Tax reliefs by German Growth Opportunities Act

The “Growth Opportunities Act” has been proposed by the German government with the goal of creating a comprehensive relief package for the German economy. Although the final decision on the law in the Bundesrat is still pending, there are indications that the opposition and the government are going to reach a consensus in these economically challenging times. Provided this is the case, it is already worth taking a closer look at the various individual measures, such as special depreciation and improved loss utilization options. 

Originally, the legislator promised for the law to provide for reliefs in the total amount of approximately seven billion euros in order to counteract the economic consequences of current crises (in particular the Covid-19 pandemic and the Russian war on Ukraine as well as the resulting economic burdens). 

An amended version of the proposed government draft of the “Act to strengthen growth opportunities, investments and innovation as well as tax simplification and tax fairness” (which is the official title) of August 30, 2023 has already been passed by the Bundestag on November 17, 2023; however, the Bundesrat refused its approval and requested the conciliation committee to bring about a compromise solution. On February 21, 2024, such committee has now dealt with the Growth Opportunities Act and decided on a result with the three-party government’s majority. The proposed compromise, which now provides for a significantly lower scope of relief (approximately three billion euros), has subsequently been confirmed by the Bundestag on February 23, 2024. 

Now, the Bundesrat’s decision on March 22, 2024 will be decisive. The German Union parties (CDU/CSU) make the required consent still dependent upon the government keeping the farmers’ diesel fuel subsidies or making other concessions to farmers; due to public pressure, in particular from trade associations, an approval is quite likely.
Individual regulations (for example, amendments in connection with the earnings stripping rule (Zinsschranke) pursuant to Art. 4h EStG (German Income Tax Act), important tax adjustments to the MoPeG (German Partnership Law Modernization Act)) have already been implemented in December 2023 by way of the Secondary Credit Market Promotion Act.

In the following, we will show a selection of important changes and will also mention regulations which have not been included in the law. 

Income tax

Special depreciation
•    Art. 7g (5) EStG: Investment costs of businesses with an income threshold of up to EUR 200,000 in the year preceding the investment, possibly subject to further requirements, may in future be subject to a special depreciation of 40 percent. Such regulation can be used for depreciable movable fixed assets acquired after December 31, 2023. 
According to the current legal situation, special depreciations can only be used in the amount of up to 20 percent of acquisition or production costs. 
•    Art. 7b EStG: Special depreciation for newly constructed rental apartments – The construction cost ceiling (acquisition or production cost) will be raised to EUR 5,200 per square meter living space (previously EUR 4,800). The maximum assessment basis for special depreciations is EUR 4,000 per square meter (previously EUR 2,500). The period of application is extended and now applies to apartments for which the planning application or notice of intended building works is submitted before October 1, 2029 (previously January 1, 2027).

Declining-balance method
•    Art. 7 (2) sentence 1 EStG: Movable fixed assets acquired after March 31, 2024 and before January 1, 2025 can be depreciated according to the declining-balance method. 
The percentage rate which can be applied to such assets’ depreciation is limited to two times the percentage applicable in case of a straight-line depreciation or a maximum of 20 percent. 
Since the introduction of the Second Corona Tax Relief Act on January 1, 2020 (extended until December 31, 2022 by the Fourth Corona Tax Relief Act), it has already been possible to claim the declining-balance method in the tax balance sheet. The percentage rate that could be applied to the depreciation of these assets was previously limited to two and a half times the straight-line annual depreciation or a maximum of 25 percent.
•    Art. 7 (5a) EStG: Buildings located in the EU/EEA which are intended for residential purposes and have been constructed or acquired by the taxpayer by the end of the year of completion, can now be depreciated according to the declining-balance method with an unchanged percentage rate of 5 percent of the respective (residual) book value. An application of the declining-balance method requires for the construction to have started after September 30, 2023 and before October 1, 2029 or, in case of acquisition, for the obligatory contract to have been concluded during such period. When applying the declining-balance method, the taxpayer cannot claim any depreciation for extraordinary technical or economic wear and tear at the same time. It is admissible for the taxpayer to switch to the straight-line method. 
Previously, there was no comparable regulation. 

Limits of minimum taxation / loss utilization
•    Art. 10d (2) EStG: Loss carryforwards during the 2024 – 2027 assessment periods can be deducted in excess of the basic amount (of EUR 1 million or EUR 2 million in case of joint assessment) (also for corporate income tax, but not for trade tax purposes) up to 70 percent of the total amount of income exceeding the basic amount. However, the law provides for a return to the regular rate of 60 percent from the 2028 assessment period. 
According to the current legal situation, the loss utilization exceeding the basic amount has been limited to 60 percent of the total amount of income in the loss carryforward year.

