BMF issues draft law for Growth Opportunity Act

However, it also amends the interest barrier rule and introduces a maximum interest deduction rule that would significantly limit interest expenses in companies. In addition, the draft introduces reporting requirements for purely national tax arrangements. This informational letter is intended to provide an initial overview of the key themes.

I. Law on tax incentives for investments in climate protection (investment grant) – funding period 20XX–2027

The draft provides for a non-profit-dependent investment grant for investments in climate protection ("real cash effect"). The following measures are being facilitated:

• Cost of acquisition and production of new, depreciable and movable fixed assets, as well as investments in existing movable fixed assets, insofar as the investment results in subsequent acquisition or production costs.

1. Prerequisites and grounds for exclusion

The prerequisites are that the assets:

• Are part of an energy-savings plan developed by an authorised energy consultant who meets the requirements of § 8a of the Act on Energy Services and Other Energy Efficiency Measures (EDL-G), that was open to all technologies and suppliers,
• Improve energy efficiency as part of the operational activities and thereby:
  • Surpass EU standards or
  • Comply with adopted but not yet entered into force EU standards, provided that the measure has been implemented and completedat least 18 months before the entry into force of the standard
• During the year of acquisition or production or termination of the measure and the following fiscal year (i.e., two years in total) in a domestic holding of the business, are used exclusively or almost exclusively for business purposes; and
• Incur purchase and manufacturing costs of at least €10,000 per asset.

Excluded from the grant are investments in:

• Co-generation
• District heating and cooling
• Energy plants powered by fossil fuels

2. Funding period and funding amount

The funding period begins after the day after the law is announced and ends on December 31, 2027. It should be noted that the measure must be started and completed before 1 January 2028. Exceptions exist for measures that were started before December 31, 2027 and for which advance payments were made or partial manufacturing costs were incurred.

The maximum eligible assessment base is € 200,000,000 during the funding period. The investment grant is 15% of the benchmark, so the maximum investment premium is € 30,000,000 (other environmental measures may need to be taken into account).

3. Income tax treatment of the investment grant

The investment grant received accordingly reduces the basis of assessment for the deduction for wear and tear as per § 7 EStG.

II. Changes to the German Research Allowance Act

The draft provides for several changes in amount and scope, which are summarised below.

• In addition to the previously eligible wage, it is now possible to include movable fixed assets which are essential for a research and development project and are used exclusively for the commercial interests of the holding.
• In contract research, the eligible expenses increase from 60% to 70% of the remuneration.
• For expenses incurred after December 31, 2023, the maximum eligible assessment base increases from €4,000,000 to €12,000,000.

III. Changes in the Income Tax Act

1. Interest Barrier

There are major adjustments related to the interest barrier. The draft adapts provisions of § 4h EStG to the ATAD, which can actually considerably expand the scope. In particular, with regard to real estate developers and real estate companies, this may result in considerable tax disadvantages in the future. The main adjustments are summarised briefly below.

• Transformation of the €3,000,000 exemption limit into an allowance. The allowance, however, unlike the exemption limit, is not granted to a specific holding, as was previously the case, but is only granted once in the case of similar holdings under (indirect) unified management by one person or a group of persons. The allowance is allocated based on the amount of the individual net interest expenses.
• Elimination of the group clause as per § 4h para. 2 sentence 1(b) EStG (German Income Tax Act)
• Elimination of the escape clause as per § 4h para. 2 sentence 1 letter c) EStG (the holding’s equity ratio does not fall below the group’s equity ratio by more than 2 %)
• Proportional loss of interest or EBITDA carryforwards in the event of abandonment or transfer of a branch of activity; also considered an abandonment of a branch of activity is the withdrawal of a controlled company from the VAT group

The elimination of the group clause and the escape clause means that, moving forward, the only way to avoid application of the interest barrier rule would be to keep the net interest expense €3,000,000.

