Significant Tax Law Changes in Germany: Year-End Status

The German legislator is currently planning a number of changes that will have a significant impact on taxpayers, including, in particular, the Act to Strengthen Growth Opportunities, Investment and Innovation as well as Tax Simplification and Fairness (Growth Opportunities Act - Wachstumschancengesetz), the Act Implementing Council Directive (EU) 2022/2523 on ensuring a Global Minimum Taxation and Other Accompanying Measures (Minimum Taxation Directive Implementation Act – Mindestbesteuerungsrichtlinie-Umsetzungsgesetz) and the Act on the Financing of Future-Proof Investments (Future Financing Act - Zukunftsfinanzierungsgesetz).

Due to delays, in particular as a result of the ruling by the Federal Constitutional Court (BVerfG) of November 15, 2023, selected tax changes are now to be included in the Act on the Promotion of Orderly Secondary Credit Markets and on the Implementation of Directive (EU) 2021/2167 on Credit Service Providers and Credit Purchasers and on the Amendment of Other Provisions of Financial Law (Secondary Credit Market Promotion Act - Kreditzweitmarktförderungsgesetz) on very short notice.

Below we provide an overview of significant developments and changes to tax regulations as well as the current status of the legislative process (at the time of publication).

Secondary Credit Market Promotion Act

The government and the opposition were unable to reach an agreement on the Growth Opportunities Act, in particular due to the budgetary policy discussions following the ruling by the Federal Constitutional Court.

Against this background, select provisions of the Growth Opportunities Act were transferred with very short notice to the legislative process for the Secondary Credit Market Promotion Act:

• Tightening of the regulations on the interest barrier, in particular an extension of the interest barrier to “economically equivalent expenses and other expenses in connection with the procurement of borrowed capital” (Section 4h (3) sentence 2 EStG) and tightening of the so-called stand-alone clause (Section 4h (2) sentence 1 EStG). In contrast, interest expenses and income from loans to finance public infrastructure projects will not be taken into account for the purposes of the interest barrier in the future (Section 4h (6) EStG).
• Continued validity of joint and several liability for partnerships for the purposes of real estate transfer tax in response to the extensive abolition of the joint and several liability under the Act on the Modernization of Partnership Law (MoPeG). The regulation is limited to three years and is intended to ensure the smooth continuation of the status quo regardless of any changes made by the MoPeG (Section 24 GrEStG).
• Extensive regulations on the qualification and recording of associations of persons with and without legal capacity as well as corporations with registered offices abroad (Sections 14a, 14b AO).

 The Bundestag passed the Secondary Credit Market Promotion Act on December 14, 2023 and the Bundesrat approved it on December 15, 2023.

Growth Opportunities Act

On November 17, 2023, the Federal Parliament passed the Growth Opportunities Act in the 2nd/3rd reading. Compared to the government draft (see our article from September 26, 2023), this contains a large number of changes, some of which were also included at the suggestion of the Federal Council.

Notwithstanding the consideration of suggestions from the Federal Council by the Federal Parliament, the chamber of the federal states referred the project to the mediation committee on November 24, 2023 and demanded a “fundamental revision of the law.” However, due to the unclear budgetary situation against the backdrop of the Federal Constitutional Court's November 15 decision on the use of credit authorizations (here: so-called climate and transformation fund), representatives of the federal and state governments were unable to agree on compromise lines for a mediation procedure.

Insofar as tax changes have not been incorporated into the Secondary Credit Market Promotion Act (see above), these are expected to be discussed by the Mediation Committee at the beginning of 2024.

Significant Income Tax Changes Compared to Government Draft

• Deletion of the interest barrier cap and instead a tightening of the requirements for the recognition of cross-border financing (Section 1 (3d) and (3e) AStG-E)
• Increase in loss carrybackward options to €10 million and €20 million, respectively, for 2024 and 2025 (€5 million thereafter) and temporary mitigation of minimum taxation with offsetting option of 75% instead of 60% for four years (Section 10d EStG-E)
• Deletion of the rule on the combined exemption limit in group cases for purposes of the interest barrier rule (the so-called anti-fragmentation rule, still contained in the government draft in Section 4h (2) sentence 1 letter a) EStG-E) and the extension of the interest barrier to “economically equivalent expenses” and other changes are now covered by the Secondary Credit Market Promotion Act (see above)
• Extension of the personal scope of application of the corporation income tax option to registered civil law companies (Gesellschaft bürgerlichen Rechts, Section 1 (1a) KStG-E)
• Crediting of tax deduction amounts also for income that is tax-exempt under double taxation treaties (extension of Section 36 (2) sentence 1 no. 2 letter b EStG-E) and treaty override with regard to crediting restrictions under Section 36a (1) sentence 1 EStG.

 Other Significant Changes Compared to Government Draft

• Real Estate Transfer Tax Act (GrEStG): Introduction of a provision on the continued validity of the joint and several liability of partnerships for the purposes of real estate transfer tax. The background of this provision is the extensive abolition of the joint ownership obligation following the amendments to MoPeG; this temporary regulation is intended to ensure the status quo for the purposes of real estate transfer tax until a final legislative adjustment (now included in the Secondary Credit Market Promotion Act, see above).
• General Fiscal Code (AO): Obligation to report domestic tax arrangements (amendment to review the income or revenue threshold, Section 138l (5) AO-E).
• Investment Tax Act (InvStG): Non-consideration of real estate and real estate companies when determining the real estate partial exemption in the absence of or insufficient prior encumbrance (Section 2 (9a) InvStG-E).

Minimum Taxation Directive Implementation Act

In contrast to the Growth Opportunities Act and Secondary Credit Market Promotion Act, the adjustments made over the course of parliamentary deliberations in the Minimum Taxation Directive Implementation Act, which was passed by the Federal Parliament on November 10, 2023, are fairly straightforward.

The main contents can therefore be found in our article dated September 26, 2023 on the government draft.

The reduction of the low tax threshold from 25% to 15% pursuant to Section 8 (5) AStG and the corresponding reduction of the low tax rate for the license barrier (Section 4j EstG-E) are particularly positive. On the other hand, the trade tax liability on the add-back amounts (Section 7 sentences 7-9 GewStG) remains in place, contrary to the repeal still envisaged in the draft bill.

According to the directive, the legislative process is to be completed by the end of 2023. The Federal Council gave its approval on December 15, 2023. The law is to enter into force on the day after promulgation.

Future Financing Act

On November 24, 2023, the Federal Council gave its final approval to the Future Financing Act, which the Federal Parliament had passed on November 17, 2023. It will therefore essentially enter into force the day after its promulgation or on January 1, 2024.

The tax changes essentially correspond to those outlined in the draft bill dated April 12, 2023 and can therefore be taken from our article dated June 01, 2023.

In particular, it should be mentioned that the planned extension of the value-added tax  exemption to the administration of alternative investment funds (AIFs) pursuant to Section 4 no. 8 letter h) UStG was implemented, whereas the value-added tax exemption for the administration of loans and loan collaterals (Section 4 no. 8 letters a) and g) UStG-E) was deleted.

In the field of benefits granted to employees, the tax exemption in connection with the acquisition of shareholdings in companies has been extended to a shareholding quote of up to 25% (Section 3 no. 71 letter a) EStG).

Furthermore, to the disadvantage of taxpayers, it has been decided that employment income subject to wage tax is also to be assumed in the case of restricted or nonsaleable participations (Section 19a (1) sentence 3 EStG). The increase in the tax-free amount for the transfer of shareholdings to €5,000, which was still provided for in the draft bill, now amounts to only €2,000 (Section 3 no. 39 EStG).