Real Estate Tax Services News
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PwC Germany I December 2023
Changes to German tax legislation at year end
In brief
The draft Growth Opportunities Act which was originally approved by the German Federal Parliament (Bundestag) will not be implemented in 2023 as the Federal Council (Bundesrat) did not yet grant its consent.
However, certain sections of the draft Growth Opportunities Act were transferred to other legislative procedures and approved by the German Federal Parliament and the Federal Council on 14 and 15 December 2023 to come into force from 1 January 2024.
Other sections of the draft Growth Opportunities Act (eg, loss carry forwards, interest deductibility or deductibility of special purposes depreciation) will not be enacted in 2023.
Key points to real estate clients
Changes with an impact on the deduction of interest expenses
The originally planned changes in the interest capping rule with regard to the anti-fragmentation rule will not be implemented, ie, the current EUR 3m threshold on an entity-by-entity basis remains in fiscal year 2024. The same applies to the interest ceiling rule and the other changes on the interest deductibility which were discussed during the legislation process but not enacted.
However, the following changes to the German interest capping rules have been enacted:
The definition of interest which falls under the interest capping rule has been expanded. From 2024 onwards not only expenses relating to debt are covered, but also any economically comparable expenses. This is relevant for the real estate sector, as contrary to the current rules, any capitalised interest expenses are subject to the interest capping in the future.
The transfer of a partial business, including a split-off, spin-off, and the transfer of a tax group company shall forfeit carryforwards of unutilised EBITDA and interest carried forward. In the future, interest carried forwards shall only be deductible up to 30% of the EBITDA even if they do not exceed the EUR 3m threshold.
The law also includes changes on the capital escape clause for corporations with regard to the harmful intercompany financing. From 2024 onwards, all interest expenses paid to shareholders that have at least 25% (currently, more than 25%) need to be considered for the test. With regard to the 10% test of interest expense paid to the above-mentioned shareholders, the new law now clarifies that all payments to shareholders with at least 25% will be accumulated.
Real estate transfer tax - Drop down into partnerships
The current tax exemption for dropdowns of German properties into German partnerships will still be applicable from 2024 until 2026. The real estate transfer tax treatment from 2024 onwards was questionable due to the changes in the German partnership law. In this regard, it was questionable whether dropdowns are still possible from 2024 onwards and whether the change in the partnership law will be seen as a breach of the claw-back period under the current rules.
The change of the rule therefore clarifies the treatment for the respective years, however, given the fact that the grandfathering rule is limited to the years 2024-2026, it presently remains open whether a taxpayer is protected for claw-back periods ending in 2027 or later.
Our view
The limited amendments to the German interest capping regime will have to be considered by real estate investors going forward with an impact to those investors with capitalised interest expenses.
It is important for real estate investors to have clarity on the German tax legislation from 2024 onwards, and it is also positive that the further restrictions on the interest deductibility were not implemented finally.
The change in the RETT rules should provide clarity on the RETT treatment of property hive downs made in the past, however, given a 10-years claw-pack period, the implementation of the grandfathering for only three years does not solve the uncertainty for any future planned hive downs.
With regard to the RETT change, the overall discussion on the potential changes in the German RETT regime also needs to be monitored.
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