Fourth Corona Tax Relief Act: Bundestag abolishes discounting requirement for liabilities

While the amendment to the German Investment Code will affect rather a small group of users, the abolition of the discounting of liabilities for balance sheet tax purposes will have far-reaching effects for a larger number of taxpayers.

The abolition of the requirement to discount non-interest-bearing non-current liabilities is justified by the fact that this discounting is no longer necessary due to the current interest rate level. In view of current inflation and interest rate developments, however, this justification seems somewhat pretextual. Pragmatic considerations are likely to have been more relevant: In practice, there were some cases which – in particular in connection with non-interest-bearing emergency relief loans issued during the Corona pandemic – might result in a special tax burden.

Notwithstanding the stated goal of avoiding undesirable special tax burdens on recipients of Corona Emergency Relief Loans, the rule will apply to all taxpayers and to all liabilities.

In particular the planned application regulation will be interesting for all companies:

The new regulation is applicable for the first time for fiscal years ending after December 31, 2021.

Existing liabilities are now generally to be recognized at nominal value – taking into account the provisions of Art. 6 (1) No. 2 EStG (German Income Tax Act). To the extent there is a liability from previous years, this results in a reduction in profit in an amount equal to the discounting volume still existing at the end of the last fiscal year.

Under the transitional provision, the discounting requirement may also be waived for fiscal years prior to the new provision’s effective date if an informal application is submitted for this purpose.

However, this is only possible to the extent the tax assessment notices concerned have not yet become final. This opens up the possibility that interest-free liabilities incurred in connection with the Corona pandemic in 2020 and 2021 can be recognized without discounting. The application can only be filed uniformly for all affected fiscal years. It can also be exercised through corresponding recognition in the determination of income for tax purposes.

The new regulation saves companies compliance effort which might be of better use elsewhere.

If, in the past, companies have overlooked the payment of interest on long-term liabilities, the retroactive application of the regulation, subject to application, can eliminate a “Sword of Damocles” for earlier years, provided the corresponding tax assessment notices have not yet become final.

When considering the new regulation, it should not be overlooked that companies will lose a tax structuring instrument. Previously, it was possible to improve taxable income by deliberately entering into long-term, non-interest-bearing liabilities and thus discounting the liabilities to income. This instrument was useful, for example, to avoid a tax loss in a given year and to reduce taxable income with the corresponding compounding in the year of maturity.