An unpopular and highly criticized German tax law, which limits the amount of losses investors are able to offset, has been repealed. The punitive tax measures, that were quietly passed through the country’s Bundestag during the 2020 Christmas holidays and came into effect in 2021, primarily affected traders of financial instruments that come under the forwards category, which includes contracts for difference (CFDs), but also options, futures and securities that have subsequently become worthless, such as shares in insolvent companies.
The controversial tax law limited the amount of losses that traders of these instruments were able to offset for tax purposes to just 20,000 euros per year. This made the trading of these instruments significantly less attractive because, under the law, a trader who breaks even over the fiscal year can still find his or herself significantly in the red when factoring in the country’s 25% tax on capital gains.
There have been traders who have opted to fight their individual cases out in court, which has led to the details of some of these cases coming to light. For instance, a private trader in Rhineland-Palatinate received a staggering €59,860.60 tax bill on profits of just €23,343. In other notable instances, six-figure tax bills have been incurred when the traders in question made no profits at all for the fiscal year.
Thus far, the only way for German traders to get around the draconian tax law has been by using a trading firm (GmbH) in order to conduct their trading activities, or by moving away from Germany altogether.
Back in 2022, Germany’s Federal Fiscal Court deemed the tax loss limit to be in contradiction with the “Basic Law.” Federal Finance Minister, Christian Lindner and Justice Minister Marco Buschmann of the FDP expressed their wishes to lift the tax law in 2022. Last year the country’s leading coalition reiterated this intention by formally committing to repealing the law.
Led by Germany’s Free Democratic Party (FDP), which was part of the traffic light coalition until November of this year, an addendum was added to this year’s annual tax law, approved by the Bundestag in October and passed through Germany’s Bundesrat at the end of November. According to Section 52, Paragraph 28 of the Annual Tax Act 2024: “the loss offset restriction for forward transactions and bad debts is no longer applicable in all open cases.”
“By ending the loss offset restriction, we are restoring tax fairness and putting an end to a possible unconstitutional tax practice,” Markus Herbrand, financial policy spokesman for the FDP, has been quoted as saying in the German press.
One of the most exciting aspects of this potential rule change, is that it is set to be retroactive back to 2020, meaning that traders who have been negatively affected by the law may be in for some substantial rebates.
While the retroactive nature of this tax law repeal is likely to lighten the hearts and bolster the accounts of many German traders, the change is being regarded as a broader return to strength for the entire German trading segment.
The introduction of the tax law back in 2020 led to a significant downturn in CFD trading volumes. According to Germany’s CFD association, CFD trading volumes fell by over 61% in Q4 2022 when compared to Q4 of 2021.
The repeal of this law is set to reinvigorate an industry that had its hands tied by the unfavourable treatment it has received up to now when compared to other leveraged instruments. The hit was also felt by trading businesses beyond Germany, as the country has historically been one of the largest CFD trading markets in continental Europe, and is second only to the UK in the broader European market.
German brokers, and other financial services firms that have a foothold in the country, are preparing for an upsurge in CFD trading demand. At Devexperts we are extremely encouraged by the news and are looking forward to supporting our German partners to prepare for a renewed period of growth.
This will involve ensuring that their respective trading infrastructures are ready to handle the increased loads that are likely to result from the repealing of this tax law. We are also excited to work with relative newcomers to the space, or with those who are looking to upgrade their systems since the law took effect. We regard the tax changes as a boon to the industry as a whole. That goes for traders, brokers, and technology providers alike.
This is a guest post by Jon Light, Head of OTC Platform at Devexperts
