Annual Tax Act 2024 and Exemption of the Existence Minimum 2024

The German Federal Council passed both the Annual Tax Act 2024 and the Act on Tax Exemption of the Existence Minimum 2024 on November 22, 2024.

The Annual Tax Act 2024 contains a number of substantive legal developments and changes that are important in practice, for example in the areas of income tax, trade tax, VAT, inheritance tax, real estate transfer tax, real estate tax, as well as in the areas of transformation tax law, tax procedural law, tax procedural law, tax procedural law and foreign tax law, the most important of which we present below.

The Act on Tax Exemption of the Existence Minimum 2024 will increase the basic allowance integrated into the income tax rate by EUR 180 to EUR 11,784 and the child allowance by EUR 228 to EUR 6,612 retroactively as of January 1, 2024.
 

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 a uniform 30 kW (peak) per residential or commercial unit according to the market master data register. The amendment also clarifies that 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.

Extended Data Record of the e-Balance Sheet

The obligation to transmit the so-called e-balance sheet as regulated in Section 5b of the German Income Tax Act is to be extended in particular to include the uncompacted account statements, the statement of assets and the list of assets. In the event that there are notes to the financial statements, a management report, an audit report or a list in accordance with Section 5 (1) sentence 2 of the German Income Tax Act, these must also be submitted electronically in accordance with the officially prescribed data record. These additions are intended to reduce the need for the tax authorities to make further inquiries during the assessment process.

The obligation to submit uncompacted account statements applies to financial years beginning after December 31, 2024. The other new submission obligations are only applicable to financial years beginning after December 31, 2027.

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, Case No. 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 (e.g. if in an individual case the book value approach works to the disadvantage of the co-entrepreneurs).

Depreciation of Buildings

The regulation of Section 7a of the German Income Tax Act on the joint provisions for increased deductions and special depreciation is editorially adapted in paragraph 9 to the new Section 7 (5a) of the German Income Tax Act inserted by the Growth Opportunities Act. This clarifies that the further depreciation after the expiry of the relevant preferential period of a special depreciation (such as the special depreciation for the new construction of rental apartments according to Section 7b of the German Income Tax Act) can also be assessed according to Section 7 (5a) of the German Income Tax Act (residual value and the relevant percentage rate according to Section 7 (5a) of the German Income Tax Act). However, the taxpayer must have already depreciated the asset using the declining balance method in accordance with Section 7 (5a) of the German Income Tax Act before the end of the preferential depreciation period. The new regulation applies retroactively from the beginning of 2023.

Childcare Costs

Up to now, two-thirds of childcare costs, up to a maximum of EUR 4,000 per child, can be claimed as special expenses (Section 10 (1) No. 5 of the German Income Tax Act). From the 2025 tax year onwards, 80 % of the expenses will be deductible; the maximum amount will be increased to EUR 4,800.

Employee Ownership

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.

Abolition of Special Loss Offset Groups for Capital Income

The special loss offset groups for forward transactions and bad debt losses in accordance with Section 20 (6) sentences 5 and 6 of the German Income Tax Act have been repealed. This means that corresponding losses carried forward can be offset against all investment income without restriction in all open cases. The background to this change in the law can be found in the constitutional doubts regarding the special loss offset groups that the German Federal Fiscal Court expressed in its decision of June 7, 2024, Case No. VIII B 113/23.

Amendment of the Reporting Standard for Dividend Income to the FASTER Directive of the EU

Due to the Withholding Tax Relief Modernization Act of 2021 (AbzStEntModG of June 2, 2021), the procedures for withholding tax relief and tax deduction pursuant to Section 50a of the German Income Tax Act for foreign taxpayers were reduced, streamlined and digitized, a withholding tax database was set up and the liability for the issuers of withholding tax certificates was tightened. These changes are intended to prevent abuse and tax evasion associated with the withholding tax relief procedure.

For the issuers of tax certificates, the requirements of Section 45a (2) to (7) of the German Income Tax Act were supplemented with Section 45b of the German Income Tax Act. This reporting standard for capital gains in accordance with the AbzStEntModG has now been adapted by the JStG 2024 to the requirements of the FASTER Directive of the EU (Section 45b (2) to (7) EStG) in order to avoid overlapping reporting requirements. The FASTER Directive aims to create a common framework for the relief of excess withholding taxes on cross-border investments while reducing the risks of tax fraud in connection with dividend payments. As a result, a reporting standard now applies to all domestic and cross-border dividend payments, regardless of whether or not the dividend payment falls within the scope of the FASTER Directive in the individual case.