At first glance, relaxing the relatedness requirement for similar companies under an (indirect) unified management or a controlling influence seems insignificant. However, the scope of application can be quite broad depending on how it is interpreted. In particular, with regard to property developers using several separate companies to carry out a project, the new rule could cause considerable hardship, as it could be assumed to be a similar company, with the result that the allowance of €3,000,000 would be granted only once. For the interpretation of the term "similar company", reference is made to § 4 para. 6 sentence 1 no.1 KStG No. 1 German Corporation Tax Law), which refers to businesses of a commercial nature, so that neither the legal text nor the relevant jurisprudence provide directly applicable case studies. In particular, the case law on the similarity of commercial businesses, etc., appears to be only partially applicable.

The amended regulations will be applied from the assessment period 2024 onwards.

 2. Maximum interest deduction rule

In addition to the change in the interest barrier rule, a maximum interest deduction will be introduced to further restrict the interest deduction from the assessment period 2024 onwards. The new rule planned in § 4l will be amended for business relationships between related persons as defined in § 1 para. 2 of the AStG (German Foreign Tax Act):

• Limitation on the deduction of interest expenses, insofar as the agreed interest rate is higher than the base interest rate increased by two percentage points according to § 247 BGB (German Civil Code)

Exceptions:

• Ability to prove the contrary: If the taxable person can prove that both the creditor and the ultimate parent company (as defined by the GloBE Directive) could only have obtained the capital, given the same conditions, at an interest rate above the maximum rate, the interest rate obtained shall be deemed to be the maximum amount.
• Possible substance carve-out: § 8 para. 2 sentence 2, 3 and 5 of the AStG (German Foreign Tax Act) offers the possibility of a substance carve-out.

According to the explanatory statement, this covers (primarily) transnational scenarios; however, this restriction is not found in the draft law’s actual text. There is (at present) no provision for the carrying forward of non-deductible interest expenses.

3. Loss offset options

The loss offset options in § 10d EStG (German Income Tax Act) and § 10a GewStG (German Trade Tax Act) should be adjusted as follows:

• Extension of the loss carryback in § 10d para. 1 EStG to three years (previously only two years) – subject to minimum taxation
• Temporary suspension of minimum taxation for the loss carryforward in accounting period 2024 to accounting period 2027 in the following:
  • § 10d EStG and
  • § 10a GewStG
• As of the accounting period 2028, the minimum taxation will be reintroduced, whereby the unrestricted losses of up to €10 million or, in the case of joint assessment, up to €20 million, can be offset.

4. Change in profit retention in § 34a EStG (German Income Tax Act)

Due to its complex application and the associated tax disadvantages, the favourable treatment of profit retention for partnerships, which has so far been hardly noticed in practice, will be optimised. In addition to the possible option as per § 1a KStG (German Corporation Tax Law), legislators are now trying to make the legal form even more neutral.

The amendments as per § 34a EStG, which will come into force from the assessment period 2025 onwards, are essentially:

• An increase in the eligible profit by means of:
  • An increase in the business tax
  • An increase through withdrawals made to pay the ESt (income tax) on tax-favoured profits that have been withdrawn
• An enhanced appropriation sequence for profit withdrawals This will mean that profits taxed primarily at the normal tax rate (e.g., 42 % and 45 %) can be withdrawn tax-free so that the withdrawal of preferential profits taxed at 25 % is subordinated, and
• The favourable treatment of profit retention is already taken into account when calculating the ESt advance payments.

5. Changes to accounting rules

• Increase of the GWG (German Anti-Money Laundering Act) limit (§ 6 para. 2 EStG) from €800 to €1000
• Expansion of the collective item method (§ 6 para. 2a EStG):
  • a. An increase in the upper limit from the current €1,000 to €5,000
  • b. Reduction of the depreciation period from five to three years
• Increase in the special depreciation outlined in § 7g para. 5 EStG from currently 20% to 50%

The foregoing amendments apply for the first time to assets acquired, manufactured, or placed after December 31, 2023.

An increase in the limits of the original tax accounting obligation in § 141 of the AO (German tax code) and the exemption from the commercial accounting obligation in § 241a of the HGB (German Commercial Code).

