Annual Tax Act 2024

Annual Tax Act 2024


The German Federal Ministry of Finance published its discussion draft of the Annual Tax Act 2024, which had been circulating for almost two months, as a draft bill on May 17, 2024 with the version dated May 8, 2024. The approximately 240-page document contains a number of substantive legal developments and amendments that are certainly important in practice, e.g. in the areas of income tax/wage tax, VAT, inheritance tax, real estate transfer tax and in the area of transformation tax law. In some cases, however, these are merely technical tax issues and necessary adjustments to EU law and the case law of the European Court of Justice and the German Federal Fiscal Court, which is why the financial impact is likely to be rather low.

A decision by the federal government on the draft of the Annual Tax Act 2024 is planned before the parliamentary summer break. However, deliberations in the German Parliament are not expected to begin until the fall, meaning that the legislative process will not be completed until the end of the year. Until then, numerous changes to the current draft are to be expected. Nevertheless, we would like to inform you about the main proposed amendments that have now become known in the following thematically structured explanations.
 

Adjustment of the Tax Exemption Regulation for Photovoltaic Systems

The amendment to Section 3 No. 72 of the German Income Tax Act increases the gross output permitted for the application of the tax exemption from 15 kW (peak) to 30 kW (peak) per residential or commercial unit according to the market master data register. The amendment also clarifies that

  • photovoltaic systems up to 30 kW (peak) per commercial unit are also eligible for buildings with several commercial units but without residential units and
  • the tax exemption is a tax-free limit and not an allowance.

The amendment is to be applied for the first time to photovoltaic systems that were acquired, commissioned or expanded after December 31, 2024.

Book Value Transfer between Partnerships with Identical Shareholdings

In response to the decision of the German Federal Constitutional Court on the book value transfer between partnerships with identical shareholdings of November 28, 2023, BvL 8/13, a new no. 4 is added to Section 6 (5) sentence 3 of the German Income Tax Act. This stipulates a continuation of the book value if an asset is transferred “free of charge between the joint assets of different partnerships of the same, identically participating co-entrepreneurs”. This eliminates the unconstitutional unequal treatment in that such transfers were previously not covered by the wording of the law. The regulation is to be applied in all open cases. However, in order to protect legitimate expectations, the new regulation may not be applied to transfers before January 12, 2024 (= date of publication of the ruling of the German Federal Constitutional Court) if the co-entrepreneurs involved in both co-entrepreneurships jointly apply for this.

Addition of a Group Clause in Section 19a of the German Income Tax Act

The scope of application of the tax concession in Section 19a of the German Income Tax Act (downstream taxation in the event of the preferential granting of a shareholding) is extended to the transfer of shares in group companies. However, in order to prevent this group clause from indirectly benefiting employees of large stock corporations, the group as a whole must also comply with the thresholds of Section 19a (3) of the German Income Tax Act. In addition, none of the group companies may have been founded more than twenty years ago.

Flat-Rate Taxation for so-called Mobility Budgets

In special cases, the employer can levy income tax at a flat rate of 25 % (Section 40 (2) of the German Income Tax Act). This should also be possible via a new no. 8 if the employee is granted benefits from a so-called mobility budget up to a maximum annual amount of EUR 2,400 in addition to the wages already owed.

A mobility budget in this sense is the offer made to the employee to use off-duty mobility services such as e-scooters, the occasional use of car-sharing, bike-sharing and other sharing offers and travel services, regardless of the means of transport, in the form of a non-cash benefit or subsidy; aircraft, private motor vehicles and motor vehicles permanently provided to the employee, including company motor vehicles, are excluded. Overall, the focus is on the short-term, occasional and needs-based provision of various forms of mobility. Therefore, the possibility of permanent and not just occasional use of motor vehicles (e.g. long-term rental, leasing or subscription models) is excluded from the scope of the regulation. It is irrelevant whether the employer provides the mobility services himself or through a third party at his instigation.

Unauthorized Tax Statement for Credit Notes

According to the new regulation in Section 14c (2) sentence 2 No. 2 of the German VAT Act, a person is also liable for incorrectly reported VAT if the tax is shown in a credit note. This closes a loophole that has arisen in case law.

Input Tax Apportionment

The new wording in Section 15 (4) of the German VAT Act clarifies that in the case of input VAT apportionment, non-deductible input VAT can only be calculated using the total turnover key if this is the only possible apportionment method. It is therefore subordinate to other, more precise (and appropriate) apportionment methods.

Revision of the Taxation of Small Businesses

The new regulation serves to implement Directive (EU) 2020/285, which must be implemented by December 31, 2024.

Previously, only entrepreneurs based in Germany were able to make use of the small business regulation of Section 19 of the German VAT Act in Germany. The newly structured regulation now also allows entrepreneurs based in the rest of the European Union to do so. The prerequisite for tax exemption is that the total domestic turnover in the previous calendar year did not exceed EUR 25,000 (previously: EUR 22,000) and does not exceed EUR 100,000 (previously: EUR 50,000) in the current calendar year. A special notification procedure will be introduced, which is the responsibility of the Federal Central Tax Office, so that entrepreneurs based in Germany can claim the exemption in another member state.

Extension of Transition Period for Public Corporations

The transitional period for the mandatory application of the new regulation on the taxation of public sector sales (Section 2b of the German VAT Act), which was due to end on December 31, 2020, will be extended by two further years up to and including December 31, 2026 (Section 27 (22a) of the German VAT Act).

