The German Growth Opportunities (Tax) Act was published in the Federal Law Gazette on March 27, 2024. The Act is intended to stimulate investment in order to strengthen Germany’s competitiveness. Further changes are due to case law and “value protection” (inflation compensation) by adjusting allowances or lump sums.
The Federal Govermnent had originally published a much more comprehensive draft law in the summer of 2023, but the Bundesrat refused to give its approval. As a result, urgent parts were transferred into a Secondary Credit Market Promotion Act (as a further “omnibus act”, with tax and other amendments) and passed in December 2023. Of particular note is the adjustment of the Real Estate Transfer Tax Act to the revised German Partnership anc Corporate Law Modernization Act (MoPeG Act). The MoPeG Act had created unwanted issues from a German real estate transfer tax perspective for pertership structures. This was remedied at the last minute by the Secondary Credit Market Promotion Act. In the long term, the real estate transfer tax consequences of acceding and leaving partnerships (owning German real estate) as well as the transfer from and to such legal entities will be revised.
The initial government draft of the Growth Opportunities (Tax) Act had provided for roughly 50 individual measures and a relief of over 6 billion euros for taxpayers. The volume of relief was significantly reduced, also due case of Germany’s constitutional court, blocking Germany from taking out further debt. The planned “climate protection investment premium” as well as a specific notification requirement for domestic tax arrangements were removed. This is food news from a practical perspective and avoids new bureaucracy and legal uncertainties.
Key points of the (streamlined) Growth Opportunities Act are:
- Introduction of degressive depreciation for wear and tear for residential buildings of 5%,
- Temporary introduction of declining balance depreciation for wear and tear on movable assets until the end of 2024,
- Temporary increase in the loss carry-forward to 70% (excluding trade tax),
- Significant expansion of tax incentives for research&development, and
- Measures to simplify the tax system and reduce bureaucracy.
Changes to income tax law (also affecting corporations)
Numerous new regulations affect income tax law and therefore also corporate income tax law by way of reference. For example, the increase in the lump sum for additional expenses incurred by professional drivers for overnight stays in the vehicle from EUR 8 to EUR 9, section 9 para. 1 sentence 3 no. 5b sentence 2 EStG, has a “value-preserving” character. A general indexation (linking to the increase in the cost of living) of lump sums or allowances as in US tax law would be worth considering.
Electric vehicles
According to section 6 para. 1 no. 4 sentence 2 no. 3 EStG (1% rule), only a quarter of the assessment basis (gross list price) is to be recognized for the private use of a company electric vehicle or fuel cell vehicle and according to section 6 para. 1 no. 4 sentence 3 no. 3 EStG (logbook rule) only a quarter of the acquisition costs or expenses. The upper limit of the gross list price will be raised to 70,000 euros for vehicles purchased from 2024 onwards. This applies accordingly for vehicles provided to employees (section 8 para. 2 sentences 2, 3 and 5 EStG).
Contributions of young assets
From the 2024 tax year, contributions of young assets will only be valued at (amortized) acquisition/production cost if they originate from private assets. This is in response to a German Federal Fiscal Court (BFH) ruling of June 21, 2021, I R 32/17, in order to prevent similar tax structuring deemed abusive (but accepted by the BFH) in the future.
Temporary reintroduction of accelerated depreciation rules
The declining balance method of depreciation for movable fixed assets was introduced with the Second Coronavirus Tax Assistance Act in 2020 and ultimately extended until the end of 2022. In view of the economic situation, declining balance depreciation is also permitted for corresponding assets that were or will be acquired or manufactured from April 2024 until the end of 2024. However, the percentage rate to be applied may not exceed twice the percentage rate applicable for regular (straight-line) annual depreciation and may not exceed 20%.
Option for declining balance depreciation for new buildings until October 2029
In order to stimulate the construction sector, declining balance depreciation for new buildings (abolished in 2006) is being reintroduced: For residential buildings located in the EU/EEA whose construction or acquisition begins from October 2023 and before October 2029, an option for declining-balance depreciation instead of straight-line depreciation (in annual amounts of 5 percent of the respective book value/residual value) will be created.
