Improvements to the investment deduction

In addition to various improvements to the investment deduction, the Annual Tax Act 2020 is also intended to legally exclude two structuring models with the deduction.

Investment deductions allow depreciation potential to be brought forward to a fiscal year prior to the acquisition or production of certain assets. With the resulting tax deferral, companies can more easily save the funds required to finance the investment. In addition, special depreciation allowances are also available for the acquisition or production of favored assets in order to bring forward further depreciation potential.

A key element of the Annual Tax Act 2020, on which the German government and parliaments are currently working, is a mini-reform of the investment deduction, which reduces various eligibility requirements for companies and raises the maximum deduction amount somewhat. At the same time, two tax arrangements involving deduction amounts will be ruled out by law, at least one of which has been popularly used to date to offset excess earnings after a tax audit.

Most of the changes, i.e. in particular the improvements for businesses, are already to apply to fiscal years ending after December 31, 2019, and can thus be taken advantage of as early as 2020. It is only one year later, i.e. from 2021, that the two changes intended to legally exclude undesirable tax arrangements will take effect. In detail, the following changes are planned:

• Investment costs: The preferential investment costs are raised from 40 to 50 %. This also indirectly allows higher limits for immediate depreciation of low-value assets, because only the acquisition or production costs reduced by the investment deduction amount are to be used for the limit test. Previously, the deduction amount could be used to immediately write off assets up to a value of 1,333 euros and to include up to 1,666 euros in the collective item rule. By increasing the eligible investment costs to 50 %, from 2021 assets with a value up to twice the threshold amount can effectively be included in immediate or collective item depreciation. For this purpose, an investment deduction amounting to 50 % of the acquisition or production costs will be claimed in 2020, which can then be used to reduce the actual costs to be recognized by half for the acquisition or production in 2021.

  

• Operational use: Previously, only assets that were used exclusively or almost exclusively in the business in the year of investment and in the following year, i.e. at least 90 %, were eligible for tax relief. Due to the fact that the assets are used in the business, they are not only used for private purposes, but also used free of charge in another business of the entrepreneur. In order to make the possibilities of use for favored assets more flexible, leased assets will also be favored in the future, regardless of the duration of the respective lease. In contrast to the previous regulation, longer-term rentals for more than three months are thus also harmless. This also applies if the entrepreneur rents out the asset to another business of his own. The draft bill also provided for preferential treatment in the case of non-business use of up to 50 % instead of only up to 10 %. However, this part of the amendment has been removed from the law, at least for the time being.

• Profit limit: Up to now, different company size criteria have applied to the individual types of income, which may not be exceeded for the investment deduction amount. In the case of companies preparing balance sheets, this is a maximum operating capital of 235,000 euros, in the case of agricultural and forestry businesses an economic value or substitute economic value of a maximum of 125,000 euros, and in the case of businesses with income statement accounting a maximum profit of 100,000 euros. Because the tax authorities are convinced that the previous size criteria are in part unsuitable for defining favored businesses, particularly in the area of agriculture and forestry, a uniform profit limit of 150,000 euros is to apply in the future for all types of income as a prerequisite for claiming investment deduction amounts. This significantly expands the group of beneficiaries, while some large companies will no longer be covered by the preferential regulation in the future.

• Subsequent assertion: It is possible to apply for an investment deduction amount retrospectively, provided that the corresponding tax assessment can still be changed, for example in the case of a proviso of subsequent audit. This possibility is often used after tax audits in order to compensate for additional results determined during the audit by subsequently claiming a deduction amount. Because this use is not in the interests of the tax authorities, from 2021 the use of deductions for investments that have already been acquired or manufactured at the time of the claim will be excluded. The amendment exclusively affects investment deduction amounts applied for retrospectively and claimed after the end of the objection period for the first tax assessment or separate determination. Deduction amounts claimed up to the end of the objection period for the first tax assessment may continue to be used for assets regardless of their date of investment.

• Partnerships: The German Federal Fiscal Court (Bundesfinanzhof) ruled that a tax-privileged investment also exists if the investment deduction has been deducted from the total net profit of a partnership and the planned investment is later made by a partner and capitalized in the partner's special business assets. As a result of this ruling, taxpayers who do not invest at all can also benefit from the relief. Therefore, from 2021 it will be clarified that the addition of investment deductions is only permitted in the asset area in which the deduction was made. For example, if a deduction was claimed in the special business assets of a shareholder, the deduction can also only be used for investments made by this shareholder in his special business assets.