Changes to the government draft of the Growth Opportunities Act

The draft Growth Opportunities Act approved by the Federal Cabinet contains additional improvements to depreciation and a number of other changes.

After some headline-grabbing wrangling, the German government passed the government draft of the Growth Opportunities Act at the end of August, which means that the bill has now been passed to the Bundestag and Bundesrat for consultation. Although the major changes to a bill usually only come after parliamentary deliberation has been completed, the government draft already contains changes compared to the draft bill. Some of the planned simplifications have been slightly reduced or partially deleted, but other measures have been added that are entirely in the interests of taxpayers. The most prominent change is the introduction of declining balance depreciation for all assets, including real estate. Here is an overview of the main changes in the government's draft bill:

• Degressive depreciation: The option of declining balance depreciation, which was reintroduced during the coronavirus pandemic and expired again following an extension until the end of 2022, is now to be reinstated. Decreasing balance depreciation is to be possible for all assets acquired after September 30, 2023. According to current plans, this option is limited until the end of 2025.

• Degressive depreciation for buildings: For movable assets, politicians have repeatedly resorted to the introduction of temporary declining balance depreciation. Due to the rapid rise in interest rates and construction costs and the decline in construction activity, the declining balance method of depreciation is now also being applied to buildings. Although the declining balance method of depreciation is limited to buildings used for residential purposes, i.e. it is intended to promote residential construction in particular, it can be applied at a rate of 6 % of the acquisition or production costs. This declining balance depreciation is also limited in time, namely to buildings whose construction begins after September 30, 2023 and before October 1, 2029 or for which the purchase contract is concluded during this period. No additional depreciation for extraordinary technical or economic wear and tear is possible while the declining balance method of depreciation is in effect. However, it is possible to switch to straight-line depreciation at any time.

  

• Electric company car: With the 1 % rule, purely electric vehicles are currently very favored. Instead of 1 % of the gross list price, only 0.25 % is to be recognized as a non-cash benefit for private use. However, the prerequisite is that the list price does not exceed 60,000 euros. For vehicles purchased from 2024, this limit will be raised to 80,000 euros.

• Interest barrier: The interest barrier is being reformed and adapted to EU requirements. This leads to a tightening, which is why the previous exemption limit of EUR 3 million was originally to be converted into an allowance to compensate for this. However, this conversion was removed from the government draft. An interest rate cap for cross-border loans has also been introduced.

• Accumulation Benefit: Several measures are intended to open up the tax relief on retained earnings to entrepreneurs who do not pay the top tax rate. To this end, the profit eligible for preferential treatment will be increased by the trade tax paid and the amounts withdrawn to pay income tax. This means that a higher retention volume will be available in future. In addition, the order of use will be improved so that tax-free and taxed profits that have been left in the company can be withdrawn with priority in future. This change was originally planned from 2024, but was postponed by one year in the government draft, i.e. to 2025.

• Loss carried forward: Under the current law, losses can be carried forward without restriction up to a base amount of EUR 1 million (EUR 2 million for jointly assessed spouses). For the portion exceeding the base amount, however, the loss carryforward is limited to 60 % of the income generated in the year to which the loss is carried forward. This minimum profit taxation will be suspended up to and including 2027, meaning that unlimited loss carryforwards are possible until then. From 2028, the minimum profit taxation will apply again. The originally planned increase in the base amount for minimum profit taxation to EUR 10 million (EUR 20 million for spouses) was dropped again in the government draft.

• Electronic invoices: From 2025, electronic invoices must be issued for deliveries and services to other entrepreneurs. This is the first step towards the introduction of a national reporting system for all sales, with which the tax authorities want to combat VAT fraud. Only an invoice in a structured electronic format that can be processed automatically is considered an electronic invoice. Paper invoices and other electronic invoices, such as pure PDF documents, are considered other invoices. During a transitional period until the end of 2025, other invoices can also be issued instead of electronic invoices. What is new in the government draft is that this transitional period even applies until the end of 2026 for companies whose total turnover in the previous year did not exceed EUR 800,000. In addition, all companies - regardless of turnover limits - can continue to issue other invoices until the end of 2027 with the consent of the recipient if these are transmitted via EDI.

• Research allowance: The draft bill already provided for improvements to the regulations on the research allowance, which were further improved in the government draft. This means that sole proprietorships and small businesses in particular can benefit more from the research allowance. For example, the eligible value of a working hour of the sole proprietor or partner will be increased from 40 euros to 70 euros from 2024. In addition, companies that qualify as SMEs can apply for an increase in the research allowance of 10 %, which means that 35 % of the assessment basis will be granted as a research allowance instead of 25 %.

• Real estate transfer tax: The "Act on the Modernization of Partnership Law (MoPeG)" will result in many changes for the civil law of partnerships from 2024, some of which may also have consequences for tax law. In particular, the reform will abolish the principle of Gesamthand, which previously played a key role for certain exemption regulations, particularly with regard to real estate transfer tax. As the federal and state governments have not yet reached a final agreement on the new structure of the exemption regulations, legal certainty will now at least be created for existing joint ownership assets. An amendment clarifies that the abolition of joint assets by the MoPeG alone does not lead to a breach of current retention periods. These are only violated if the share in the company's assets is reduced during the subsequent retention period.