In contrast to the previous declining balance depreciation, this geometric declining balance depreciation does not simultaneously allow for deductions for extraordinary technical or economic wear and tear. If these occur, you can switch to straight-line depreciation.
Special depreciation for new rental housing construction
The tax incentives introduced in 2018 for the construction of new rental apartments (the effectiveness of which is disputed) is extended until the beginning of October 2029. The maximum possible assessment bases will be increased from EUR 4,800 to EUR 5,200 and from EUR 2,500 to EUR 4,000 respectively.
Improved special depreciation (Section 7g EStG)
The special depreciation of investment costs and for businesses that do not exceed the profit limit of EUR 200,000 in the year preceding the investment will be increased to 40% for assets acquired from 2024.
Avoiding the “double taxation” of pensions
In 2021, the Federal Fiscal Court (decisions X R 20/19 and X R 33/19) issued guidelines to avoid “double taxation” of pension expenses and the resulting pension benefits, which are now implemented in law as follows:
The allowances for pension benefits will now be slowed down and completely melted away by 2058. Pension payments (pensions) are fully income from employment in accordance with section 19 of the German Income Tax Act (EStG) from 2058 onwards.
In addition, section 22 no. 1 sentence 3 letter a double letter aa sentence 3 EStG is amended. The Annual Tax Act 2022 already removed the percentage limit on pension expenses as a special expense deduction from the 2023 tax year in order to mitigate a “double burden” on pensions for future pensioners.
The amendment to section 24a sentence 5 EStG reflects the slower increase in the taxation rate for the old-age relief amount. From 2023, the applicable percentage rate will no longer be reduced by 0.8 percentage points per year, but by 0.4 percentage points. From 2023, the maximum amount will fall by EUR 19 per year instead of EUR 38.
These changes must be considered in the wage tax procedure sas of January 2025.
Extended loss carry-forward
Under previous law, a loss carry-forward of up to EUR 1 million or EUR 2 million (spouses) could be used without restriction and the loss carryforward for the excess amount was limited to 60% of the total amount of income in the assessment period. From the 2024 tax year up to and including 2027, the usable loss carryforward is increased to 70% of the total amount of income in the loss carryforward year. This also applies to corporations (section 8 para. 1 KStG in conjunction with section 31 para. 1 sentence 1 KStG). From the 2028 tax year, a return to the 60% limit (so to speak “minimum profit tax”) is planned.
(No) “one-fifth” income tax tariff rule for wage tax
From 2025, the rate reduction under section 34 para. 1 EStG for, among other things, compensation or remuneration for multi-year activities may no longer be claimed in the wage tax procedure, but only in the assessment procedure, due to the susceptibility to errors.
Rate reduction for persons with limited tax liability
With effect from the 2025 tax year, section 50 para. 2 sentence 2 no. 4 letter d EStG will enable an application assessment for employees with limited tax liability with wages to be taxed at a reduced rate. This is aimed at employees outside the EU/EEA that would otherwise be barred form receiving the beneficial “one-fifth” income tax tariff on certain relevant income portions (such as VSOP payments for long-term services)
Increased exemption limit for withholding tax under paragraph 50a EstG
In “small” cross-border licensing cases (or other transfers of rights, for example by foreign-based creatives or other authors or rights holders), German licensees or remuneration debtors have the option of waiving tax deduction in addition to the unfortunately lengthy exemption and/or refund procedure at the Federal Central Tax Office (BZSt). The annual exemption limit for the de minimis rule is increased from EUR 5,000 to EUR 10,000 for all remuneration for the licensing of rights that is received (paid or offset) from 2024 onwards. In addition, a retroactive deduction (and tax filing) obligation is avoided, in contrast to the old rule.
This means: License payments by German licensees under 10,000 EUR annually to licensors in relevant treaty countries can be structured free of German withholding taxes, even if subsequent license payments in the same calendar between the same parties year occur.
There is no requirement to retroactively pay withholding tax on such initial 10,000 EUR.
“Donation receipts”
With effect from 2025, foreign recipients of donations who are included in the register of recipients of donations in accordance with section 60b AO will be able to use officially prescribed forms or electronic donation receipts. This means that the tax-privileged foreign corporation must be entered in the donor register in accordance with section 60b AO.