The reporting standard adapted to the FASTER Directive will apply to dividend payments received after December 31, 2026, and thus three years before the latest date of application provided for in the Directive. The application of the provisions of the AbzStEntModG, which was originally planned for capital gains accruing to the creditor after December 31, 2024, has thus been postponed by two years.

No so-called Mobility Budget

The introduction of a so-called mobility budget, which was still included in the government draft, has been dispensed with. Instead, the federal government is asked to develop proposals for comprehensive simplifications under tax and social security law for benefits in kind, as well as further standardization and flat-rate taxation of employee income.


Until 2024, the trade tax deduction pursuant to Section 9 No. 1 sentence 1 of the German Trade Tax Act is linked to the unit value; from 2025, the real estate tax reform requires the deduction of the real estate tax entered as an operating expense during the tax assessment period. In doing so, it is ensured that the reduction standard will continue to apply to all affected norm addressees throughout Germany in the future, due to different state models.

Changes in the Place of Performance of the Other Services

Cultural, artistic, scientific, educational, sporting, entertaining or similar services within the meaning of Section 3a (3) No. 3 of the German VAT Act, which are transmitted to a non-business recipient via streaming or made available virtually in some other way, are deemed to have been provided where the recipient is established, has his domicile or usual place of residence. The corresponding face-to-face services will continue to be provided at the place where they are actually provided by the entrepreneur.

If a business customer is granted virtual participation in a cultural, artistic, scientific, educational, sporting, entertaining or similar event within the meaning of Section 3a (3) No. 5 of the German VAT Act, the place of performance is deemed to be the place from which the recipient operates his business (Section 3a (2) of the German VAT Act). For face-to-face events, the venue continues to be decisive.

Both new regulations will apply from January 1, 2025.

Tax Exemption for Educational Services

The restriction of the tax exemption for educational services in accordance with Section 4 No. 21 of the German VAT Act, which was still provided for in the government draft and was clearly criticized by the German Federal Council, will be corrected to the effect that the services of public-sector institutions directly serving the purpose of education and training, which are entrusted with such tasks, private schools and other general or career-oriented educational institutions provide services that are exempt from VAT. To this end, a corresponding certificate from the competent state authority is required. In addition, school and university education provided by private teachers is also exempt from VAT. This ensures that the corresponding services that have been exempt from VAT so far remain exempt from VAT without change.

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 Deduction from the Invoice of a Person who is Liable for Tax on Income

Due to the revision of Section 15 (1) sentence 1 No. 1 of the German VAT Act, in the future, input tax deduction from the invoice of a tax on income taxpayer (Section 20 of the German VAT Act) is only possible if and to the extent that a payment has been made for the service performed.

In order for the recipient to be informed that the performing entrepreneur pays tax on his or her services after collection of the remuneration (actual taxpayer) and to be able to take this into account for the deduction of input tax, a new mandatory invoice detail “Taxation after collection of remuneration” is being introduced at the same time (Section 14 (4) sentence 1 No. 6a (new) of the German VAT Act).

The new regulations will come into force on January 1, 2028.

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.

The prerequisite for claiming the small business regulation is that the domestic total 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.

Until now, only entrepreneurs based in Germany were able to take advantage of the small business regulation of Section 19 of the German VAT Act. The newly drafted regulation now also allows entrepreneurs based in the other EU member states to do so. The requirement for tax exemption here is that the domestic total turnover does not exceed the above-mentioned limits and the annual turnover in the EU area does not exceed the EU-mandated limit of EUR 100,000 in both the previous and current financial year. Furthermore, the entrepreneur must be issued a valid identification number for small businesses by his or her country of residence.

In order for entrepreneurs based in Germany to be able to claim the exemption in another EU member state, a special notification procedure has been introduced, with the allocation of a small business identification number, which lies within the jurisdiction of the German Federal Central Tax Office.

It is also made clear that small businesses are not obliged to issue e-invoices, even beyond the statutory transitional provisions. They can therefore continue to issue these as other invoices on paper or in another electronic format. However, they must be able to receive e-invoices.

