On February 21, 2024, the Mediation Committee of the German Federal Parliament and the German Federal Council proposed amendments to the controversial “Act to Strengthen Growth Opportunities, Investment and Innovation as well as Tax Simplification and Fairness” (Growth Opportunities Act), which the German Federal Parliament passed in its session on February 23, 2024. However, for the act to enter into force, it must also be approved by the German Federal Council at its next session on March 22, 2024. We present the most important tax policy measures - which fall far short of the original tax policy plans with this act - below.
Improvement of the Tax Loss Carryover
Under current law, the loss carryforward for each loss carryforward year is only possible without limitation up to a base amount of EUR 1 million (or EUR 2 million for married couples assessed jointly). For the part exceeding these amounts, the loss carryforward is limited to 60 % of the total amount of income in the loss carryforward year (so-called minimum profit taxation). The percentage limit is to be temporarily increased to 70% for the assessment periods 2024 to 2027. However, this regulation is only to apply to income and corporation tax and not to trade tax. The changes to the loss carryback still envisaged in the previous legislative process have been canceled.
Improved Depreciation Options
The reintroduction of declining-balance depreciation is to apply instead of straight-line depreciation for movable fixed assets acquired or produced after March 31, 2024 and before January 1, 2025. It shall be possible to apply the declining-balance method of depreciation according to a fixed percentage of the respective book value (residual value); the percentage to be applied shall not exceed twice (previous legislative process: two and a half times) the percentage considered for straight-line depreciation and shall not exceed 20 % (previous legislative process: 25 %). With regard to special depreciation in accordance with § 7g (5) of the German Income Tax Act, it is planned to increase this from the previous 20 % to 40 % (previous legislative process: 50 %). The consideration of these effects in terms of amount is to be applied for the first time to assets that are acquired or produced after December 31, 2023.
Due to the current lack of residential space and the ongoing economic burdens caused by high construction costs, it is proposed that, in order to promote residential construction and support the construction industry, all residential buildings located in an EU member state whose construction is commenced after September 30, 2023 and before October 1, 2029 may be depreciated on a declining-balance basis for a limited period of time. Depreciation in decreasing annual amounts should be possible according to an unchangeable percentage of 5 %, and no longer 6 % of the respective book value (residual value) as provided for in the previous legislative process.
The upper limit for construction costs as part of the special depreciation for the construction of new rental apartments in accordance with § 7b of the German Income Tax Act is to be increased from EUR 4,800 to EUR 5,200 per square meter of living space. The temporal scope of the special depreciation allowance is also to be extended to apartments for which the building application or building notification is submitted either from September 1, 2018 to December 31, 2021 or from January 1, 2023 to September 30, 2029 (previously: December 31, 2026). The assessment basis for the special depreciation is a maximum of EUR 4,000 (previously: EUR 2,500) per square meter of living space.
The changes to the immediate depreciation of a low-value asset and to the depreciation as part of a collective item, which were still planned in the previous legislative process, have been canceled.
Reform of the Reinvestment Preferential Tax Treatment (Thesaurierungsbegünstigung) and the Option for Corporate Income Taxation
In the case of the reinvestment preferential tax treatment pursuant to § 34a of the German Income Tax Act, the profit eligible for preferential treatment is to be increased by the trade tax paid and the amounts withdrawn for the payment of income tax. Thus, a higher reinvestment volume will be available in the future. In addition, the requirements for subsequent taxation are specified and the scope of application is extended in certain cases of gratuitous transfer of a business. The new rules on the reinvestment preferential tax treatment are to be applied for the first time for the 2024 assessment period.
With regard to the option for corporate income taxation pursuant to § 1a of the German Corporate Income Tax Act, measures are planned to boost the appeal of this regulation. For example, in the future, newly established companies are to be given the option to be able to opt for corporate income taxation from the outset. For this purpose, it will be sufficient if the application is submitted by the end of one month after the company agreement has been concluded. The adjustments regarding the option for corporate income taxation are to come into force after the day the law is promulgated.
Private Use of Electric Vehicles
In the case of private use of a company vehicle that has no CO2 emissions (purely electric vehicles incl. fuel cell vehicles), only a quarter of the gross list price is to be recognized under the so-called 1 % rule or only a quarter of the acquisition costs or comparable expenses under the so-called logbook rule. However, this has so far only applied if the gross list price of the vehicle does not exceed EUR 60,000. Against the background of increased acquisition costs of such vehicles, the maximum amount for electric vehicles acquired after January 1, 2024 is to be increased to EUR 70,000.