6. Other significant changes to the Income Tax Act

• Increase the exemption limit for gifts from the current €35 to €50
• Increase the lump sum amounts for meals from €28 to €30 or from €15 to €30
• An increase in the allowance for employee benefits at company events from currently €110 to €150
• Introduction of a tax exemption limit of €1,000 for income from rentals and leasing
• Increase of the exemption limit for private sale transactions in § 23 EStG from € 600 to € 1,000
• Extension of the limited tax liability for non-self-employed work to cases in which the activity is not carried out in Germany, but rather in the taxable person’s country of residence or one or more other countries and a DBA concluded with the country of residence, or a bilateral agreement assigns a right of taxation to Germany with respect to the activity carried out in the country of residence or one or more other States. The new rules will apply for the first time to non-self-employed income accruing after December 31, 2023.
• Increase of the exemption limit in § 50c para. 2 sentence 1 no. 2 EStG as a prerequisite for the application of the exemption procedure for limited taxable income from the transfer of rights as per § 50a para. 1 no. 3 from currently €5,000 to €10,000

IV. Changes to the Corporate Income Tax Act

1. Option for corporate income tax (§ 1a KStG)

• The personal scope of application will be extended to all partnerships (previously "commercial partnerships and partnerships").
• Newly founded partnerships can now apply for an option for corporate tax up to one month after the conclusion of the articles of association with effect for the current financial year.
• When a corporation changes its form to a partnership, it now has the option to apply the change in form to the appropriate registry up to one month after the change to ensure that operations continue seamlessly.
• The retention of shares in the general partner in a GmbH (limited liability company) for the purposes of opting is now explicitly harmless, even if this is necessary under reorganisation tax law (as essential for the functional operation).
• The inflow of profit shares in the opting company is restricted to the extent that an inflow exists only if they are actually withdrawn. In this respect, an optioned partnership may result in a later inflow that differs from the original corporation, since this inflow is accepted by a controlling partner when the decision is taken and, accordingly, not only when the inflow actually occurs.

2. Tax deduction on capital gains from non-profit organisations subject to limited tax liability

• The tax exemption according to § 5 para. 1 no. 9 KStG (German Corporation Tax Law) for non-profit organisations based overseas, or in EU and EEA countries, will now also be applied with regard to capital gains tax relief. Please refer to the draft law for details.

V. Changes to the German Trade Tax Law

In addition to the synchronisation of the changes related to § 10d EStG (German Income Tax Act) in § 10a GewStG (German Trade Tax Law) in the case of loss carryforwards (for details please refer to the explanations on § 10d EStG), the following change related to the extended property reduction also applies as per § 9 No. 1 sentences 2 et seq. GewStG from the reference period 2023 onwards:

• Increase of the harmlessnessthreshold for certain income from electricity supplies (from the operation of plants for generating electricity from renewable energies, operation of charging stations for electric vehicles or e-bicycles, § 9 No. 1 sentence 3 letter b GewStG) from currently 10% to 20%

VI. Changes to the German Reorganisation Tax Law

Tightening of the post-divestment lock-up period

The purpose of the newly drafted § 15 para. 2 sentence 2 of the UmwStG-E (German Reorganization Tax Law draft) is to eliminate a divestiture at book or interim value if the divestiture will conclude the sale to, or prepare the sale to, external persons. An "external person" is therefore defined as any person who has not been involved in the divesting entity uninterruptedly in the five years prior to the split.

The "preparation of a sale" to an external person will from now on be defined as:

• A situation in which at least one share in a corporation participating in the divestiture is actually sold to external persons within five years of the effective date of transfer for tax purposes, or
• Within five years of the effective date of transfer for tax purposes, shares representing more than 20 % of the value of the shares in the divesting corporation on the tax transfer date are sold to external persons. The preparation of a sale by a divesting entity will be irrefutably presumed in such cases.

Note: The proposed amendments will first be applied to divestments for which application for entry in the appropriate registry is made after the date the draft law is published.

