The German cabinet approved the government's draft bill to strengthen growth opportunities, investment, and innovation, as well as tax simplification and tax fairness (Growth Opportunities Act), on August 30, 2023. The bill, which provides for numerous tax changes, aims to strengthen Germany's competitiveness as a business location, increase growth opportunities for the economy, and enable investment and innovation in new technologies. Tax-tightening measures to counteract this are also planned.
SIGNIFICANT TAX CHANGES
Introduction of Climate Protection Investment Premium Act, an investment subsidy to promote climate protection: Initial and subsequent acquisition and production costs of depreciable tangible assets are eligible for this investment subsidy if they serve climate protection. The assets must be included in a savings concept, improve operational energy efficiency, and be used (almost) exclusively for operational purposes within a domestic permanent establishment. The investment must be made after December 31, 2023, or the promulgation of the law, and completed before January 1, 2030. The maximum subsidy amounts to 15% of the maximum eligible assessment basis of €200 million and is to be deducted from the acquisition costs in a tax-neutral manner. It is capped at €30 million.
Improvement of tax depreciation: The plan is to (1) increase the German Anti-Money Laundering Act small items amount from €800 to €1,000, (2) increase the maximum collective item amount from €1,000 to €5,000, (3) increase the special depreciation rate from 20% to 50%, and (4) temporarily reintroduce the declining balance depreciation (Sections 6 (2), (2a) EStG-E, and 7g (5) EStG-E).
Changes to retention allowance: The retention allowance in Section 34a EStG is to be simplified and improved for taxpayers by, among other things, increasing the profit eligible for the allowance. In the future, this is to include trade tax paid as well as amounts withdrawn for the payment of income tax pursuant to Section 34a EStG para. 1 EStG. In addition, the first-time application shall no longer be subject to a time limit and shall be possible as long as the tax assessment can still be amended.
Tightening of interest barrier regulation (Section 4h EStG-E): For the purposes of the exemption regulation (threshold of €3 million), “similar businesses that are under uniform management” or are jointly controlled by a person or group of persons will also be considered as one business as of the 2024 tax year. The standalone clause will be changed, i.e., in the future, it will no longer be based on the group affiliation. Instead, an escape is to be possible if the taxpayer is not related to a person as defined in Section 1 (2) AStG and also does not have a permanent establishment outside its country of legal seat or the country of its place of management.
Furthermore, the definition of interest expenses (and correspondingly of interest income) will be expanded and in the future will also refer to “economically equivalent expenses” in connection with the procurement of debt capital as defined in the “ATAD Directive” (EU 2016/1164). In addition, an interest or EBITDA carryforward shall in the future also forfeit on a pro rata basis in the event of the transfer or discontinuation of a business unit (or the withdrawal from a fiscal unity). A new feature is an exemption for interest expenses incurred on loans to finance “long-term public infrastructure projects” if these loans originate from public budgets, the assets created with them are located within the European Union, and the income from the infrastructure project is subject to taxation in an EU member state.
Introduction of further restriction on deductibility of interest expenses in form of interest rate cap (Section 4l EStG-E): In the future, interest on loans between related parties within the meaning of Section 1 (2) of the German Foreign Tax Act (AStG) will generally only be tax deductible up to the maximum rate in the form of the prime rate (Basiszinssatz) pursuant to Section 247 of the German Civil Code (BGB) increased by two percentage points. An exception to this is possible if the taxpayer proves that, all other things being equal, both the creditor and the ultimate parent company could only have received the debt financing at a higher interest rate. The interest rate cap does not apply if (1) the creditor carries out a substantial economic activity in the country of domicile or management (whereby the provisions of Section 8 (2) AStG shall apply mutatis mutandis) and (2) this country is obliged under intergovernmental agreements to provide administrative assistance to the Federal Republic of Germany upon request in accordance with the OECD standard for transparency and effective exchange of information.
(Temporary) improvements in loss offsetting (Sections 10d (1), (2) EStG-E): The increased maximum amounts for loss carryback in 2020 (€10 million or €20 million in the case of joint assessment) are to be retained permanently, and loss carryback is to be possible in future for up to three assessment periods back. In contrast to the government draft, the minimum taxation for loss carryforwards will be maintained, but the loss offset rate will temporarily increase from 60% to 80% of the total amount of income for the tax years 2024 to 2027 inclusive.
Extension of limited tax liability for employment: The scope of the limited tax liability for income from employment in the country in which the work is carried out is to be extended and will in the future also apply if the work is carried out in the country of residence, but a double taxation agreement or other bilateral agreement nevertheless assigns the right of taxation to the country in which the work is carried out. A corresponding agreement was recently concluded between Germany and Luxembourg.
No tax neutrality in demerger cases in preparation of disposal: The abuse avoidance provision in Section 15 (2) of the German Reorganization Tax Act (UmwStG) is supplemented—as a response to the case law of the BFH on Section 15 (2) sentence 3 UmwStG (ruling of August 11, 2021 – I R 39/18)—to include the facts of preparation of a disposal. In the future, this will be irrefutably presumed if shares in the transferee or transferor with a value of more than 20% of the transferring company are sold to persons who have not continuously held a share in the transferor within the last five years prior to the demerger (so-called outside persons). In addition, in line with previous administrative practice, it is to be stipulated by law for the first time that indirect subsequent disposals are also detrimental. The provision shall already apply to demergers which have become effective after July 14, 2023 by entry in the relevant register.
Obligation to notify domestic tax arrangements (Sec. 138l–n AO-E): An obligation to notify certain domestic tax arrangements is introduced. This notification obligation is based on the existing methodology for the notification of cross-border tax arrangements. Its commencement is to be determined by the Federal Ministry of Finance and is to take place no later than December 31 of the fourth year following the calendar year in which the Growth Opportunities Act enters into force.
Real estate transfer tax clawback periods are not affected by the MoPeG: According to Section 23 para. 25 of the draft bill, the introduction of the Act on the Modernisation of Partnership Law (MoPeG) as of January 1, 2024 and the associated statutory deletion of the “Gesamthand” shall not trigger any violation of existing clawback periods for real estate transfer tax pursuant to Section 5 (3) sentence 1, Section 6 (3) sentence 2, Section 7 (3) sentence 1, and Section 19 (2) No. 4 GrEStG. In this respect, for the purposes of these privilege provisions in Sections 5, 6, and 7 GrEStG, the “assets of the joint ownership” are no longer to be taken into account in the future, but rather the “company assets” as defined by the MoPeG. Surprisingly, the explanatory memorandum to the Growth Opportunities Act indicates that the privilege provisions will no longer be applicable as of January 1, 2024 due to the implementation of the MoPeG. The prevailing opinion has so far assumed that this is precisely not the case—i.e., that the privilege provisions will continue to apply even after the MoPeG comes into force.
The legislative process is expected to be completed by the end of 2023. It remains to be seen whether further changes will be made to the bill in the course of parliamentary deliberations.