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Executive summary

On 22 March 2024 the German Federal Council approved a revised version of the Growth Opportunities Act. The scope of the final bill was reduced significantly compared to the initial discussion draft (details on the initial discussion draft and an earlier revised draft can be found in EY Global Tax Alerts: German government issues revised draft Growth Opportunities Act bill on corporate tax reform, dated 6 September 2023; and German Ministry of Finance surprises with draft bill for biggest corporate tax reform since 2008, dated 18 July 2023.). The bill will be enacted after the publication in the Federal Law Gazette, which is expected soon.

The bill, which had started as the biggest corporate tax reform since 2008, has shrunk to a minor stimulus package. It includes new limitations on deductible interest expenses on intercompany financing and amended rules for tax loss utilization. Major relief measures of the initial package were cut, such as further improved rules for loss offsetting and the climate protection investment premium. Mandatory disclosure rules for domestic tax arrangements have also been deleted from the bill.

Major changes

Interest deduction limitation

The earlier proposed interest-rate based limitation rule was replaced by new provisions in the Foreign Tax Act (AStG) within the legislative process, which are still part of the final bill.

The new provisions on intercompany financing provide that interest expenses for an intercompany cross-border financing relationship (loans, in particular, as well as the use or provision of debt or debt-like instruments) can only be deducted if the taxpayer can demonstrate that (i) principal and interest payments can be serviced throughout the entire term of the financing period (debt capacity/cash-flow test) and (ii) there was a business need for the financing and the borrowed funds were utilized for that purpose (business-purpose test). Additionally, the interest rate for the cross-border intercompany financing relationship transaction must not exceed the interest rate at which the group refinances vis-à-vis third parties unless it is demonstrated, in a particular case, that a credit rating deviating from, but nonetheless derived from, the group credit rating is in line with the arm's-length principle.

Furthermore, a new provision includes a rebuttable presumption that any intercompany cross-border financing arrangements that are mediated, arranged or forwarded are considered per se a low-function and low-risk service. This is also applicable to captive treasury centers and captive financing companies performing, for example, liquidity management or financial risk management for other group companies. How such low-function and low-risk service should be remunerated is only briefly described in the explanatory notes. According to these, the remuneration for such transactions is typically to be determined based on the cost-plus method considering directly attributable operating costs but not including refinancing costs in the cost base. A markup between 5% and 10% is considered as not unreasonable. In addition, refinancing costs can be taken into account with a risk-free return.

Given that the explanatory notes do not provide further guidance, it is currently unclear how to interpret these potentially far-reaching new rules. The rules on cross-border intercompany financing will apply with retroactive effect for the tax assessment period 2024.

Tax loss deduction

The improved loss carryforward annual offset percentage is implemented for four years (2024 to 2027). Income exceeding €1m can be offset against tax loss carryforwards at a rate of 70% (instead of 60% under current rules) during this period. This applies to income tax and corporate tax, but not to trade tax, contrary to the earlier draft bill.

However, the loss carryback will not be increased as proposed in an earlier draft. There will also be no extension of the carryback period. As a result, the old maximum limits with a carryback period of two years will apply again from 2024.

Claw-back provisions within tax-neutral demergers

The claw-back provisions within tax-neutral demergers are tightened in response to case law. According to the revised rules, a tax-neutral demerger is not possible (or becomes taxable retroactively) if the demerger results in a direct or indirect sale of an involved corporation to third parties, or a sale is prepared. This is assumed if shares in any of the involved entities are sold to a third party within five years of the effective date. A third party is defined as anyone "who did not participate in the transferring corporation for an uninterrupted period of five years prior to the demerger." Affiliated parties of the transferor are not required to meet the five-year period.

The changes apply (retroactively) to demergers for which the application for registration in the required public register takes place after 14 July 2023.

Increased R&D allowance

The maximum assessment basis for the research and development (R&D) allowance will be increased from €4m currently to €10m, while the proportion of eligible costs for contract research will increase from 60% to 70%. These and other changes will only apply as of the day after which the law is promulgated and not as of 1 January 2024.

Improved depreciation

A declining balance depreciation for movable fixed assets will be granted for assets acquired or produced after 31 March 2024 and before 1 January 2025 and can amount to a maximum of twice the straight-line depreciation but not more than 20%.

Updated "check-the-box" elections for partnerships

The "check-the-box" election for partnerships to be taxed as corporations will be adjusted to make the election more appealing. The scope will be expanded to all partnerships (currently only possible for certain partnerships). In addition, the timing will be adjusted so that it would be possible to elect to be taxed as a corporation beginning when the partnership is formed or when a change of legal form into a partnership occurs (currently only possible for the first fiscal year following the year of foundation).

Transfers of assets between corporations on rollover basis

The contribution of assets that were acquired or developed three years prior to the transfer must be reflected at fair market value. The existing rollover regime for contributions of such "young assets" will be abolished for all transfers executed after the bill is published in the Federal Law Gazette.

Additional amendments

In addition, the bill includes amendments to several other rules, such as:

• For value-added tax, mandatory business-to-business e-invoicing is introduced in principle as of 1 January 2025. The general transition period covers two years, from 1 January 2025 to 31 December 2026.
• Changes are made to the treatment of earnings retained by a partnership in a specific regime.
• The de-minimis threshold for income from the delivery of electricity within the extended trade tax reduction for real estate businesses is increased from the tax year 2023 onward.
• Changes are made to the treatment of earnings retained by a partnership in a specific regime.

Provisions deleted from earlier drafts include:

• The previously planned reporting obligation for domestic tax arrangements is not introduced.
• The premium for climate protection investments is not part of the final Growth Opportunities Act. It remains to be seen whether the coalition will present a revised investment premium at a later date.