Fiscal Measures of the German Government in Light of the COVID-19 Pandemic

On March 13, 2020, the German government announced that it will launch a set of measures to take action against the economic impacts of the COVID-19 crisis.

The so called “protective shield for employees and companies” encompasses actions in three areas which are being implemented into German law in an accelerated procedure:

• Reduced Working Hours (Short-time Work) Compensation Benefits.To mitigate the impact of a temporary disruption in order flows, German labor law provides for the possibility to introduce short-time work (Kurzarbeit). This means that the working hours of employees and, correspondingly, the wages owed by the employers, are reduced based on collective labor agreements or with the employee’s consent.To mitigate the financial impact for employees, the Federal Employment Agency pays compensation amounts (typically 60 percent of the net shortfall, or 67 percent, if the employee is under an obligation to support dependents) to the employers who have to pay these amounts to their employees.Prior to the implementation of these changes, compensation was only due if at least one third of the employees in a company had to work reduced hours and a reduction of hours could not be avoided by building up negative balances in the working hours account.The instrument of reduced working hours had proven suitable to address the challenges of the financial crisis 2008.
  
  The compensation is now already payable if at least 10 percent of the employees work reduced hours;  the requirement to build up negative balance in working hours has been waived.  The compensation will also be available for temporary/agency workers.  The Federal Employment Agency will now also fully pay social security contributions on the compensation payments.  Once the respective guidelines have been issued by the Ministry of Employment, the changes are announced to enter into force (retroactively) with effect on March 1, 2020.
• Tax-related Liquidity Assistance.To improve the liquidity situation of companies, the German Ministry of Finance has instructed the tax authorities to make generous use of existing rules that allow to defer tax payments or reduce prepayments.For example, tax authorities shall grant tax deferrals if the tax collection would lead to a significant hardship for companies affected by the economic impact of the COVID-19 crisis.Tax prepayments should be reduced as soon as it becomes clear that the income or turnover will be lower than in previous years. Eventually, enforcement measures and late-payment fees will be waived until December 31, 2020 if the taxpayer is directly affected by the COVID-19 crisis.
• Loan and Guarantee Program.Existing liquidity programs of Germany’s development bank, the Kreditanstalt für Wiederaufbau (KfW) will be expanded to provide easy access to loans for affected companies.According to an announcement of the German federal government, no volume limits will be applicable. The current German federal budget provides for a guarantee framework of up to EUR 460bn, which can be increased to EUR 553bn.
  
  Domestic and non-domestic businesses with a group-turnover of up to EUR 5bn can now apply for loans under one of KfW’s various loan programs.[1]  In addition, KfW will bear a higher portion of the default risk for loans extended under its various programs (up to 80 percent default risk for loans not exceeding EUR 200m), and interest rates may be reduced.  It is expected that the first loans under the new rules can be extended within the next two or three weeks.
  
  Restrictions for public guarantees are also loosened:  Guarantee banks (Bürgschaftsbanken) will be allowed to decide themselves (i.e., without public approval) on guarantees of up to EUR 250k within three days.  The maximum guarantee amount will be doubled to EUR 2.5m.  The program for large guarantees (Großbürgschaftsprogramm) of the German federal government and the German states, which was previously limited to companies in structurally weak regions, will be opened to companies in all regions.  The program enables the collateralization of loans and investments exceeding EUR 50m.  However, the funds available for the German Federal Export Credit Guarantees (Hermes covers – Hermesbürgschaften) will remain unchanged.
  
  In addition, the German federal government and several German states may launch further special loan programs for companies that temporarily experience serious financial difficulties because of the pandemic.  However, the details of such programs are not yet available.

• Other.In addition to the above, recent debates focus on two further potential measures:
  • a reduction of the VAT rate (currently 19 respectively 7 percent), even if only limited to certain sectors, such as hotels or gastronomy;
  • an early termination of the solidarity surcharge (Solidaritätszuschlag) which currently accrues at a rate of 5.5 percent of the income tax.  Under current law, the solidarity surcharge will be terminated at the beginning of 2021 for 90 percent of the German taxpayers.  Please note that the solidarity surcharge will remain in force for all corporations and any individuals with an annual income of more than EUR 62k or EUR 123.5k for couples filing a joint return.