Tax Further Development Act and Exemption of the Minimum Subsistence Level
Tax Further Development Act and Exemption of the Minimum Subsistence Level
The German federal government has adopted the drafts for an Act on the Further Development of Tax Law and the Adjustment of the Income Tax Rate (“Tax Further Development Act”) and for an Act on the Tax Exemption of the Minimum Subsistence Income 2024 - the draft bill was still entitled “Second Annual Tax Act 2024”. We would like to inform you about the main changes planned so far, which are not or only partially linked to each other.
By raising the lower amount limit from EUR 250 to EUR 800, immediate depreciation for low-value assets in accordance with section 6 para. 2 of the German Income Tax Act can be claimed in future for a depreciable movable fixed asset that is capable of independent use and whose acquisition or production costs do not exceed EUR 800. Expenses for assets whose acquisition or production costs for the individual asset exceed EUR 800, but not EUR 5,000, can continue to be allocated to a collective item and written back over three years on a standardized basis. As a result, the two methods will no longer overlap in future, but will complement each other.
The assets that are combined in a collective item no longer have to be recorded in a separate list, but only in the accounts.
The basic tax-free allowance is also to be increased by a further EUR 300 to EUR 12,084 for 2025 and by a further EUR 252 to EUR 12,336 for 2026. At the same time, with the exception of the benchmark value of the so-called “wealth tax”, both the other benchmark values of the income tax rate and the exemption limits for the solidarity surcharge are to be adjusted for the assessment periods 2025 and from 2026.
The tax-free allowance for children is to be increased by EUR 60 to EUR 6,672 for the 2025 assessment period and by a further EUR 156 to EUR 6,828 from the 2026 assessment period. Child benefit is to be increased by EUR 5 to EUR 255 per child per month with effect from January 1, 2025 and by a further EUR 4 to EUR 259 per child per month with effect from January 1, 2026. With effect from January 1, 2026, it is also to be enshrined in law that the child allowance and child benefit will continue to increase at the same time.
For the exact determination of the necessary increase in both the basic allowance and the child allowance for the years 2025 and 2026, it is still necessary to wait for the 15th minimum subsistence level report, which is expected to be published in the fall of 2024, so that the amounts previously estimated in this regard may change again.
A change in the splitting procedure for spouses and life partners is not associated with these measures and is not provided for in the reform.
The general principles of charitable law, in particular the principle of exclusivity pursuant to section 56 of the German Tax Code, remain unaffected and further ensure that in future there will be no tax-privileged corporations that do not use the funds saved to sustainably fulfill their statutory purposes.
For photovoltaic systems whose business does not fall within the scope of the income tax exemption provision pursuant to section 3 no. 72 of the German Income Tax Act, this should only apply if they - like other self-sufficiency facilities - are predominantly, i.e. at least 80 %, used for own purposes. The 80 % limit does not apply to photovoltaic systems that are used exclusively to generate tax-exempt income and withdrawals in accordance with section 3 no. 72 of the German Income Tax Act. They are also deemed to be tax-privileged special-purpose businesses if, for example, only 50 % of the electricity generated is used for own purposes.
The first date of application of the new obligation to report is to be announced by a circular from the Federal Ministry of Finance at least one year in advance, but no later than four calendar years after the act comes into force. If the act comes into force in 2024, this would be December 31, 2028.
Income Tax
Collective Item Depreciation
For depreciable movable fixed assets that are capable of independent use, a collective item for pool depreciation in accordance with section 6 para. 2a of the German Income Tax Act can be created in the financial year of acquisition or production if the acquisition or production costs for the individual asset exceed EUR 800 (previously: EUR 250) but do not exceed EUR 5,000 (previously: EUR 1,000). The collective item must be reversed in the financial year in which it is created and in the following two (previously: four) financial years, reducing profits evenly.By raising the lower amount limit from EUR 250 to EUR 800, immediate depreciation for low-value assets in accordance with section 6 para. 2 of the German Income Tax Act can be claimed in future for a depreciable movable fixed asset that is capable of independent use and whose acquisition or production costs do not exceed EUR 800. Expenses for assets whose acquisition or production costs for the individual asset exceed EUR 800, but not EUR 5,000, can continue to be allocated to a collective item and written back over three years on a standardized basis. As a result, the two methods will no longer overlap in future, but will complement each other.
The assets that are combined in a collective item no longer have to be recorded in a separate list, but only in the accounts.
