earliest possible opportunity.

Limit import VAT

A taxable person may ask for the setting-up of a deferment account (Aufschubkonto) with the customs authorities to avoid pre-payment of import VAT before input VAT has been refunded.

Request R&D tax credits

A R&D tax credit of up to € 500,000 for each year is available for personnel expenses and fees for subcontracting related to any research and development activity. In a loss-making situation, the R&D tax credit will be fully paid out. The R&D tax credit must be requested at the relevant authorities.