Real Estate Tax Services News
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PwC Germany I March 2024
Growth Opportunities Act approved by the German Federal Council
In brief
After months of discussions, the Growth Opportunities Act has been finally approved by the German Federal Parliament and the German Federal Council. The act will become effective as per 1 January 2024. It comprises numerous changes to the German tax legislation, which inter alia include limitations of interest deductibility, while simultaneously allowing for a broader utilisation of tax losses and loss carryforwards. Other features previously discussed by the legislator, such as the extending the DAC6 notification obligation to national tax arrangements as well as the anti-fragmentation rule of the interest barrier rule, have not been implemented. Regarding those amendments to the German tax regime already implemented in December 2023, we refer to our previous Real Estate Tax Services News.
Key points for real estate clients
Tightening of arm’s length principles
The initially planned interest ceiling rule is no longer included in the final wording of the new law. However, the following amendments to the German transfer pricing regime have been implemented limiting interest deduction in Germany.
As regards interest expenses from cross-border financing payable to related parties a group rating is to be applied. Interest only remains deductible if the taxpayer proves that its used credit rating derived from the group rating which complies with the arm’s length principles.
Based on the new law interest deduction is to also to be denied if
- the tax taxpayer cannot credibly demonstrate that he could service the debt for the entire term of the financing from the very beginning and,
- the taxpayer cannot credibly demonstrate that the financing is economically necessary and is used for the purpose of the business.
These two requirements are in principle already applicable for the past and part of the discussions with the tax authorities in current tax audits. However, given the fact that the principles are now included in the law, we expect that there will be more discussions going forward on this point.
The new rules also clarify that the on-lending of funds within a group of companies is generally to be regarded as a service with a low functional and risk profile for which remuneration can only be demanded on a cost-plus basis. This clarification is not justified by the most recent case law as well and further developments need to be monitored.
For more details on the German transfer pricing regime as applicable in FY 2024 and later, please refer to our next Real Estate Tax Services News to be issued at short notice which will also be available on our PwC Real Estate Tax Services News website.
Corporate income tax - Loss deduction
All loss carryforwards can be deducted in full up to an amount of EUR 1m and up to 70% (currently up to 60%) of the taxable income exceeding EUR 1m until FY 2028 and up to 60% afterwards.
The intended increase of the EUR 1m minimum taxation threshold to EUR 5m / 10m as well as the extension of the loss carry-back option to the third assessment period from FY 2024 have not been implemented.
Corporate income tax - Degressive depreciation of residential property
A declining (non-linear based on the book value in the previous FY) depreciation of 5% p.a.) for residential properties is introduced. This declining depreciation will be available only if the construction of the property will be started after 30 September 2023 but before 1 October 2029 or the acquisition is based on a mandatory contract concluded with legal effect within the same time period.
Special depreciation for the construction of new rental flats
The scope of application of the already available accelerated depreciation for newly built rental units in the first three years of use of 5% (instead of 2-3%) is increased by an increase of the applicable construction cost limit and the maximum assessment basis for the construction of new rental flats to EUR 5,200 and EUR 4,000 respectively. This also applies to the extension of the temporal scope of the special depreciation allowance to flats for which the building application or building notification is submitted before 1 October 2029.
Trade tax - Extended Trade Tax Deduction and loss deductions
The trade tax relief for real estate holding entities (so-called Extended Trade Tax Deduction) generally applies only to such entities that limit the scope of activity to the mere long-term letting of real estate. The presently available escape regarding income from renewable energy is increased from currently 10% to 20%. The amendment will apply from FY 2023 onwards.
However, the minimum taxation provisions as applicable for trade tax have not been aligned with the above-described amendments to the corporate income tax regime. Trade tax loss carryforwards can be deducted in full up to an amount of EUR 1m and only up to 60% of the taxable income in excess of EUR 1m.
VAT - Introduction of a mandatory electronic invoice
For domestic supplies between entrepreneurs (B2B) the electronic invoice is introduced as mandatory. Such an electronic invoice must be issued, transmitted and received in a specific structured electronic format and enable electronic processing. The transition period is two to three years depending on the turnover of the respective entrepreneur.
Our view
Comparing the final law version as approved by the German Federal Council on 22 March 2024 with the intended law as approved by the German Federal Parliament on 17 November 2023, the final law includes less strict limitations and some favourable changes for real estate investors. The initially intended significant changes of the interest capping rule are no longer included in the final law, which should be favourable for the German real estate industry. However, real estate investors will have to prepare for the amendments to the transfer pricing regime (group-rating) and the respective approach taken by the German tax authorities.
The additional changes to the corporate tax and trade tax regimes are mainly a relief for the German real estate industry and, especially the change on the special and degressive depreciation would have a positive effect on existing structures.
From a VAT perspective, real estate investors will have to prepare to be in the position to receive and to send electronic invoices for domestic B2B supplies within the mentioned transition period.
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