The legal regulation on the mandatory use of electronic invoices between domestic companies (eInvoice) is to be introduced on January 1, 2025. However, transitional regulations are planned. According to these, entrepreneurs will generally be able to switch to invoice formats other than electronic invoices until December 31, 2026. For entrepreneurs whose total turnover pursuant to § 19 (3) of the German VAT Act did not exceed EUR 800,000 in the previous calendar year, the transitional regulation will be extended to December 31, 2027.
Other Bureaucratic Simplifications
The lump sum for professional drivers who spend the night in the vehicle is to rise from EUR 8 to EUR 9. In future, profits from private sales transactions are also to remain tax-free if the total profit generated from these transactions in the calendar year was less than EUR 1,000; up to now, an exemption limit of EUR 600 applies in this regard.
Furthermore, the thresholds for the accounting obligation of certain taxable sole traders are to be raised. In the future, it will be possible to switch from commercial accounting with preparation of annual financial statements (and corresponding determination of taxable profit) to determination of profit by means of a cash-based accounting with simplified accounting for sales of up to EUR 800,000 and annual net profit of up to EUR 80,000. This is to be applied for sales of calendar years starting after December 31, 2023.
Likewise, the thresholds for VAT actual taxation (possibility of calculating the tax according to received instead of agreed consideration) will be raised from the previous EUR 600,000 to EUR 800,000 from January 1, 2024, and for exemption from filing quarterly advance VAT returns from EUR 1,000 to EUR 2,000 from January 1, 2025. In addition, so-called small entrepreneurs are to be generally exempted from submitting VAT returns for the calendar year for the first time for the taxation period 2024. The conditions for the application of the so-called small business regulation are then to be monitored independently by the entrepreneur and are to be checked on the basis of the information in other tax returns - in particular the cash-based accounting.
The planned increases of the exemption limit for gifts from currently EUR 35 to EUR 50, the lump sums for additional expenses in the context of an external professional activity from currently EUR 28 or EUR 14 to EUR 32 or EUR 16 and the tax-free allowance for company events from currently EUR 110 to EUR 150 were rejected. The introduction of a statutory exemption limit for income from rent and leasing is also no longer being pursued.
Amendment of the German Reorganization Tax Act
A significant tightening is envisaged for all spin-offs declared as of July 18, 2023 (= day after publication of the ministerial draft on July 17, 2023). According to this, a book or interim valuation is to be excluded for a spin-off if this prepares a subsequent sale of more than 20 % of the shares within five years or a sale to outside persons is completed.
Purely intercompany restructurings, such as the transfer of shareholdings within the concern in connection with the spin-off or following it, were not privileged in the ministerial draft. The German Federal Cabinet has already taken up the criticism frequently expressed in this regard in its government draft. Accordingly, such transactions should no longer constitute a detrimental event leading to the failure of a book or interim valuation. However, if the affiliated company subsequently sells the shares to an external party, this transaction must be subject to the above assessment criteria.
Strengthening Tax Incentives for the Promotion of Research
Funding under the Research Grants Act (Forschungszulagengesetz) has so far only been granted in respect of the wages of employees working on the research and development project, which are subject to wage tax deduction, the own contribution of a sole proprietor in the amount of EUR 40 per working hour for a maximum of 40 working hours per week, and pro rata (60 %) in respect of the remuneration for contract research.
In the future, the part of the acquisition and production costs of a depreciable movable asset of the fixed assets shall, under certain conditions, also be part of the eligible expenses of a business year starting after December 31, 2023. Furthermore, the amount of an individual entrepreneur’s own contribution is to be adjusted to EUR 60 per working hour.
The assessment basis shall be the eligible expenses of the beneficiary incurred in the business year. However, it amounts to a maximum of EUR 2 million for eligible expenses incurred after January 1, 2020 and before July 1, 2020, EUR 4 million for eligible expenses incurred after June 30, 2020 and before January 1, 2024, and EUR 10 million for eligible expenses incurred after December 31, 2023 and no longer EUR 12 million as provided for in the previous legislative process.
The research allowance amounts to 25 % of the assessment basis for all eligible persons. Small or medium-sized enterprises as defined by the SME definition of the General Block Exemption Regulation may additionally apply for an increase of the research allowance by 10 percentage points.
The regulations for the introduction of a so-called Climate Protection Investment Premium Act and the much-criticized notification requirements for domestic tax arrangements provided for in the previous legislative process were removed by the Mediation Committee.
The necessary so-called MoPeG-amendments, in particular to the Real Estate Transfer Tax Act and the reform of the interest barrier provided for under EU law, were already adopted in December 2023 as part of the so-called Secondary Credit Market Promotion Act.