Interim status of the Growth Opportunities Act

The Growth Opportunities Act has already had to overcome several hurdles and is still on the brink, even though a compromise has already reduced the scope of the law to less than half of the original relief volume.

The Growth Opportunities Act contains many tax breaks, especially for companies, with which the German government hopes to boost the economy. However, the legislative process is simply never-ending, as politicians have been arguing about the law for almost nine months. First, the government draft failed to be passed by the cabinet due to a dispute over the financing of the basic child benefit, and when the draft bill finally reached parliament, the Bundesrat refused to approve it.

Although the federal states agree with the aim of boosting the economy, they find the changes brought about by the law too expensive. With the accusation that money was being distributed according to the watering can principle, the Bundesrat referred the law to the mediation committee on November 24, 2023.

Sometimes conciliation procedures are completed very quickly, but here too there was another stumbling block for the law in the form of the Constitutional Court ruling on the federal budget, which caused the financing of EUR 60 billion in already planned expenditure to falter at short notice. The opposition did not want to start a conciliation procedure until the budget was on a firm footing.

Parts of the Growth Opportunities Act, which were undisputed and had to come into force before the start of the year, were therefore transplanted at short notice into the Secondary Credit Market Promotion Act, which the parliaments passed in their last session week before Christmas. In addition to various changes for 2024, this also included the retroactive removal of the tax liability for the December aid.

As a reminder: In December 2022, the federal government took over the costs of the discount for gas and heating in order to relieve citizens of the high energy prices at the time. As social compensation, this aid was to be taxed, but this proved to be impractical. The December 2022 aid will therefore now be made tax-free retroactively.

On February 21, 2024, the Mediation Committee finally dealt with the law. The federal states wanted to weaken some of the more expensive changes or negotiate them out of the law. In the end, the committee reached a compromise that had already been worked out beforehand, which more than halved the volume of relief provided by the law from around €7 billion to €3.2 billion.

In order to achieve this reduction, the planned extended depreciation options were weakened and the premium for investments in climate protection, which was originally planned as the core of the law, was completely removed. There were also cuts in other areas. Here is an overview of the changes and deletions compared to the previous version:

• Investment premium: For investments that contribute to climate protection through energy savings, an investment premium of 15 % of the investment costs, up to a maximum of 30 million euros per applicant, was to be introduced. The investment premium has now been removed from the law without replacement.

• Low-value assets: In 2018, the limit for the immediate write-off of low-value assets, which had remained almost unchanged for decades, was raised to 800 euros. The plans at the time to raise this limit to 1,000 euros did not receive majority support. The Growth Opportunities Act will also not see an increase in the limit, meaning that it will remain at EUR 800.

• Collective item depreciation: The changes to the collective item depreciation for assets with a value between 250 and 1,000 euros were also removed. Originally, assets with an acquisition or production cost of up to EUR 5,000 were to be included in the collective item from 2024 and the depreciation period for the collective item was to be reduced from five to three years.

• Special depreciation: Smaller businesses that made a maximum profit of €200,000 in the previous year can claim special depreciation of up to €20 % in total for movable assets in the first five years. For assets acquired or manufactured from 2024 onwards, the special depreciation allowance is now only increased to a maximum of 40 %. An increase to up to % 50 was planned.

• Degressive depreciation: The option of declining balance depreciation, which was reintroduced during the coronavirus pandemic and expired after an extension at the end of 2022, is to be reinstated as planned, albeit with significant restrictions. Instead of for all assets acquired or manufactured after September 30, 2023, declining balance depreciation will now only be possible for assets acquired or manufactured from April 1, 2024. The term has also been shortened at the other end - instead of running until the end of 2025, declining balance depreciation will only run until the end of 2024. Finally, the maximum depreciation rate will be capped at 20 % or twice the straight-line depreciation rate instead of 25 % as planned.

  

• Degressive depreciation for buildings: Due to the sharp decline in construction activity, the introduction of declining balance depreciation for buildings is still included in the law. Although it is limited to buildings used for residential purposes, it can then be applied in the amount of 5 % (originally 6 % was planned). 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. The period has therefore not been shortened compared to the original version. No additional depreciation for extraordinary 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.

• Rent-free limit: A tax-free limit of EUR 1,000 was to be introduced for income from letting and leasing from 2024. This was a particular thorn in the side of the federal states and was therefore removed without replacement.

• Additional expenses for meals: The lump sums for additional expenses for meals when working away from home were to be increased from 2024, which would have been more than appropriate in view of the particularly high food inflation and higher VAT in the catering sector. However, this increase has been withdrawn, meaning that the daily rate will remain at 28 euros for a full day's absence. The rate for the day of arrival or departure remains unchanged at 14 euros.

• Company events: The tax-free allowance for employer contributions to employees and their companions on the occasion of a company event should be increased from 110 euros to 150 euros. This increase would also have been overdue, as the tax-free allowance has remained unchanged for some time and increased food prices and higher VAT in the catering industry regularly have a particularly noticeable effect on expenses for company events. However, the increase was canceled without replacement.

• Gifts: Gifts to non-employees may not be deducted as business expenses if their value does not exceed EUR 35 per recipient in a calendar year. Somewhat surprisingly, the planned increase in the deduction limit to EUR 50 per person per year for all financial years beginning after 2023 is still included in the law.

• Loss carryback: All planned improvements to loss carry-back have been deleted without replacement. This applies both to the increase in the maximum amounts for loss carry-back and to the extension of the carry-back period to three years.

• 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. Instead of suspending this minimum profit taxation, the limit of 60 % will merely be raised to 70 % for a limited period until the end of 2027.

• Electronic invoices: The Federal Council's requests for changes to the introduction of electronic invoices were only addressed to a very limited extent. The version of the amendments adopted at the end of 2023 has remained unchanged.

• Research allowance: The regulations on the research allowance will be improved in several areas so 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, SME companies 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 %. However, the changes will not apply from January 1, 2024, but only after the law comes into force. In addition, the maximum limit of the assessment basis will only be raised from the previous EUR 4 million to EUR 10 million instead of the planned EUR 12 million.

• Flat-rate farmers: For 2024, the average rate and the input tax flat rate for flat-rate farmers should fall from 9.0 % to 8.4 %. For comparison: in 2021, the average rate was still 10.7 %. As the law could not be passed before the turn of the year and retroactive changes to VAT are practically impossible, the adjustment of the rates for 2024 will not apply.

• Sales tax on gas & heat: The early expiry of the reduced VAT rate on the supply of gas and heat on February 29, 2024 was canceled, especially as the law could not have been passed in time.

Despite these changes, the law is still not a done deal, as only representatives of the governing coalition, which has a majority on the Mediation Committee, voted in favor of the resolution. In the Bundesrat, however, the federal states in whose government the CDU/CSU is a member are in the majority, and they have announced that they will only approve the law if the reduction in tax relief for agricultural diesel, which has already been passed, is reversed. The federal government, on the other hand, does not want this to happen because it would create another funding gap.

The law must now clear the next and possibly final hurdle in the Federal Council meeting on March 22, 2024. This is where the showdown will take place when the revised law is put to the vote.