VII. Amendments to the German VAT Code

1. E-invoice

• Introduction of e-invoicing in the B2B sector: In addition to the already-known details, the draft law envisions a transitional phase in which an e-invoice cannot be used even with the consent of the recipient. Furthermore, the draft law does not envision e-invoices being applied to small-value invoices and travel tickets.

2. Other key changes to the German VAT Code

• Small entrepreneurs as defined in § 19 UStG are generally exempted from the obligation to submit advance VAT declarations and annual VAT returns; the deadlines for waiving the small business rule and revoking the waiver have been amended.
• As per § 20 sentence 1 No. 1 of the UStG (previously € 600,000), the total turnover threshold will be raised to € 800,000.
• The threshold for a possible exemption from the obligation to submit prior declarations is raised (previously € 1,000, now € 2,000). The changes come into effect on January 1, 2024.

VIII. Changes resulting from the MoPeG (Act to Modernise the Law on Civil Law Partnerships)

• Introduction of the notional (for tax purposes) joint assets of the shareholders in § 39 para. 2 No. 2 of the AO-E (General Tax Code draft): This ensures that the abolition of the shareholders’ joint assets under corporate law does not lead to any tax changes compared to the current legal situation and that the principle of transparency in income tax law continues to apply.
• Definition of:
  • Associations of persons in § 14a AO as well as
  • A corporate entity with a registered office abroad and place of management in Germany in § 14b AO. Note: The (foreign) shareholders of such a company are to be treated, provided that they are not to be treated as a legal person under domestic corporate law due to lack of legal capacity, as fully liable for the claims owed by the corporation from the tax liability relationship.
• There is a subsequent change in the ErbStG (German Inheritance Tax Law) and the BewG (German Valuation Act) as well as in the corporate tax [e.g., § 8b para. 6 KStG (German Corporation Tax Act)] and in the GewStG (German Trade Tax Law).

IX. Introduction of a reporting requirement for domestic tax structures

The new §§ 138l to 138n of the AO-E, for the first time, introduces an obligation to report certain domestic tax structures, which is largely closely aligned with the statutory provisions on the disclosure requirement regarding transnational tax structures according to §§ 138d to 138h of the AO. This is the first proposal regarding the disclosure requirement for national tax structures already contained in the coalition agreement.

Reportable structures

A (reportable) domestic tax structure is in accordance with Art. § 138l para. 2 AO-E any organisation that:

• Is not a transnational tax structure as per § 138d para. 2 i. V. m. § 138e AO
• Does not involve a tax on income or property, the trade tax, the inheritance or gift tax, or the property transfer tax
• Has at least one designation and
• From which a reasonable third party, taking into account all the essential facts and circumstances, can reasonably expect that the main advantage or one of the main benefits will be the attainment of a tax advantage within the meaning of § 138d para. 3 sentence 1 AO, which arises within the scope of this law.

Designations

The designations for domestic structures are listed exhaustively in § 138l para. 3 AO-E. Except for three new designations, they are identical to the designations for transnational structures. This affects:

• "General" designations involving the relationship between the intermediary and the taxable person (confidentiality clause, bonus) or characteristics of the intermediary's services (standardised documentation or structure)
• "Special" designations of structures such as in cross-border tax structures, such as
  • The acquisition of loss-making enterprises to use the losses
  • Income in assets, gifts or other untaxed or lower-taxed income or non-taxable income; and
  • Transactions involving intermediary companies that do not perform any significant economic activity or are used for circular movements of assets.