Corporation Tax Act
Option for corporation tax for all partnerships
All (registered) partnerships, including asset-managing partnerships, are given the opportunity to opt for corporation tax (previously only commercial partnerships and partnerships).
For limited partnerships, it is clarified that the tax-neutral exercise of the option does not require that an interest in a general partner (usually a limited liability company or other corporation with a 0% interest) is also brought into the opting company.
In contrast to a “genuine” corporation, where a taxable dividend to the controlling shareholder is deemed to occur with the distribution resolution already, German corporate law does not provide for such a distribution resolution for partnerships. It is clarified that in the case of a partnership opting to be treated as corporation for tax purposes, a taxable diviend is only triggered upon actual withdrawal. However, please be aware of booking entries onto a “loan”account of any partner!
Electricity supplies from tax-exempt housing cooperatives and associations
From 2023 onwards, housing cooperatives and associations retain their tax exemption under section 5 para. 1 no. 10 KStG even if their income from the supply of electricity from tenant electricity systems exceeds 10% of their total income, but not 30% (previously 20%) of their total income. This also applies to trade tax.
Reimbursement of capital gains tax by foreign tax-exempt entities (NPOs)
With a statutory refund claim, the tax exemption pursuant to section 5 para. 1 no. 9 KStG for NPOs based in other EU or EEA countries is extended to withholding taxes on capital income, but is linked to certain formal substance requirements.
Trade tax – extended reduction
To promote the expansion of solar power generation and the operation of charging stations, the non-detrimental threshold for retaining the extended trade tax reduction for real estate companies has been increased to 20%.
Value Added Tax Act
Transfer of emission certificates
The simplification rule that the recipient is deemed to be the tax debtor if the supplier and the recipient have applied section 13b para. 2 UStG, although this was not objectively correct, is extended to the transfer of emission allowances.
Mandatory electronic invoicing
The mandatory e-invoice from 2025 will be a prerequisite for the obligation (still to be introduced) for the transaction-related reporting of sales in the B2B area by entrepreneurs to a standardized electronic reporting system. Only invoices that are issued, transmitted and received in a structured electronic format and comply with the requirements of Directive 2014/55/EU will be considered electronic invoices. Invoices in another electronic format or on paper will in future be referred to as “other invoices”. It is regulated when an e-invoice is mandatory and when the use of other invoices remains possible – the latter in particular for low-value invoices up to amounts of 250 EUR (section 33 UStDV) and tickets (section 34 UStDV).
Until the end of 2026, a miscellaneous invoice can be issued instead of an e-invoice. section 27 para. 39 sentence 1 no. 2 UStG extends this regulation until the end of 2027 for entrepreneurs with a total turnover of no more than EUR 800,000 in the 2026 calendar year.
Advance VAT return
From the 2025 VAT year, all entrepreneurs “shall” be exempted by the tax office from the obligation to submit advance VAT returns and make advance payments if the VAT for the previous calendar year amounted to a maximum of EUR 2,000 (previously EUR 1,000).
VAT returns for small businesses
From the 2024 assessment period, small businesses are exempt from submitting annual VAT returns, unless there is a case of section 18 para. 4a UStG (including certain cross-border EU transactions, vehicle suppliers) or a separate request from the tax office.
VAT taxation based on received (and not agreed) considerations
From the 2024 VAT reference year, the maximum value for the option of VAT registration based on received instead of agreed consideration has been raised from EUR 600,000 to EUR 800,000 in the previous calendar year.
Inheritance and gift tax
It is clarified that the increase in value of a shareholding of a personally liable partner of a KGaA is also deemed to be a taxable donation.
Insurance companies that pay insurance sums or life annuities abroad or make them available to foreign beneficiaries are liable for inheritance tax on the amount paid out. However, the tax authorities may not assert liability if the amount paid out does not exceed the non-assessment limit of EUR 5,000 (previously EUR 600).