Private use of electric vehicles (1 % rule)
•    Art. 6 (1) No. 4 sentence 2 No. 3 EStG: According to the 1 % rule, electric vehicles acquired after December 31, 2023, are to be recognized at a quarter of the gross list price or, using the logbook method, at a quarter of the acquisition cost. However, this only applies as long as the vehicle’s gross list price does not exceed the maximum amount of EUR 70,000. This also includes the transfer to employees. For hybrid vehicles registered from January 1, 2025, the minimum range will be increased to 80 km as planned.
According to the current legal situation, electric vehicles can be recognized at a quarter up to a gross list price of EUR 60,000. The previous range limit for hybrid vehicles is 60 km.

Valuation of contributed “young” assets from business assets
•    Art. 6 (1) No. 5 sentence 1a EStG: In future, contributed “young” assets will only be valued at amortized cost if they originate from private assets. 

Private sales
•    Art. 23 (3) sentence 5 EStG: From the 2024 assessment period, the exemption limit for private sales will be increased to EUR 1,000 per calendar year. Such exemption limit, up to which sales are fully tax-exempt, is still to be granted separately to each spouse within the scope of joint assessment. 
According to the current legal situation, the exemption limit for private sales was EUR 600 per calendar year. 

Gifts
•    Art. 4 (5) sentence 1 No. 1 sentence 2 EStG: For fiscal years starting after December 31, 2023, expenses for gifts to persons who are no employees of the taxpayer, and which do not exceed an amount of EUR 50, must not reduce profits. 
According to the current legal situation, gifts up to an amount of EUR 35 must not reduce profits. 

Preferential treatment of retained earnings
•    Art. 34a EStG: From the 2024 assessment period, profits eligible for preferential treatment will be increased by the paid trade tax and the amounts withdrawn for payment of income taxes pursuant to Art. 34a (1) EStG. The amended order of use in accordance with Art. 34a (2) EStG is to be welcomed, according to which withdrawals up to the amount of income tax payable (plus solidarity surcharge) are deemed to have priority use. In return, the law will be tightened with regard to potential events subject to subsequent taxation in order to avoid possible structuring models.
One-fifth rule in the payroll deduction process
•    Former Art. 39b (3) sentence 9 and 10 EStG: From the 2025 assessment period, the application of the one-fifth rule for wages subject to a reduced rate pursuant to Art. 34 (1) EStG by way of the wage tax deduction procedure will be completely abolished in view of its complexity. It will then only be possible to apply for the one-fifth rule as part of the income tax assessment process.
•    Art. 50 (2) sentence 2 No. 4 lit. d EStG: From the 2025 assessment period, employees subject to limited tax liability will be able to opt for a voluntary assessment upon application provided their wages are taxed at a reduced rate.
Exemption limit for withholding tax
•    This rule generally affects remuneration debtors with low-paid creditors (e.g., payments from publishers for the transfer of rights to photographs). The exemption limit including the tax to be paid in accordance with Art. 50a EStG will be increased to EUR 10,000 (previously EUR 5,000) for remuneration received after December 31, 2023.

Corporate income tax

Corporate income tax option
•    Art. 1a KStG: Extension of the scope of application to include registered companies under civil law, as well as further adjustments of the statutory regulation. 

Foreign countries / loss recognition for consolidated tax groups
•    The regulation pursuant to Art. 14 (1) sentence 1 No. 5 KStG will be deleted. According to such regulation losses of the controlling or the controlled company will be disregarded for German tax purposes, to the extent they are taken into account in a foreign country, in particular within the scope of the controlling and the controlled company’s taxation.
 
Harmlessness limit for housing cooperatives and associations
•    Art. 5 (1) No. 10 sentence 3 KStG: From the 2023 assessment period, housing cooperatives and associations can also benefit from the tax exemption if the harmlessness limit of 10 percent is exceeded exclusively because of income from electricity supplies from landlord-to-tenant electricity systems but this income accounts for less than 30 percent of their total income.
According to the current legal situation, the tax exemption pursuant to Art. 5 (1) No. 10 sentence 3 KStG is only applicable to the extent the income from electricity supplies do not exceed the total income threshold of 20 percent. 
Reimbursement claims of foreign non-profit organizations
•    Art. 32 (6) KStG: Due to the free movement of capital, the capital gains tax refund will in future also be granted to foreign non-profit organizations domiciled in EU and EEA countries. Such refund claim simulates the tax exemption pursuant to Art. 5 (1) No. 9 KStG for such organizations in the area of capital gains tax.
Previously, there was no comparable regulation. 