Exemption for Properties Rented out for Residential Purposes Worldwide

In its ruling of October 12, 2023, the ECJ found in case C-670/21 (BA) that the tax exemption for properties let for residential purposes pursuant to Section 13c of the German Inheritance Tax Act 2009 (now Section 13d of the German Inheritance Tax Act), insofar as properties in third countries are excluded from this benefit, is fundamentally in breach of the free movement of capital. With the new regulation in Section 13d (3) No. 2 of the German Inheritance Tax Act, the exemption discount can in future not only be granted if the property is located in Germany or in an EU member state if the other requirements are met. It can also be used if the property is located in a third country and an exchange of information with this third country is ensured with regard to inheritance tax.

Extension of Deferral pursuant to Section 28 (3) of the German Inheritance Tax Act

The previous regulation to defer inheritance tax/gift tax on application for up to ten years if the acquirer can only pay the tax by selling the assets only covered properties that meet the requirements of Section 13d (3) of the German Inheritance Tax Act at the time of acquisition, i.e. that are rented out for third-party residential purposes or, in the case of single-family houses, two-family houses and condominiums, are used for own residential purposes after acquisition. The amendments to Section 28 (3) of the German Inheritance Tax Act extend the deferral rule to all cases in which property is used for residential purposes. In particular, the new deferral regulation now also covers cases in which the property used by the testator or donor is rented out for residential purposes after the inheritance or gift.

In connection with the tightening of the real estate transfer tax regulations, the problem of the attribution of real estate with regard to the realization of the supplementary facts subject to real estate transfer tax (Section 1 (2a) to (3a) of the German Real Estate Transfer Tax Act), which is significant in practice, arose. Both the German Federal Fiscal Court and the tax authorities had taken a position on the issue of the “ownership” of a property that was ultimately detrimental to taxpayers. According to the insertion of Section 1 (4a) of the German Real Estate Transfer Tax Act provided for in the draft bill, a property should be part of the assets of a company within the meaning of Section 1 (2a) to (3a) of the German Real Estate Transfer Tax Act if the company has acquired it as a result of a transaction pursuant to Section 1 (1) of the German Real Estate Transfer Tax Act or if the company has the power of disposal pursuant to Section 1 (2) of the German Real Estate Transfer Tax Act. Contrary to case law and administrative opinion, this would avoid a renewed attribution of a property upon the realization of a transaction pursuant to Section 1 (3) or (3a) of the German Real Estate Transfer Tax Act and thus a double attribution of the same property.

Deadline for Closing Balance Sheet

According to a new paragraph 2a in Section 3 of the German Transformation Tax Act, the closing tax balance sheet is to be submitted electronically within 14 months of the transfer date for tax purposes; in this respect, Section 5b of the German Income Tax Act, which is relevant for the electronic submission of balance sheets, applies accordingly. The 14-month deadline is based on the deadline for submitting tax returns for advised taxpayers in accordance with Section 149 (3) of the German Fiscal Code.

Treatment of a Merger by the Shareholder

Shares in the transferring corporation are generally deemed to have been sold at fair market value in accordance with Section 13 (1) of the German Transformation Tax Act and shares in the acquiring corporation are deemed to have been acquired at this value. Section 13 (2) of the German Transformation Tax Act allows the recognition of the book value of the shares in the transferring corporation for the shares in the acquiring corporation under certain conditions (German right of taxation or EU merger) if the shareholder submits a corresponding application.

With the new regulation in Section 13 (2) of the German Transformation Tax Act, the book value approach becomes the new rule. This is because it requires the shares in the acquiring corporation to be recognized at the book value of the shares in the transferring corporation if the previous application requirements are met and the taxpayer does not apply for recognition of the fair market value in accordance with Section 13 (1) of the German Transformation Tax Act. Recognition at fair market value in accordance with Section 13 (1) of the German Transformation Tax Act will now only take place upon application or if the requirements of Section 13 (2) of the German Transformation Tax Act are not met. In addition, a deadline has been introduced for the application for recognition of the fair market value in accordance with Section 13 (1) of the German Transformation Tax Act. Accordingly, the application is generally possible until the expiry of the deadline for submitting the tax return for the calendar year of the conversion; however, the application must be submitted at the latest when the tax return is submitted and is irrevocable.

Trade Tax Burden for Indirect Transfers

To date, the gain on the sale or discontinuation of the business of a partnership into which a corporation was merged or which was created from a corporation through a change of legal form has been subject to trade tax (Section 18 (3) of the German Transformation Tax Act). It is disputed whether the regulation also applies if the shares in the acquiring partnership were sold indirectly. To close this loophole, a gain on disposal or abandonment will also be subject to trade tax in the future if a share in a partnership that mediates the participation in the acquiring partnership is sold or abandoned by a natural person and if this gain on disposal or abandonment is attributable to the share in the acquiring partnership.

Legislative Amendment Correcting the Law on Withdrawals in the Retroactive Period

In accordance with the existing administrative interpretation of Section 20 (2) of the German Transformation Tax Act in conjunction with Section 20 (5) of the German Transformation Tax Act, the law stipulates that withdrawals and contributions in the retroactive period must be taken into account when determining the transferred business assets. This means that it is not possible to recognize the book value of the contributed business assets if negative acquisition costs would result if withdrawals and contributions were taken into account in the retroactive period; the book values of the contributed assets must then be increased. The new regulation is to be applied for the first time to contributions for which the transformation resolution or the contribution agreement was passed or concluded after December 31, 2023. The intended amendment to the law contradicts the ruling of the German Federal Fiscal Court dated March 7, 2018, I R 12/16.

Taxation of the Contribution Gain II

Section 22 (2) sentence 5 of the German Transformation Tax Act clarifies that the contribution gain II is only not taxed if the hidden reserves are disclosed.