Introduction
In a late August 2023 move, the German government unveiled a revised proposal to amend a draft bill released in July 2023, which outlines significant corporate tax reform measures. This revamped version of the bill introduces pivotal changes, particularly impacting areas such as climate protection investments, tax loss utilization, interest deduction limitations, accelerated depreciation, and claw-back provisions within tax-neutral demergers. Taxpayers, especially those potentially affected, should pay close attention to these proposed alterations as the bill progresses through the legislative process.
Executive Summary
On August 30, 2023, the German government introduced a revised version of the Growth Opportunities Act, building upon the draft bill initially issued by the German Ministry of Finance in mid-July. The release of this revised bill marks the commencement of the formal legislative journey, which could reach completion by the end of 2023.
The Growth Opportunities Act, if passed, would signify the most significant corporate tax reform in Germany since 2008. This development includes several substantial amendments compared to the original draft, encompassing revisions to the expansion of tax loss utilization, modified interest deduction limitations, and the introduction of a new interest rate-based deduction limitation.
Detailed Discussion
- Premium for Climate Protection Investments
One of the standout amendments in the revised bill pertains to the extension of the premium for climate protection investments. Under the new proposal, this premium will be extended by two years, applying to qualified investments initiated after December 31, 2023, and concluding before January 1, 2030. This incentive is targeted at investments in depreciable movable fixed assets associated with energy-saving or energy-management systems. The premium offered could reach up to 15% of the investment amount, capped at €30 million.
2. Tax Loss Utilization
The government’s revision introduces substantial modifications to the utilization of tax losses. Notably, it increases the utilization rate of taxable income exceeding €1 million from 60% to 80% for the years 2024 through 2027, reverting back to 60% from 2028 onwards. Initially, the bill had proposed unlimited utilization during these years. Additionally, the government’s revision abandons the initially proposed increase of the €1 million threshold to €10 million, keeping the improved tax loss carryback intact.
3. Interest Deduction Limitation
The previously abolished group and equity escapes for the interest deduction limitation rule will remain available, although the group escape will be subject to stricter conditions. 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 but maintains the concept of a one-time claim per group of similar businesses that are related parties. This adjustment further tightens the rule.
The proposed interest rate limitation rule, applicable to interest expenses arising after December 31, 2023, remains largely unchanged. However, the government’s revision introduces a one-month delay in its applicability if the agreed interest rate exceeds the stipulated maximum interest rate. This change necessitates taxpayers to adjust existing financing arrangements within one month of an updated interest rate, ensuring compliance with the new threshold.
4. Accelerated Depreciation
Accelerated depreciation will apply to residential buildings constructed or acquired by taxpayers after September 30, 2023, and before October 1, 2029. Furthermore, movable assets purchased or manufactured between September 30, 2023, and January 1, 2025, will benefit from temporarily reintroduced accelerated depreciation.
5. Claw-Back Provisions within Tax-Neutral Demergers
The original draft bill proposed modifications to the rules governing tax-neutral demergers to counteract previous case law. These changes required a five-year holding period before the tax effectiveness of the demerger, affecting recently established or combined corporate groups. The government’s revision relaxes this requirement somewhat by exempting affiliated parties of the transferor from the five-year period obligation.
Conclusion
The German Growth Opportunities Act, with its recent amendments, stands as a significant milestone in the country’s corporate tax reform landscape. These changes promise to impact various facets of taxation, from climate protection investments to interest deduction limitations. Tax professionals, investors, and those engaged in tax-related endeavors should closely monitor the bill’s progress, as it could reshape the tax landscape in Germany and potentially influence corporate strategies in the years to come.
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