The new designations, which apply exclusively to domestic tax structures, are as follows:

• The same taxable matter is allocated to several users or other taxable persons or to one user or taxable person multiple times.
• Using coordinated legal transactions, tax-effective losses and wholly or partly tax-free income are generated in a targeted manner (known as tying transactions).
• A party involved in the structure conducts inappropriate legal activities to produce a tax advantage for themself or a third party with regard to a tax deduction from capital gains

Obligation to report domestic tax structures

An obligation to disclose the domestic tax structure is, for example: If, at the time of the event that triggers the reporting period, the user has the following in at least two of the three calendar years or fiscal years preceding the calendar year in which the event that triggers the reporting period occurred:

• Taxable sales as defined in § 1 Para. 1 of the UStG of more than €50,000,000 per fiscal year or calendar year (turnover threshold), or
• A sum of positive income [including income subject to the separate tariff as per § 32d EStG (German Income Tax Act) of more than € 20,000,000 in the calendar year (income threshold], or
• Income according to § 8 para. 1 KStG (German Corporation Tax Act), which is increased by the remuneration and profits not recognised under § 8b KStG and reduced by the operating expenses that cannot be deducted under § 8b para. 3 and 5 of the KStG, is more than € 2,000,000 in the fiscal year (income threshold).

There is also a reporting obligation in the following cases if the user of the tax structure:

• Belongs to a group within the meaning of § 18 of the German Stock Corporation Act
• Together with other domestic is controlled or uniformly managed by a foreign natural or legal person, a majority of persons, a foundation or other special purpose reserve, or economically linked to a foreign business as per § 138e para. 3
• Is an investment fund or a special investment fund within the meaning of the Investment Tax Act, or
• Is an investor:
  • Either in an investment fund within the meaning of the Investment Tax Act, if no more than 100 investors are involved in the investment fund and the acquisition costs of the investor's investment shares were at least €100,000 or
  • Or is a special investment fund within the meaning of the Investment Tax Act.

A reporting obligation also applies if the structure relates to the following:

• By acquisition of death or by a donation of assets, whose value according to § 12 of the German Inheritance Tax Law is expected to be at least €4,000,000 or
• Shares in a company are acquired or transferred directly or indirectly and the value of the real estate property mediated by the shares is at least €5,000,000 according to § 8 para. 2 of the GrEStG (German Real Estate Transfer Tax Act)

Personal reporting obligation

The intermediary is responsible for reporting. What constitutes an intermediary is defined in § 138d para. 1 of the AO (German General Fiscal Code). An intermediary is defined as any person who markets, designs, organises or makes available to third parties a domestic tax structure or manages its implementation by third parties. In addition, the intermediary must have a domestic reference in order to be reportable to the BZSt (Germany’s Federal Central Tax Office). This is the case when the intermediary:

• Is a resident of Germany (registered office, management, residence, or habitual residence)
• The tax-related service is provided through a domestic establishment
• Is entered in the commercial register or a public professional register
• Is registered with a professional association for legal, tax or advisory services

The user is then subject to reporting (with regard to all information) if there is no reportable intermediary or if the user has planned the domestic tax structure for their own use.

Reporting procedure

The reporting procedure and the information that must be transmitted to the BZSt essentially correspond to the requirements of § 138f AO applicable to transnational tax structures. The reporting must be done electronically to the BZSt (Federal Central Tax Office) in accordance with an officially prescribed data form.

Unlike for transnational structures, the reporting is not required to be done within 30 days, but rather within two months of the end of the day on which the first of the following events occurs:

• The domestic tax structure is made available for implementation.
• The user of the domestic tax structure is willing to implement it.
• At least one user of the domestic tax structure has taken the first step in implementing this tax structure.

Additional disclosure requirements in the tax return

Similar to the transnational reporting requirements, the registration and disclosure numbers must be indicated in the tax return in which the tax advantage is to have an effect for the first time.

Sanctions for infringements

Violations of the reporting obligation are treated as an administrative offence and are punishable with fines of up to €10,000. Violations are the failure to report, missing the reporting deadline, and incomplete or incorrect reporting.

If the DE registration number and DE disclosure number are not specified in the tax return in which the tax advantage is to have an effect for the first time, this also constitutes an administrative offence punishable with a fine of up to €10,000.

Time of application

The provisions of the reporting obligation for domestic structures will take effect on January 1, 2025. It should be noted that domestic tax structures, the first step of whose implementation was after the announcement of the Growth Opportunities Act and before January 31, 2025, should already be included in the reporting requirement.

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