In more detail

On 30 August 2023, the German government presented a draft of the Growth Opportunities Act, which contains several proposals that, if implemented, could be of considerable importance to multinational corporations operating in Germany. The federal government states that the Growth Opportunities Act is intended to introduce targeted measures to improve the liquidity situation of companies and provide impetus so that companies can invest more on a permanent basis and dare to innovate with entrepreneurial courage. The draft bill's long-term objective is to support the transformation of the German economy and strengthen Germany's competitiveness, growth opportunities, and attractiveness as a business location. However, it should be noted that the Growth Opportunities Act also contains several tightening measures. Given the current political environment in Germany, it remains to be seen whether and in what form the Growth Opportunities Act will pass through the legislative process. In addition, several federal states, (Bundesländer), have already signaled that they are not willing to bear a loss of tax revenues, indicating that they expect the federal level to "pick up the tab."

Interest barrier rule:

• The draft bill provides for several changes to the so-called interest barrier rule (Zinsschranke).
• The most important change concerns the tightening of the de minimis rule, according to which net interest expenses (which are interest expenses in excess of interest income) of up to EUR 3 million are always fully deductible. Currently, this threshold applies to each individual company in a group (with tax groups being considered as one company). The proposal is to consolidate all companies with similar business operations that are under common control and treat them as a single entity for this purpose. The EUR 3 million allowance would then be allocated to the individual companies in proportion to their respective net interest expenses.
• According to the draft bill, the amended rules would apply to fiscal years starting after 30 August 2023 and not ending before 1 January 2024.

Interest rate ceiling rule:

• The draft bill also proposes to introduce a so-called interest rate ceiling rule (Zinshöhenschranke) to apply in parallel to the already existing interest barrier rule (Zinsschranke) and certain other rules (e.g., the add-back rules of the trade tax act) that could restrict the deductibility of interest expenses.
• Under the proposed interest rate ceiling rule, interest expenses (on related party debt) will, in principle, only be deductible up to a rate that is at most two percentage points above the base interest rate as foreseen in the German Civil Code (which is currently 3.12%, so that the maximum interest rate allowing deductibility would currently be 5.12%). Where the base interest rate changes after a related party loan agreement has been concluded, and the interest rate in the loan agreement exceeds the base interest rate only because of this change; the rule will only apply from one month after the change of the base interest rate.
• Two exemptions will apply to this rule: (i) the lender and the group's top parent company demonstrate that they are able to obtain the debt under similar terms only at a higher interest rate, in which case the lowest possible interest rate should apply; or (ii) the lender demonstrably performs an actual economic activity in its jurisdiction of residence, in which case the interest rate ceiling rule will not apply at all. According to the explanatory statements to the draft bill, such actual economic activity must have a connection to the specific financing arrangement.
• According to the draft bill, the interest rate ceiling rule will apply to interest expenses incurred after 31 December 2023.

Tax loss deduction rules:

• Furthermore, the draft bill proposes to extend the rules for a tax loss carryback (applicable for income tax purposes only) from 2024 onwards to allow for a carryback of up to three years and a carryback amount of up to EUR 10 million. By comparison, under the current law, the tax loss carryback would be limited to EUR 1 million from 2024 onwards and to a carryback of only two years.
• Moreover, the limitation of tax loss carryforwards (applicable for income tax and trade tax purposes) — so-called minimum taxation rules — is proposed to be changed for 2024 to 2027 so that in these years, up to 80% (currently, up to 60%) of the taxable income exceeding EUR 1 million can be offset against tax losses carried forward (in addition to the first EUR 1 million of taxable income). From 2028 onwards, the proposed changes will be reversed, and the currently applicable version will apply again.

Blocking period for demergers:

• Under the current law, when conducting a demerger (Abspaltung) without gain realisation at tax book values under the so-called German Reorganisation Tax Act (Umwandlungssteuergesetz), the shares in the transferor and the transferee are subject to a five-year blocking period. Recently, the Federal Tax Court decided that this blocking period only applies in connection with a 20% threshold, i.e., the blocking period would only be violated where shares in the transferor or the transferee whose fair market value exceeds 20% of the transferor's total fair market value prior to the demerger are disposed of within five years after the demerger.
• The draft bill proposes to extend the blocking period to situations where the demerger was conducted to prepare the disposal to an unrelated party and where, within five years after the demerger, at least one share in the transferor or the transferee is actually transferred to an unrelated party. According to the explanatory notes to the draft bill, it is assumed that a demerger was conducted to prepare the disposal to an unrelated party if there was already a specific intention for disposal at the time of the demerger or where the disposal was actually considered, not just hypothetically.
• Furthermore, the draft bill includes an exemption for share transfers between associated entities. On the other hand, according to the draft bill, the indirect disposal of the shares in the transferor or the transferee by an associated entity to an unrelated party will qualify as harmful disposal as well.
• The draft bill foresees that the amended rules will apply to demergers that are applied for registration with the commercial registry after 14 July 2023 (the date on which the ministerial draft bill was published).

