Growth Opportunity Act | Planned Changes to Interest Deduction Restrictions

Given the current legal situation, the exemption limit of EUR 3 million (§ 4h (2) sentence 1 letter a) EStG) can be claimed on an individual company basis, i.e. per company. In the future, the exemption limit is to be granted only once for similar entities that are under the uniform management of one person or group of persons or over whose management the same person or group of persons can directly or indirectly exercise a controlling influence. Consequently, in the future, the exemption limit is to be allocated to these same entities in proportion to their net interest expenses.

With regard to the term “similar”, the explanatory memorandum refers to the regulation on commercial operations of legal entities under public law pursuant to § 4 (6) sentence 1 no. 1 KStG. In accordance with the case law of the German Federal Fiscal Court, businesses of a commercial nature are not only similar if they have the same purpose, but also if the activities are different, but complement each other; a significant indication of this is when the range of one activity complements the other or customers from one area are occasionally passed on to the other area. Business entities are considered to have a single management if the same person or the same group of persons is entitled to manage the business in both entities or can enforce his or her will in both entities.

From now on, the group clause/stand-alone clause (§ 4h (2) sentence 1 letter b) EStG) shall no longer be based on a group affiliation on the basis of consolidation rules, but on possible dependency relationships. For the exception from the prohibition of deduction, the taxpayer must therefore not be related to any person within the meaning of § 1 (2) of the German Foreign Tax Act (AStG) and must not have a permanent establishment outside the country in which its domicile, habitual residence, registered office or management is located. The clarifying provision in § 8a (2) KStG concerning the application of the group clause for corporations will be deleted in the course of this amendment.

The equity capital escape (§ 4h (2) sentence 1 letter c) EStG) will essentially remain in place. However, when calculating the equity ratio, the increase in equity by half of special items with an equity portion is to be omitted.

Additionally, two changes are planned in the corresponding provision of § 8a (3) KStG. Subsequently, the full deduction of interest due to the application of the escape clause by means of an equity ratio comparison between the relevant business entity and its associated group is only possible if there is no harmful shareholder debt financing.

In view of the ATAD Directive, the relevant shareholding threshold (“at least” 25 % instead of “more than” 25 %) has been adjusted. On the other hand, the case law of the German Federal Fiscal Court is to be “corrected”. In its ruling of November 11, 2015 (Case No. I R 57/13), the German Federal Fiscal Court had decided that the remuneration for debt capital of the individual qualified shareholders is not to be cumulated when examining the 10 % limit regarding harmful shareholder debt financing, i.e. the 10 % limit is to be examined individually for each shareholder. Even though the ruling was published in the Federal Tax Gazette and in the Corporate Income Tax Notes on § 8a KStG and could thus far be applied in administrative practice beyond the scope of the individual case decided, in the future the aggregation is to be made binding by law, which means that the shareholder debt financing that is detrimental to the interest deduction will be reached much more quickly.

For the purposes of § 4h EStG, interest expenses currently include not only traditional interest, but also remuneration for borrowed capital in general. With reference to the requirements of the ATAD Directive, in future this will also include economically equivalent expenses and other expenses in connection with the procurement of borrowed capital. Correspondingly, the concept of interest income will be expanded to include economically equivalent income in connection with capital claims.

This is likely to involve extensive recalculations of deductible interest expense, but also disputes about what constitutes “economically equivalent” expenses or income.

For one thing, it is “clarified” that an EBITDA carryforward does not arise in fiscal years in which interest expenses exceed interest income. For another, the exemption limit, the anti-fragmentation rule, the group clause/stand-alone clause and the equity escape are not to apply in the future to the extent that interest expenses were increased due to an interest carryforward.

In analogy to the complete loss of an unused EBITDA or interest carryforward in the event of the discontinuation or transfer of an operation, an unused interest or EBITDA carryforward in the event of the discontinuation or transfer of a partial operation is also to be lost on a pro rata basis in the future. Thus, in the future, a possible loss of EBITDA or interest carryforward is also to be taken into account in decisions to be made in the context of restructuring with regard to a (non-) desired partial business status. The withdrawal of a tax group company from the tax group is also considered to be a partial discontinuation of operations.

Under certain conditions, interest expenses for certain long-term public infrastructure projects are not to be covered by the interest barrier. The ATAD Directive also provides for the possibility of such an exception.

As per the interest rate cap, interest expenses are not deductible if they are based on an interest rate that exceeds the maximum rate. The maximum rate is the base interest rate pursuant to § 247 of the German Civil Code (BGB) increased by 2 percentage points.

The base interest rate is published by the German Federal Bank on January 1 and July 1 of each year. The base interest rate has been 3.12 % since July 1, 2023, so that the current maximum rate of the interest rate cap would be 5.12 % if the regulation were applicable. If the agreed interest rate is above the maximum interest rate after a regular change in the base interest rate, the taxpayers are to have one month to adjust the contractually agreed interest rate; in this respect, there is then no restriction on deductions.

The interest rate cap is to apply only to interest expenses incurred as a result of a business relationship between related parties as defined in § 1 (2) of the AStG. Thus, all intra-group - both cross-border and domestic - loan relationships are covered.

In the event that the taxpayer proves that, all other things being equal, both the creditor and, in the case of a group of companies, the ultimate parent company could only have received the capital at an interest rate higher than the maximum rate, the maximum rate is deemed to be the interest rate that could have been obtained by them in the most favorable case.

Suitable evidence may be, for example, the refinancing rate of the ultimate parent company or database studies at the level of the ultimate parent company at the time of the conclusion of the financing relationship under review. However, mere offers from banks or other potential creditors are not sufficient.

The interest rate cap shall also not be applied if the creditor carries out a substantial economic activity in relation to the specific financing transaction in the country in which it is domiciled or has its management. However, this so-called substance exception does not apply if there is no sufficient exchange of information with the respective state.