Trade tax

Extended real property deduction
•    Art. 9 No. 1 sentence 3 lit. b GewStG (German Trade Tax Act): From the 2023 assessment period, a real estate company’s income from systems for generating electricity from renewable energies or from the operation of charging stations for electric vehicles or electric bicycles is not detrimental for the purposes of applying the extended real property deduction if it does not exceed the harmlessness limit of 20 percent of the income from the transfer for use.
According to the current legal situation, the harmlessness limit is only 10 percent.
Foreign Transaction Tax Act
•    Art. 1 (3d) and (3e) AStG: In connection with cross-border financing relationships and services, the law demands, inter alia, strict requirements for the admissible amount of interest on loans according to arm’s-length principles, as well as proof that the debtor needs and is able to repay the loan.

VAT

E-invoicing
•    Art. 14 (1) sentence 2 to 8, (2) and (3) UStG (German VAT Act), Art. 27 (38) UStG, Art. 33, 34 UStDV (Value Added Tax Implementation Ordinance): With effect from January 1, 2025, the introduction of an e-invoice becomes mandatory for sales between businesses (so-called B2B sales). The law provides for a transitional period from January 1, 2025 to December 31, 2026. 
Previously, there was no comparable regulation according to which e-invoices had to be issued between businesses. 
Input VAT return
•    Art. 18 UStG: If the tax for the previous calendar year does not exceed an amount of EUR 2,000, the tax office can release the entrepreneur from his obligation to file an input VAT return. Such regulation applies from the 2025 assessment period. 
According to the current legal situation, the tax office can release the entrepreneur from his filing obligation if the previous year’s tax does not exceed an amount of EUR 1,000.
Small business owners
•    Art. 19 (1) sentence 4 UStG: With some exceptions, small businesses will no longer be required to file an annual VAT return from the 2024 tax period onwards.
Previously, small business owners were also required to file an annual VAT return with the tax office. 
Limits of actual taxation
•    Art. 20 sentence 1 No. 1 UStG: The option to calculate taxes according to actually collected instead of agreed fees will be granted to entrepreneurs from the 2024 tax period, provided their total sales generated in the previous calendar year does not exceed an amount of EUR 800,000. 
According to the current legal situation, this is granted to entrepreneurs with total sales of EUR 600,000 in the previous calendar year. 

German General Tax Code

Notification obligations
•    Art. 138 (1c) AO: The obligation to notify the competent tax office of gainful employment can be waived in future by means of authorization from the Federal Ministry of Finance.
Previously, there has not been any comparable regulation. 
Thresholds for the obligation to keep accounts
•    Art. 141 AO: The threshold amounts for the obligation to keep accounts will be raised for fiscal years after December 31, 2023 to EUR 800,000 (sales) in the calendar year or income from trade or business of more than EUR 80,000. These amounts will be adjusted accordingly at the level of the German HGB. 
According to the previous legal situation, entrepreneurs are obliged to keep accounts if sales in the calendar year exceed an amount of EUR 600,000 or if profits exceed an amount of EUR 60,000. 
Retention obligation in case of surplus income
•    Art. 147 (1) AO: From the 2027 assessment period, taxpayers generating surplus income of more than EUR 750,000 in the calendar year are obliged to retain records and documents on the surplus income’s underlying income and income-related expenses for a period of six years. 
According to the current legal situation, entrepreneurs are obliged to retain documents to the extent their surplus income exceeds an amount of EUR 500,000. 

International risk assessment process
•    With Art. 89 b AO, the legislator wants to provide large enterprises with the general possibility to achieve, at an early stage, planning security in tax-related issues in an international context. 
Suspension interest
•    Art. 237 (6) AO: With regard to liability claims suspended from enforcement, suspension interest will be introduced for all liability claims arising after December 31, 2024.

German Research Allowance Act
•    In this context, several changes need to be taken into account, in particular the removed time limit and increase in the maximum assessment basis for eligible expenses to EUR 10,000,000 (Art. 3 (5) FZulG).

Selection of deleted measures compared to the original government proposal

•    Reporting obligation for national tax structures: The law now refrains from introducing an obligation to report national tax structures in line with the regulation pursuant to Art. 138d AO for international tax structures. 
•    Exemption limit for income from rent and lease: The planned exemption limit for income from rent and lease in the amount of EUR 1,000 will not become part of the law. 
•    Increase of the exemption limit for low-value assets: The plans to increase the exemption limit to EUR 1,000 and the extended application of the compound-item regulation pursuant to Art. 6 (2), (2a) sentence 1 and sentence 2 EStG are not going to be implemented. 
•    Increase of the allowance for corporate events: The allowance is not going to be increased to EUR 150 (Art. 19 (1) sentence 1 No. 1a sentence 3 EStG), the current value will be retained. 
•    Extended loss carryback: The loss carryback is not going to be extended to three years; losses can still be carried back for only up to two assessment periods. Apart from that, the original maximum amounts are to be applied from the 2024 assessment period. 
•    Climate protection investment bonus: Contrary to the original plans, no investment bonus will be granted.