September 6, 2023
German government issues revised draft Growth Opportunities Act bill on corporate tax reform
- A late-August 2023 proposal by the German government would amend a draft bill published in July 2023 that proposes significant corporate tax reform measures.
- Compared to the initial draft, the revised bill in particular affects the proposed changes to climate-protection investments, tax-loss utilization, interest-deduction limitation, accelerated depreciation, and claw-back provisions within tax-neutral demergers.
- Potentially affected taxpayers should note the proposed changes and watch for further developments as the bill works its way through the legislative process.
The German government, on 30 August 2023, issued a revised Growth Opportunities Act, a draft bill that the German Ministry of Finance (MoF) had initially issued in mid-July. Issuance of the revised bill begins the formal legislative process, which could be completed by the end of 2023.
The Growth Opportunities Act would constitute the biggest corporate tax reform in Germany since 2008 (see Global Tax Alert, German Ministry of Finance surprises with draft bill for biggest corporate tax reform since 2008, published 18 July 2023). The government's revision includes several changes to the initial draft bill, including changes to the proposed expansion of tax loss utilization, revised interest deduction limitations and the proposed new interest rate-based deduction limitation.
Premium for climate protection investments
- The period for the premium for climate protection is proposed to be extended by two years, now covering qualified investments started after the 31 December 2023 and ending before 1 January 2030.
- The premium is to be available for investments in new and existing depreciable movable fixed assets that are part of an energy-saving or energy-management system. The premium would amount to up to 15% of the investment but would be capped at €30 million.
Tax loss utilization
- The government's revision would make significant changes to the utilization of tax losses. Specifically, the revision would only increase the utilization rate of taxable income exceeding €1 million from 60% to 80% for the year 2024 up to and including 2027 and revert back to 60% as of 2028. Initially, the bill had proposed to allow for an unlimited utilization during these years. Moreover, the government's revision abandons the initially included increase of the €1 million threshold to €10 million.
- The proposed improved tax loss carryback remains unchanged in the revised bill.
Interest deduction limitation
- The initially abolished group and equity escapes for the interest deduction limitation rule will remain available. However, the group escape will be tightened in that it will not apply if the taxpayer has any affiliated party or a foreign permanent establishment. The revision excludes the proposal to transform the €3 million net interest threshold into an allowance. However, in line with the initial proposal, the threshold can only be claimed once per group of similar businesses that are related parties and would have to be allocated proportionally to each entity of a group based on net interest expenses. Effectively, this tightens the rule further.
- The proposed interest-rate limitation rule applicable for all interest expenses arising after 31 December 2023 remains mainly unchanged (see Global Tax Alert, German Ministry of Finance proposes interest-rate limitation rule, published 25 July 2023). The government's revision would delay applicability of the rule by one month if the agreed interest rate exceeds the stipulated maximum interest rate (currently 3.12% plus 200 basis points) only because of the bi-annually updated base interest rate under the German Civil Code. Effectively, this would require taxpayers to adjust existing financing arrangements within one month of an update of the relevant interest rate if the agreed rate would otherwise be above the new updated threshold and none of the other available exceptions is met. Otherwise, interest would become nondeductible to the extent it exceeds the interest expense based on the current maximum interest rate and neither of the two escape clauses can be applied.
- Accelerated depreciation would be implemented for a building used for residential purposes that the taxpayer constructed or acquired by the end of the year of completion; construction must begin after 30 September 2023 and before 1 October 2029 or the acquisition must be made based on an obligatory contract concluded with legal effect after 30 September 2023 and before 1 October 2029.
- Accelerated depreciation for movable assets purchased or manufactured after 30 September 2023 and before 1 January 2025 would be temporarily reintroduced.
Claw-back provisions within tax-neutral demergers
- The initial draft bill proposed changes to the rules on tax-neutral demergers to counteract case law that held a share transfer of 20% or less within five years after a tax-neutral demerger is not harmful. The proposed changes, however, required a five-year holding period prior to the tax effectiveness of the demerger, thereby tightening the rules for recently established or combined corporate groups. The government's revision eases this requirement somewhat in that affiliated parties of the transferor are not required to meet the five-year period.
For additional information with respect to this Alert, please contact the following:
Ernst & Young GmbH, Germany
Ernst & Young LLP (United States), German Tax Desk, New York
Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor