Federal Ministry of Finance publishes proposals for extensive changes to business taxation and group financing
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With the Minimum Tax Directive Implementation Act, the EU Directive (EU) 2022/2523 on the introduction of a global minimum tax for multinational groups of companies is to be implemented into German law. For details of the global minimum tax, please see our separate TaxBlog. In addition, the draft law provides for relief in relation to controlled foreign companies (CFC) taxation and the abolition of the so-called license barrier, which are described below. The draft of the Growth Opportunities Act contains tax reliefs, for example in the offsetting of losses, but also numerous tightening measures under the heading of "tax fairness".
Whether and to what extent the proposed amendments will be implemented in the further legislative process remains to be seen.
Minimum Tax Directive Implementation Act
Relief with regard to CFC taxation
The German CFC taxation rules (§§ 7-13 AStG) applies to low-taxed passive income (e.g. from interest or licenses) generated by foreign companies controlled in Germany. Under current law, low taxation exists if the passive income is taxed at less than 25%. This very high tax rate has often been criticized because it is higher than the combined corporate and trade tax rate of domestic corporations in some German municipalities with low trade tax rates.
In view of the establishment of a global minimum tax rate of 15%, the tax threshold shall be reduced to 15% as of 1 January 2024. The reduction affects not only CFC taxation due to control (§ 7 AStG), but also in respect of income with investment character, where CFC taxation can apply even if the foreign entity is not controlled by the German taxpayer (§ 13 AStG) as well as the extended CFC taxation under the German Tax Heaven Defense Act (§ 9 StAbwG).
In addition, amounts taxable in Germany under the CFC rules shall no longer be subject to trade tax, but only to corporate income tax (at 15% plus solidarity surcharge). This is also consistent with the global minimum tax rate of 15 %.
Notifications and declarations regarding CFC taxation are to be transmitted electronically in the future (declarations in paper form are only to be possible in exceptional cases).
Abolition of the license barrier
The license barrier introduced in 2018 (§ 4j EStG) prohibits the tax deduction of license expenses in Germany in certain cases of low taxation of the corresponding license income of a foreign licensor (e.g. due to a preferential "patent box" system). The practical significance of the regulation is low. Also against the background of the introduction of a global minimum tax as well as other internationally coordinated measures against profit shifting, the license barrier is to be abolished as of 1 January 2024.
Growth Opportunities Act
Facilitation of the offsetting of losses
The proposed simplifications in the offsetting of tax losses are very welcome:
The loss carry-back period for income and corporate income tax purposes is to be increased from currently 2 to 3 years. The current maximum amount for loss carrybacks of 10 million euros (or 20 million euros for married couples assessed jointly) is to apply permanently. For trade tax purposes, however, a loss carryback shall still not be possible.
In addition, the minimum profit taxation, which currently limits the offsetting of loss carry-forwards with current profits above 1 million euros to 60%, is to be suspended from 2024 up to and including 2027. Profits can hence be offset against losses carried forward without restriction. For companies with loss carry-forwards, asset deals or reorganizations effected at fair market value or interim value to generate a tax step-up will thus become much more attractive.
From 2028, the minimum profit taxation is to be "reintroduced", but only for profits exceeding 10 million euros (or 20 million euros in the case of joint assessment).
For trade tax, too, the minimum taxation is to be suspended for periods from 2024 up to and including 2027 and then only apply from an amount of 10 million euros.
Tightening of tax rules for group financing
The planned tightening of tax rules for group financing concerns the existing regulations on the interest barrier (Zinsschranke, § 4h EStG) as well as the introduction of a new interest rate ceiling (Zinshöhenschranke, § 4l EStG-E).
Interest barrier (Zinsschranke)
The interest deduction restriction of § 4h EStG (generally at 30% of taxable EBITDA) must be adapted to the requirements of the EU Anti-Tax Avoidance Directive (ATAD) by 31 December 2023 at the latest. This is expected to lead to a significant tightening as of 2024.
The currently existing exceptions under the "stand-alone clause" (§ 4h (2) (b) EStG) and the "equity escape" (§ 4h (2) (c) EStG) are considered to be incompatible with the ATAD and are to be abolished without replacement. While the equity escape is of little importance in practice due to strict requirements, the abolition of the stand-alone clause will for the first time lead to the application of the interest barrier to companies that do not belong to a group (e.g. a GmbH without subsidiaries in which two shareholders each hold a 50% stake). This would probably also affect common securitization structures in which the securitization vehicles are held by several foundations, thus avoiding group affiliation and the application of the interest barrier.
On the positive side, the currently applicable threshold amount of 3 million euros net interest expenses is to become a deductible of 3 million euros (the interest barrier would then only affect net interest expenses above 3 million euros). However, this is to be accompanied by a further considerable aggravation: Similar businesses that are under the same control are to be grouped together so that the deductible amount can only be used once by these businesses in total (the allowance is then to be divided according to the respective net interest expenses).
Example: M-GmbH holds all shares in A-GmbH and B-GmbH, both of which produce packaging machines that M-GmbH sells. A-GmbH has net interest expenses of 2 million euros in the relevant assessment period, B-GmbH of 4 million euros. M-GmbH has no net interest expense. There is no fiscal unity for income tax purposes. Under current law, the threshold amount of 3 million euros applies at the level of both A-GmbH and B-GmbH. The interest barrier is therefore only to be observed by B-GmbH (there, however, in respect of the entire net interest expense). In future, A-GmbH and B-GmbH would be considered as similar businesses under the uniform control of M-GmbH. The total allowance amount of 3 million euros available would have to be divided between A-GmbH and B-GmbH in the ratio 2:4. This means that in future the interest barrier would have to be checked at A-GmbH for the net interest expense exceeding 1 million euros and at B-GmbH for the net interest expense exceeding 2 million euros. If one of the companies does not have a deduction restriction under the interest barrier due to sufficient taxable EBITDA, the tax allowance attributable to this company would probably be lost, i.e. it could most likely not be used by the other company.
In addition, the term "interest expenses" is to be expanded and in the future will include not only interest but also other expenses economically comparable to interest as well as expenses in connection with the procurement of borrowed capital. With regard to the current version of the interest barrier, the German Federal Tax Court recently ruled that a so-called arrangement fee does not qualify as interest expense; this should be different in the future. The term "interest income" (which is relevant for the test as to whether net interest expenses exist) shall be extended accordingly. Exceptions are envisaged for the financing of long-term public infrastructure projects.
The new regulations do not provide for the grandfathering of existing financing structures, i.e. the interest deduction may be limited from 2024 under the new regulations, even though the financing relationship was already in place before.
Interest rate ceiling (Zinshöhenschranke)
For the deductibility of interest paid on financing between related parties, a statutory maximum interest rate is to be established from 2024 (in addition to the interest barrier).
This maximum interest rate shall be two percentage points above the base interest rate according to German civil law (as of 1 July 2023, the base interest rate is 3.12%, the maximum interest rate would thus be 5.12%). It is unclear whether the maximum interest rate applicable at the time of entering into the respective financing is decisive for the entire term or would have to be adjusted to the respective development of the base interest rate.
Any higher interest expenses would only be tax deductible if one of the following two exceptions is met: Firstly, the taxpayer can prove that both the creditor and, in the case of a group of companies, the ultimate parent company could only have obtained the financing at an interest rate above the maximum rate, all other things being equal (similar to the approach taken in the recent transfer pricing guidelines by the German tax authorities). On the other hand, proof of substance (substantial economic activity of the lender) can be provided.
It is unclear whether the maximum interest rate within the meaning of § 4l EStG-E is also to be regarded as arm's length in every case and thus equivalent to a safe haven regulation. This seems desirable to us, but rather unlikely.
The planned interest rate ceiling also does not provide grandfathering for existing financing.
Tightening the requirements for a tax-neutral demerger
The planned tightening concerns the conditions under which a demerger of a corporate entity can be effected in a tax neutral way (§ 15 UmwStG). Already under current law, the subsequent sale of shares by the shareholders can be detrimental to the tax neutrality of the demerger. In a recent ruling the German Federal Tax Court ruled that disposals of shares in a corporation involved in the demerger below the 20% threshold provided for in the law or after the expiry of a five-year period are not harmful.
In future - irrespective of the 20 % threshold - it will be already detrimental if a sale to outside shareholders is carried out or even prepared in relation to the demerger.
The new rules shall apply to demergers that are filed for registration with the commercial register (which is mandatory under German corporate law for the demerger to become effective) after the publication of the draft bill (i.e. with immediate effect!).
Obligation to report purely domestic tax arrangements
From 2025, the obligation to report cross-border tax arrangements (sections 138d et seq. AO, so-called DAC 6) is to be extended to purely domestic tax arrangements (sections 138l to 138n AO-E), provided they concern German taxes on income or assets (e.g. income tax or corporate income tax), trade tax, inheritance or gift tax or real estate transfer tax. Certain further criteria apply (e.g. a turnover or income threshold, affiliation with a group). In addition, similar to DAC 6, certain hallmarks must be met, which are all subject to a "main benefit test", i.e. the main benefit or one of the main benefits of the arrangement must be a tax benefit. The notification should be made within two months of the occurrence of the event triggering the notification requirement.
Other selected changes
In addition, the draft Growth Opportunities Act contains several other changes with relevance for business taxation. In this regard, the following measures are of particular importance:
- Introduction of a Climate Protection Investment Grant Act, according to which certain investments before 1 January 2028 in depreciable movable assets are supported with a tax free investment grant. The assets must contribute to energy efficiency, be part of a savings concept prepared by an energy consultant or an in-house energy manager, exceed applicable EU standards or meet planned EU standards, and be used at least almost exclusively to a certain extent over a certain period of time in a domestic permanent establishment. The maximum investment grant is 15% of the eligible expenses with a cap of 30 million euros. Up to two investment projects can be supported.
- In the Investment Tax Act, tightening measures are planned for real estate funds with regard to the partial tax exemption for investors and for capital gains from real estate companies. The threshold for generating income from the operation of renewable energy systems and from the operation of charging stations for the purposes of the trade tax exemption for German real estate companies (erweiterte Kürzung für Gewerbesteuerzwecke) is to be raised from 10 % to 20 % with effect from 2023 (see also our separate Real Estate TaxBlog for further tax measures affecting real estate investments).
- Introduction of an electronic invoice for VAT purposes, whereby such an invoice must be issued mandatorily in certain cases.
The draft bill must still be approved by the government before it can be introduced into the formal legislative process. Discussion of the government draft by the government is currently planned for August 2023. The legislative process is expected to be completed this year.