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) will be extended by two further years up to and including December 31, 2026 (Section 27 (22a) of the German VAT Act).

Increase of the Inheritance Tax Allowance

Previously, a lump sum of EUR 10,300 could be deducted without proof for income-related expenses associated with an inheritance, such as the testator’s funeral, costs for an appropriate gravestone, costs of grave maintenance, settlement, regulation and distribution of the estate, as well as costs of acquiring the estate. This lump sum will be increased to EUR 15,000.

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 as well as legal and administrative cooperation 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 and/or is located in a third country. For property located in a third country, the deferral is only granted if a corresponding exchange of information as well as legal and administrative cooperation with this third country is ensured with regard to inheritance/gift tax.

Rule on the Ownership of a Property

In connection with the tightening of the rules on real estate transfer tax, the issue of the attribution of real estate in relation to the realization of the additional facts that are subject to real estate transfer tax (Section 1 (2a) to (3a) of the German Real Estate Transfer Tax Act) has arisen, which is significant in practice. The Real Estate Transfer Tax Act does not yet contain any provisions on the attribution of real estate. According to case law and the tax authorities, double attribution of real estate and the associated double taxation of the acquisition process is possible.

After the insertion of a paragraph 4a in Section 1 of the German Real Estate Transfer Tax Act, a property is to be included in 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 on the basis of a transaction in accordance with Section 1 (1) of the German Real Estate Transfer Tax Act or the company holds the right of exploitation in accordance with Section 1 (2) of the German Real Estate Transfer Tax Act. The realization of an additional fact according to Section 1 (3) or (3a) of the German Real Estate Transfer Tax Act does not lead to a change in ownership, thus avoiding double attribution of the same property. The realization of an additional fact according to Section 1 (2a) or (2b) of the German Real Estate Transfer Tax Act does not already lead to a change in ownership.

Post-Retention Periods for Tax Breaks on Real Estate Transfer Tax

The tax privileges of Sections 5 and 6 of the German Real Estate Transfer Tax Act, which are aimed at the overall ownership, will continue to apply for an initial period until December 31, 2026 via Section 24 of the German Real Estate Transfer Tax Act since the Act to Modernize the Law on Partnerships (Gesetz zur Modernisierung des Personengesellschaftsrechts, MoPeG) came into force on January 1, 2024. A new paragraph 27 in Section 23 of the German Real Estate Transfer Tax Act stipulates that the post-retention periods to be observed for current and completed transfers by December 31, 2026, in accordance with Sections 5 and 6 of the German Real Estate Transfer Tax Act will not be violated thereafter simply because of the implementation of the MoPeG.

According to the newly added paragraph 2 in Section 220 of the German Real Estate Act, the lower fair market value is to be assessed as the real estate tax value if the taxpayer proves that the real estate tax value determined according to the relevant provisions differs significantly from the fair market value of the economic unit at the time of the assessment. This is to be assumed if the real estate tax value exceeds the proven fair market value by at least 40 %. An expert opinion from the responsible expert committee within the meaning of the German Federal Building Code or a certified expert can be regularly used as proof of the lower fair market value. Furthermore, a purchase price for the economic unit to be valued that has been agreed in the ordinary course of business within one year before or after the main valuation date can also serve as proof if the relevant circumstances for this remain unchanged compared to the circumstances at the main valuation date. Proof of individual valuation bases, e.g. a lower rent by means of a rental value report or a lower standard land value, is not sufficient.

The background to this legal amendment are two rulings of the German Federal Fiscal Court of May 27, 2024, Case No. II B 78/23 (AdV) and II B 79/23 (AdV), according to which taxpayers must have the option, in individual cases and under certain conditions, to prove that the value of their property is lower than the assessed property tax value, in accordance with a constitutional interpretation of the German Valuation Act.

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 no later than the expiry of the relevant deadline for filing the corporate income tax return for the tax period in which the tax transfer date falls, in contrast to the government draft. This ensures that the deadlines for submitting the closing balance sheet and the tax return are synchronized, even in the case of financial years that deviate from the calendar year and in the case of conversions during the year. In addition, it is expressly stipulated that the relevant Section 5b of the German Income Tax Act applies accordingly to the electronic transmission of balance sheets.

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.

