Proposed “Growth Opportunities Act“ presented

The recently announced draft bill of the German Federal Ministry of Finance 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 the day following the promulgation of the law until, in principle, 31 December 2027.

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

The investment incentive can only be claimed if the (subsequent) acquisition or production costs per asset amount to at least EUR 10,000. 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 50,000.

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.

Henceforth, under certain conditions, the part of the acquisition and production costs of a depreciable movable asset shall also be included in the eligible expenses of a business year beginning after 31 December 2023.

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 1 January 2020 and before 1 July 2020, EUR 4 million for eligible expenses incurred after 30 June 2020 and before 1 January 2024, and EUR 12 million for eligible expenses incurred after 31 December 2023.

The improved tax loss carryover

Pursuant to the Fourth Corona Tax Relief Act of 19 June 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 1 January 2024.

In addition, the limits of the so-called minimum profit taxation are to be temporarily suspended. Pursuant to the currently applicable 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. For the assessment periods 2024 to 2027, these limits on the amount (so-called minimum profit taxation) shall not apply; the amount of the loss carried forward is therefore not limited in these assessment periods. The extensions of the loss carryforward apply equally to corporations subject to corporate income tax.

From the 2028 assessment period onwards, the so-called minimum profit taxation is to be applied again pursuant to the previous system for loss carry-forwards. However, the base amounts are to be raised considerably: from the current EUR 1 million to EUR 10 million and from EUR 2 million to EUR 20 million for married couples subject to joint assessment.

The new regulations on minimum profit taxation shall apply correspondingly to trade tax.

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 two years. 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 31 December 2023.

Reform of the reinvestment preferential tax treatment (Thesaurierungsbegünstigung) and the option for corporate income taxation

In the case of the preferential reinvestment 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 sequence of use is to be improved and, for this purpose, tax-exempt and rate-taxed profits that were retained in the company after 31 December 2023 may be withdrawn with priority. Furthermore, it is planned that the tax effects of the reinvestment preferential treatment can already be taken into account in the advance payment procedure in the future.

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 31 December 2023. Subsequently, in particular the previous exemption regulations such as the (almost) uniform group-relatedness of the interest barrier in the stand-alone clause and the EC escape are to be abolished in the course of the ATAD implementation. As compensation for the tightening of the interest barrier prescribed by the ATAD, the previous exemption limit will be converted into an allowance of EUR 3 million. On the other hand, the implementation of an anti-fragmentation rule is intended to prevent tax structures in which several subsidiaries are established in order to claim the tax allowance for each of these subsidiaries as an independent business in the sense of the interest barrier (and consequently several times).

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 1 January 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.

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 1 January 2024 pursuant to a new number 73 of § 3 of the German Income Tax Act if the total of such 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 1 January 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 1 January 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.

The thresholds for the obligation of certain taxpayers to keep accounts are also to be raised. This applies to turnover in calendar years beginning after 31 December 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.

The statutory regulation on the mandatory use of electronic invoices between domestic companies (eInvoice) is to be introduced on 1 January 2025.

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.

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.