Election to treat partnerships as opaque entities for income tax purposes:

• With effect from 2021, Germany has introduced an election right to treat partnerships as opaque entities subject to corporate income tax (instead of being treated as tax transparent with the income being directly taxed at the partner level for income tax purposes). Even though the election right, in principle, has been widely endorsed, some of the underlying provisions have been criticised as being too formalistic and complicated.
• The draft bill responds to some of the criticism and, among other things, proposes to change the law so that making an election will also be possible with effect from the first year of a partnership's existence and not only from the following year. Furthermore, the rules regarding deemed distributions of profits are proposed to be amended to be more in line with the tax treatment of corporations. These changes are intended to enhance a seamless change of legal form from corporation to partnership without changing the taxation regime of the entity.

Mandatory reporting of domestic tax arrangements:

• Accompanying the existing DAC6 reporting obligations for cross-border tax arrangements, the draft bill proposes to introduce a similar mandatory reporting obligation for domestic tax arrangements. The draft rules for this additional reporting obligation are largely similar to the German DAC6 rules. However, there are differences with respect to some specific aspects (e.g., the main benefit test must always be fulfilled), the relevant hallmarks (three additional hallmarks solely for domestic reporting obligation are proposed), and the reporting deadline (two months compared to 30 days under the German DAC6 rules).
• The draft bill foresees that the German Federal Ministry of Finance must publish a specific date as from which triggering events will result in a relevant reporting obligation and that this date is published at least one year in advance. If the German Federal Ministry of Finance does not publish such a date, the rules should apply at the latest four years after the end of the calendar year in which the rules have entered into force.

Further changes as proposed in the draft Growth Opportunities Act include the following:

• Introducing a premium for climate protection investments from 2024 to 2029.
• Increasing R&D allowances.
• Improving the attractiveness of the optional regime to preferential tax earnings retained by a partnership (as an alternative to the above election to treat partnerships as opaque entities).
• Increasing the amortisation allowance for low-value assets, compound items, and the accelerated deprecation regime for such.
• Temporarily reintroducing the declining balance method to depreciate movable assets acquired after 30 September 2023 but prior to 1 January 2025.
• Temporarily introducing the declining balance to depreciate residential buildings acquired or started to be built after 30 September 2023 but prior to 1 October 2029.
• Implementing the EU Mutual Assistance Directive for joint audits and including a legal basis for risk assessment programs like the OECD International Compliance Assurance Program (ICAP).
• Introduction of mandatory e-invoices for B2B transactions.

Further changes outside the draft Growth Opportunities Act:

In addition, on 11 August 2023, the German government published a governmental draft bill regarding rules to implement Pillar Two into German law. Besides the Pillar Two rules, the draft bill includes the following two changes:

• Lowering the threshold of harmful low taxation under the so-called royalty barrier rule Lizenzschranke from 25% to 15% for all royalty payments made after 31 December 2023 to related parties enjoying preferential law taxation under a regime that is not compliant with the Modified OECD Nexus Approach
• Lowering the threshold for harmful low taxation from 25% to 15% under the German CFC rules¹ (If implemented, the changes will apply from 2024 onwards.)

Moreover, recent publications of the German Federal Ministry of Finance include the following:

• Discussion draft dated 15 June 2023 regarding a proposal to change several aspects of German real estate transfer tax (RETT) law, including the RETT treatment of share deals that may also impact the validity of so-called RETT-blocker structures.
• Draft circular dated 13 July 2023 on the application of the German anti-hybrid rules that had been introduced to transpose the ATAD II Directive into German law. The draft circular is more than 50 pages long.
• Draft circular dated 19 July 2023 focusing on the application of the German CFC rules and certain other rules in the Foreign Transactions Tax Act. The draft circular is more than 250 pages long.

1 While the ministerial draft still included a proposal that German CFC income should not be subject to German trade tax, but only to German corporate income tax plus a solidarity surcharge, such a proposal is no longer included in the Government draft.