Degressive Depreciation
The degressive depreciation pursuant to section 7 para. 2 of the German Income Tax Act is to be continued for movable fixed assets acquired or produced in the period from 2025 to 2028 and increased to two and a half times the percentage rate applicable to straight-line depreciation, up to a maximum of 25 %.Basic Allowance, Child Allowance and Child Benefit
After updating the database as a result of the higher updating of standard needs under social law, there is a need to adjust the tax allowances for the exemption of the material subsistence level of adults and children for 2024. An increase of EUR 180 to EUR 11,784 in the basic tax-free allowance integrated into the income tax rate and an increase of EUR 228 to EUR 6,612 in the tax-free allowance for children are therefore planned with retroactive effect. However, this will not be taken into account for income tax purposes until the payroll for December 2024.The basic tax-free allowance is also to be increased by a further EUR 300 to EUR 12,084 for 2025 and by a further EUR 252 to EUR 12,336 for 2026. At the same time, with the exception of the benchmark value of the so-called “wealth tax”, both the other benchmark values of the income tax rate and the exemption limits for the solidarity surcharge are to be adjusted for the assessment periods 2025 and from 2026.
The tax-free allowance for children is to be increased by EUR 60 to EUR 6,672 for the 2025 assessment period and by a further EUR 156 to EUR 6,828 from the 2026 assessment period. Child benefit is to be increased by EUR 5 to EUR 255 per child per month with effect from January 1, 2025 and by a further EUR 4 to EUR 259 per child per month with effect from January 1, 2026. With effect from January 1, 2026, it is also to be enshrined in law that the child allowance and child benefit will continue to increase at the same time.
Compilation of the planned adjustments:
All values in EUR.| 2024 (until now) |
2024 (new) |
2025 | 2026 | |
| Basic Allowance | 11,604 | 11,784 | 12,084 | 12,336 |
| Child Allowance | 6,384 | 6,612 | 6,672 | 6,828 |
| Child Benefit per child and month |
250 | 250 | 255 | 259 |
For the exact determination of the necessary increase in both the basic allowance and the child allowance for the years 2025 and 2026, it is still necessary to wait for the 15th minimum subsistence level report, which is expected to be published in the fall of 2024, so that the amounts previously estimated in this regard may change again.
Factor Method
The plan is to transfer tax classes III and V to tax class IV with a factor. Specifically, a factor is to be automatically calculated for all employees who are classified in tax classes III or V based on the data available from the electronic wage tax statements on a conversion date yet to be determined. This factor is then to be made available to employers from the following calendar year instead of tax classes III or V for wage tax deduction purposes. Spouses and civil partners who are in tax class combination IV/IV at the time of the changeover can retain this or alternatively choose the factor method. It will still be possible to switch from the factor method to tax class combination IV/IV (without factor) at the request of one partner. The start of the new procedure is currently planned for 2030.A change in the splitting procedure for spouses and life partners is not associated with these measures and is not provided for in the reform.
Tax Code
Use of Funds by Tax-Privileged Corporations
The obligation to use funds promptly for tax-privileged corporations, which was previously regulated in section 55 para. 1 no. 5 of the German Tax Code, is to be abolished as of January 1, 2025. A statement of the use of funds will then no longer be required.The general principles of charitable law, in particular the principle of exclusivity pursuant to section 56 of the German Tax Code, remain unaffected and further ensure that in future there will be no tax-privileged corporations that do not use the funds saved to sustainably fulfill their statutory purposes.
Political Activities of Tax-Privileged Corporations
In future, a new no. 11 in the catalog of section 58 of the German Tax Code is to clarify that tax-privileged corporations may also take a position on day-to-day political issues without risking their non-profit status. However, the statements must be made for a specific reason and be subordinate to the pursuit of the tax-privileged purpose as a whole.Photovoltaic Systems as a Special-Purpose Business
The term “self-sufficiency facility” referred to in section 68 no. 2 letter b) of the German Tax Code is to be extended to include photovoltaic systems as of January 1, 2025. This would make them tax-privileged special-purpose businesses.For photovoltaic systems whose business does not fall within the scope of the income tax exemption provision pursuant to section 3 no. 72 of the German Income Tax Act, this should only apply if they - like other self-sufficiency facilities - are predominantly, i.e. at least 80 %, used for own purposes. The 80 % limit does not apply to photovoltaic systems that are used exclusively to generate tax-exempt income and withdrawals in accordance with section 3 no. 72 of the German Income Tax Act. They are also deemed to be tax-privileged special-purpose businesses if, for example, only 50 % of the electricity generated is used for own purposes.
Obligation to Report Domestic Tax Arrangements
With the new sections 138l to 138n of the German Tax Code, following the failure of a corresponding legislative proposal as part of the so-called Growth Opportunities Act, another attempt is being made to introduce an obligation to report certain domestic tax arrangements. As far as possible, a close alignment with the statutory provisions on the obligation to report cross-border tax arrangements in accordance with sections 138d to 138h of the German Tax Code is envisaged.The first date of application of the new obligation to report is to be announced by a circular from the Federal Ministry of Finance at least one year in advance, but no later than four calendar years after the act comes into force. If the act comes into force in 2024, this would be December 31, 2028.