Also, a loophole consisting of transferring German real estate through a legacy claim (between non-residents) without triggering German gift tax, previously accepted by German tax courts, has been closed by the legislator
Fiscal Code
International risk assessment procedure
A new legal basis for an international risk assessment procedure is intended to enable a joint assessment of tax risks of realized circumstances by several states. If, in the international risk assessment procedure, the risk of a tax loss in the assessed situation is deemed to be low, the taxpayer’s tax situation may not be determined as part of an external audit. An application to this effect must be submitted by the group parent company.
Notification of gainful employment
If there is typically no tax default risk, the Federal Ministry of Finance will in future be allowed to waive the mandatory notification of gainful employment and the subsequent obligation to provide information to the local tax office by means of circulars.
Limits of the tax accounting obligation
The turnover limit for establishing a tax accounting obligation will be increased to EUR 800,000 for financial years starting from January 2024 for entrepreneurs as well as farmers and foresters and the (alternatively relevant) profit limit to EUR 80,000.
Limit for the retention obligation for surplus income
Taxpayers who generate surplus income must keep the records and documents relating to the income and income-related expenses on which the surplus income is based for 6 years. This limit will be increased from EUR 500,000 to EUR 750,000 with effect from the 2027 tax year. However, existing retention periods that have arisen up to and including 2026 will continue to apply, even if the increased income limit is not reached from 2027.
Foreign Tax Act – cross-border financing
As a replacement for the originally planned specific interest rate cap, detailed requirements for the tax recognition of cross-border financing relationships and services are now in force introduced with effect from the 2024 tax year (section 1 para. 3d and 3e AStG). In addition to stricter requirements for the permissible (arm’s length) amount of loan interest, the taxpayer must also demonstrate that debt service can be provided and that the loan is economically necessary. Moreover, the view that an intra-group financing function is a (low-margin) function and low-risk service is laid down in law.
Reorganization Tax Act – abusive carve-outs
The tax court case law provided structuring options for the tax-free sale of partial business units after a carve-out operation. The rules on tax-detrimental post-demerger disposals have been tightened with effect for legal operations for which the application for entry in the relevant public register was made after July 14, 2023.
German Commercial Code – thresholds in paragraph 241a HGB
The thresholds in section 241a HGB are adjusted – as in section 141 AO – from EUR 600,000 to EUR 800,000 (turnover) and from EUR 60,000 to EUR 80,000 (net income or profit). Below these thresholds, businesses are permitted to determine profits using a revenue-surplus account with simplified bookkeeping.
Research&Development Allowance Act (R&D tax credits)
Good news for German r&d tax credits: As of the promulgation of the law, personal contributions by an individual entrepreneur to a research and development project are eligible for funding in the amount of EUR 70 instead of EUR 40 per documented working hour up to a maximum of 40 working hours per week. The same applies to personal contributions by co-entrepreneurs (section 3 para. 3 sentences 2 and 3 FZulG).
Previously, funding under the Research Allowance Act (FZulG) has only been granted in relation to wages subject to wage tax deduction for employees engaged in research and development, own work and proportionately in relation to remuneration for contract research. For financial years from January 2024, the research allowance will be extended to depreciable movable fixed assets used in the research and development project that are necessary and essential for the implementation of the research and development project (section 3 para. 3a FZulG). In addition, 70% instead of 60% of the costs incurred by the client can be considered as eligible expenses for commissioned research and development projects (section 3 para. 4 FZulG). The assessment basis comprises the eligible expenses incurred in the financial year and amounted to EUR 2 million. The Second Corona Tax Assistance Act temporarily doubled the maximum assessment basis to EUR 4 million. This has now been permanently increased to EUR 10 million (section 3 para. 5 FZulG). The research allowance amounts to 25% of the assessment basis. Small and medium-sized enterprises within the meaning of the SME definition in Annex I of the General Block Exemption Regulation can apply for an increase in the research allowance of 10 percentage points (section 4 para. 1 sentence 2 FZulG), hence 35%.
Conclusion: The “slimmed-down” Growth Opportunities Act contains some welcome tax reliefs (extended loss carry-forward, small withholding tax cases, r&d tax credit) and simplifications as well as some tightening (also due to BFH rulings in favour of taxpayers). It is no proper tax reform, though.
