Growth Opportunities Act

The government draft published on August 30, 2023 for a “law to strengthen growth opportunities, investment and innovation as well as tax simplification and tax equity” aims to address the challenges of the economic consequences of the Corona pandemic, the Russian war of aggression on Ukraine, decarbonisation and demographic change. To this end, a total of around fifty fiscal policy measures are proposed, of which we present the most significant.

Introduction of an Investment Incentive

The newly created Climate Protection Investment Incentive Act (Klimaschutz-Investitionsprämiengesetz) provides for the introduction of an investment incentive for companies subject to income and corporate tax in the incentive period from January 1, 2024 or at the earliest from the day following the promulgation of the law until, in principle, December 31, 2029.

The acquisition or production of a new depreciable movable asset of fixed assets as well as measures on an existing movable asset of fixed assets that lead to subsequent acquisition or production costs are eligible, if the asset is included in a savings concept and improves the energy efficiency of the eligible enterprise.

The investment incentive can only be claimed if the eligible expenses amount to at least EUR 5,000. The basis of assessment for the investment incentive is the sum of the eligible expenses, which may amount to a maximum of EUR 200 million in the incentive period. The investment incentive then amounts to 15 % of this assessment basis, i.e. a maximum of EUR 30 million in the funding period, and is only granted upon application by the eligible enterprise if the assessment basis is at least EUR 10,000.

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 12 million for eligible expenses incurred after December 31, 2023.

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.

Improvement of the Tax Loss Carryover

Pursuant to the Fourth Corona Tax Relief Act of June 19, 2022, the loss carryback period, which was extended to two years, will be extended by an additional year to three years. Furthermore, the maximum loss carryback amounts, which have been increased to EUR 10 million from the 2020 assessment period onwards, or to EUR 20 million for married couples assessed jointly, will be permanently maintained. This regulation will take effect as of January 1, 2024.

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 of the loss carryforward year (so-called minimum profit taxation).

The temporary suspension of minimum profit taxation still envisaged in the ministerial draft for the assessment periods 2024 to 2027 was scrapped in the government draft, as well as the planned increase in the base amounts from the previous EUR 1 million to EUR 10 million and from EUR 2 million to EUR 20 million for jointly assessed spouses from the assessment period 2028 onwards. The government draft now only provides for a temporary increase in the percentage amount from 60 % to 80 % for the assessment periods 2024 to 2027.

Improved Depreciation Options

There are plans to increase the amount for immediate depreciation of a low-value asset from the previous EUR 800 to EUR 1,000. The amount for depreciation within the framework of a compound item is to be increased from the previous EUR 1,000 to EUR 5,000. Furthermore, the compound item is no longer to be written off over five years, but rather only over three years; in the ministerial draft, a reduction to two years was still planned. With regard to the special depreciation pursuant to § 7g (5) of the German Income Tax Act, it is planned to increase the latter from the previous 20 % to 50 %. This impact in terms of the amount is to be taken into account for the first time for assets that are acquired or manufactured after December 31, 2023.

The reintroduction of declining-balance depreciation is to apply instead of straight-line depreciation for movable fixed assets acquired or produced after September 30, 2023 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 two and a half times the percentage considered for straight-line depreciation and shall not exceed 25 %.

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 6 % of the respective book value (residual value).

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 improvement in the sequence of use still envisaged in the ministerial draft by giving priority to the withdrawal of tax-exempt and rate-taxed profits that were left in the company after December 31, 2023 is not included in the government draft, likewise the consideration of the retention allowance in the advance payment procedure.

The new rules on the reinvestment preferential tax treatment are to be applied for the first time for the 2025 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.

Reform of the Interest Barrier and Introduction of an Interest Rate Cap

The regulations on the interest barrier are to be adapted to Directive (EU) 2016/1164 (Anti-Tax-Avoidance-Directive - ATAD) by December 31, 2023. The government draft no longer contains the abolition of the tax exemption rules such as the stand-alone clause and the equity escape that were still envisaged in the ministerial draft. In addition, there are no longer any plans to convert the exemption limit of EUR 3 million applicable under the interest barrier into an allowance.

In the future, the stand-alone clause will only be applicable if the taxpayer is not related to any person within the meaning of § 1 (2) of the German Foreign Tax Act and does not have a permanent establishment outside the country in which its domicile, habitual residence, registered office or management is located.

In addition, the implementation of an anti-fragmentation rule is intended to prevent arrangements in which several subsidiaries are specifically established in order to be able to claim the exemption limit of EUR 3 million for each of these subsidiaries as an independent business within the meaning of the interest barrier and thus more than once.

Moreover, profit shifting to low-taxed foreign countries is to be counteracted even more. For interest expenses due to a business relationship between related parties in the sense of § 1 (2) of the German Foreign Tax Act, a so-called interest rate cap is therefore to be introduced with the new § 4l of the German Income Tax Act. For this purpose, interest expenses shall not be deductible as of January 1, 2024 if they are based on an interest rate above the maximum rate. This maximum rate is the base interest rate increased by two percentage points pursuant to § 247 of the German Civil Code.

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 80,000.

Introduction of an Exemption Limit for Income from Rent and Leasing

In an effort to reduce the administrative burden, income from renting and leasing is to be tax-exempt as of January 1, 2024 pursuant to a new number 73 of § 3 of the German Income Tax Act if this income in the assessment period is less than EUR 1,000 (exemption limit). However, they remain taxable upon application if the expenses directly related to them exceed the income.

Other Bureaucratic Simplifications

The exemption limit for gifts, currently EUR 35, is to be increased to EUR 50 as of January 1, 2024. It is also planned to adjust the lump sums for additional expenses in the context of an external professional activity from currently EUR 28 and EUR 14 to EUR 30 and EUR 15. Furthermore, the tax-free allowance for company events is to be increased from currently EUR 110 to EUR 150 as of January 1, 2024. Profits from private sales transactions are also to remain tax-exempt in the future 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 and for exemption from filing quarterly advance VAT returns from EUR 1,000 to EUR 2,000. 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 2023. 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 statutory regulation on the mandatory use of electronic invoices between domestic companies (eInvoice) is to be introduced on January 1, 2025.

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 took on board the criticism that had been voiced in many quarters. According to the current draft, 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.

Measures to Achieve Fiscal Equality

The new §§ 138l to 138n of the German General Tax Code will introduce an obligation to notify certain domestic tax structures, which - as far as possible - shall closely follow the legal provisions on the obligation to notify cross-border tax structures pursuant to §§ 138d to 138h of the German General Tax Code. These regulations are to enter into force already after the day of the promulgation of the law. However, the German Federal Ministry of Finance is authorized to determine the specific first application date of the new notification obligations by means of a letter to be published in the Federal Law Gazette. Accordingly, a period of at least one year is to be provided between the date of the announcement of the application provision and the first application date in order to give all parties involved sufficient time to set up the IT infrastructure required for the application of the new notification obligations.

The German Federal Central Tax Office will set up a register of beneficiaries in which all tax-privileged beneficiaries are to be recorded. Based on this, a digital donation deduction procedure is to be implemented from 1 January 2024.