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Draft bill for the 2024 Annual Tax Act

While it was only recently, in March 2024, that the German Growth Opportunities Act was passed, now already, there is an (unofficial) draft bill for the 2024 Annual Tax Act. The draft’s 240 or so pages contain not solely adjustments to take account of court rulings, but also consequential amendments as well as the correction of errors and they relate to many types of tax. In the following section we discuss the most important planned changes; unless otherwise noted these will apply when the legislation is promulgated.

Income tax/payroll tax

(1) Tax exemption for PV systems - The permissible gross capacity according to the core energy market data register (Marktstammdatenregister) to which a tax exemption can be applied will be increased from 15 kW (peak) to 30 kW (peak) per residential or commercial unit. Furthermore, also in the case of buildings with several commercial units, PV systems with capacity of up to 30 kW (peak) per commercial unit (exemption limit) will be eligible for the tax benefit.

(2) Flat-rate taxation for so-called mobility budgets - If, in addition to remuneration that would in any case be due, an employer gives a benefit in kind or a subsidy for the private use of mobility services (such as, e.g., e-scooters or the occasional use of car sharing, bike sharing as well as other sharing offerings and travel services, irrespective of the means of transport) then the employer can tax these at a flat rate of 25% up to a maximum amount of €2,400 p.a. and assume these costs. In doing so, the aim is to encourage environmentally-friendly mobility. According to the draft bill, permanent use of cars and other vehicles is excluded.

(3) Addition of a corporate group clause in Section 19a of the Income Tax Act (Einkommenssteuergesetz, EStG) - The tax concession will be extended to cover the transfer of shares in group companies. It will accordingly be possible to defer the taxation of non-cash benefits from capital participations if shares in the employer’s company are transferred or alternatively shares in affiliated companies. The application of the corporate group clause will however be linked to certain conditions. The planned date of entry into force has been backdated to 1.1.2024.

Trade Tax 

(1) Income from foreign permanent establishments - All passive income from foreign permanent establishments will be deemed to have been generated in a (German) domestic permanent establishment and also as such income that Germany would have the right to tax if a DTA was in place. This provision will also be applicable for reporting periods prior to 2024.

(2) Trade tax liability in the case of indirect transfers - In the future, if a natural person transfers their assets to a partnership and if the shares in the acquiring partnership are directly or indirectly sold or relinquished then the gains from the sale or the relinquishment would be subject to trade tax.

Value Added Tax

(1) Unauthorised VAT amounts stated on credit notes - According to the draft bill, the scope of the current provision that applies to invoices with an incorrect or an unauthorised statement of the VAT element will be extended to include credit notes. The recipient of the credit note would then thus be liable for the VAT even if it had been wrongly charged.

(2) Expansion of the scope of the VAT exemption for small businesses - The scope of the small business exemption that has hitherto applied only to businesses that are resident in Germany for tax purposes will now be expanded to also include companies resident elsewhere in the European Union. Furthermore, the thresholds will be adjusted to take account of general price developments so that the total revenues that are relevant for the application of the small business exemption will be increased in the preceding calendar year to €25,000 (previously: €22,000) and in the current calendar year to €100,000 (previously: €50,000). A special reporting procedure will be introduced at the Federal Central Tax Office (Bundeszentralamt für Steuern) for the implementation of the new rules. The planned date of entry into force is 1.1.2025.

(3) Input tax deduction where cash accounting is used for VAT purposes (Ist-Versteuerung) - Up to now, it has generally been possible to claim an input tax deduction on the date of performance (subject to the other conditions) irrespective of whether or not payment has been made. In cases where cash accounting is used for VAT purposes, it will now only be possible to claim an input tax deduction once payment has been received. The planned date of entry into force is 1.1.2026.

Reorganisation Tax

(1) Deadline for submitting the closing balance sheet - A new paragraph 2a, which is to be added to Section 3 of the Reorganisation Tax Act (Umwandlungssteuergesetz, UmwStG), stipulates that, in the future, the closing tax balance sheet will have to be sent electronically to the local tax office within 14 months after the transfer cut-off date for tax purposes. 

(2) Treatment of mergers at the shareholder level - In the case of mergers, shares in the transferring corporation should generally be recognised at book value at the shareholder level if the requirements have been satisfied. Recognition at fair market value pursuant to Section 13(1) UmwStG would now only be possible upon request (and potentially be irrevocable and time limited). 

(3) Withdrawals during the retroactive period - Withdrawals and contributions made during the retroactive period should generally be taken into account when determining the contributed business assets. Recognising the contributed business assets at their book values would then only be possible if no negative acquisition costs arise as a result of taking into account the withdrawals and contributions made during the retroactive period. If this is the case, then the book values of the contributed assets would have to be increased. The aim is for this legislative amendment, which corrects a court ruling, to be applicable for the first time to contributions made as of 1.1.2024.

Inheritance tax

(1) Exemption for real estate worldwide that is rented out for residential purposes - In future, it will be possible to claim the tax exemption for real estate that is rented out for residential purposes (Section 13d of the Inheritance Tax Act [Erbschaftsteuergesetz, ErbStG]) irrespective of whether the real estate is in Germany, in an EU Member State or in a third country. The condition that is provided for this is that an exchange of information has to be ensured with this (third) country in respect of inheritance tax.

(2) Extension of deferral pursuant to Section 28(3) ErbStG - According to the draft bill, the option to defer inheritance/gift tax, which was hitherto only available for real estate used for specific purposes, will now be extended to all cases where the real estate is used for residential purposes.

Short overview of other planned changes

(1) EStG - Transfers at book values between partnerships that are identical in terms of participation. 

(2) UStG - Determining the non-deductible part of input tax amounts, place of taxation for virtual events/activities, revision of the tax exemption rules for sporting events.

(3) Real Estate Transfer Tax Act (Grunderwerbsteuergesetz, GrEStG) - Provision on the attribution of real estate in the case of the realisation of supplementary facts pursuant to Section 1(2a) to (3a) GrEStG.

Next Steps

The draft bill was submitted for so-called early coordination within the government and has not yet been officially published; therefore, before the legislative procedure is completed, it can be expected that a number of changes will be made to the draft text that is currently available.

Comments by associations and the so-called interministerial consultation are still pending. The Federal Government still intends to adopt a resolution on the draft 2024 Annual Tax Act before the parliamentary summer recess. Consultations in the Bundestag and Bundesrat [lower and upper houses of German Parliament] are then likely to follow in autumn 2024. The legislative procedure is not expected to be completed until probably the end of the year.

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