The revision provided for in the government draft in Section 13 (2) of the German Transformation Tax Act, according to which the book value approach should become the norm if the relevant conditions are met, has been cancelled. Instead, an application for the recognition of the book value is still required, which must be submitted to the tax office responsible for the taxation of the shareholder at the latest by the first tax return.

Trade Tax Burden for Indirect Transfers

To date, the gain on the disposal or abandonment 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.

Expansion of the Catalog of Charitable Purposes

The support of residential charitable purposes is included in the catalog of charitable purposes in accordance with Section 52 of the German Tax Code. This is the discounted, selfless provision of living space by tax-privileged corporations to people in need. The rent for this must be set permanently below the market rent. Whether the rent is below the market rent only has to be checked at the beginning of the tenancy and when the rent is increased. It is also sufficient if the respective apartment is rented out at a rent that only covers the actual expenses, including the regular depreciation, and does not include any profit margin. Potential losses can be offset against other income from the non-material area.

Electronic Communication with the Tax Authorities

The preferred and proven electronic communication channel between taxpayers or their authorized representatives and the tax authorities is the ELSTER procedure or the ERiC interface. These are secure electronic procedures that authenticate the data transmitter and ensure the confidentiality and integrity of the data record.

Documents transmitted electronically in any other way – whether by unencrypted e-mail, by transmission with a qualified electronic signature or from a special lawyer’s or tax advisor’s mailbox to the special electronic authority mailbox – significantly impair the tax authorities’ proceedings. For this reason, these possible forms of transmission are expressly not permitted with the insertion of a corresponding legal wording in Section 87a (1) sentence 2 of the German Tax Code.

Evaded Tax Prepayments

Tax prepayments are not only payments for taxes that may arise at a later date, but are themselves to be qualified as tax liabilities. The evasion of tax prepayments can lie in incorrect information in both an application for a reduction of tax prepayments and in the tax return for the previous year.

Since the lower interest rate of 0.15 % per month for back-payment interest in accordance with Section 233a of the German Tax Code came into force, those evading advance payments have, in certain cases, inadvertently been put in a better position. The new paragraph 5 in Section 235 of the German Tax Code is intended to ensure that interest is consistently charged at 0.5 % per month on evaded advance payments. For this purpose, the end of the interest period for the evaded tax is explicitly stipulated; the various conceivable case constellations are explicitly regulated. No special regulation is required for cases in which the accrual of evasion interest on evaded advance payments ends before the end of the waiting period, since double interest cannot occur here. Double interest that arises in other cases is resolved by offsetting the interest on the additional payments against the evasion interest, so that the higher interest rate for tax evasion is applied.

The new regulation applies in all cases in which interest on evaded advance payments is assessed after the day following the promulgation of the law.

Transitional or non-Objection Provision regarding Section 1 (3d) of the German Foreign Tax Act for Old Contracts

With the Growth Opportunities Act, paragraph 3d was newly added to Section 1 of the German Foreign Tax Act. It further specifies the arm’s length principle with regard to cross-border financing relationships (ability to service the debt, economic need for the financing received for the purpose of the business and assessment of the interest rate) within a multinational group of companies, which is intended to counteract excessive deduction of interest expenses as business expenses. According to the application regulation of the Growth Opportunities Act, the standard is to be applied for the first time for the 2024 assessment period, which, however, constitutes a pseudo-retroactive effect and thus a disadvantage for old contracts.

According to Section 21 (1a) sentences 2 and 3 of the German Foreign Tax Act, Section 1 (3d) of the German Foreign Tax Act does not apply to expenses incurred by December 31, 2024, that are based on financing relationships that were agreed under civil law before January 1, 2024 and whose actual implementation began before that date. If such financing relationships are materially modified after December 31, 2023, and before January 1, 2025, Section 1 (3d) of the German Foreign Tax Act does not apply to expenses incurred before the material modification.

Reduction amount in accordance with Section 11 of the German Foreign Tax Act for a deviating financial year

To avoid double taxation, Section 21 (4) sentence 1 of the German Foreign Tax Act ensures, with retrospective effect, that even in cases in which a taxpayer in 2022 has received a profit distribution from an intermediate company with a different financial year (e.g. from July 1, 2021 to June 30, 2022), a reduction amount pursuant to Section 11 of the German Foreign Tax Act is applicable in the 2022 assessment period.