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Decision about business tax reform bill delayed into 2024
Minor technical amendments implemented as part of an omnibus bill include changes to interest deduction limitation rules and real estate transfer tax
After the upper house of the German parliament on 24 November 2023 withheld its approval (see GTLN dated 11/27/23) of the business tax reform bill (“Growth Opportunity Act”) that was approved by the lower house of parliament on 17 November 2023 (see GTLN dated 11/22/23), the bill was sent to the conference committee of the upper and lower houses of parliament for further consideration. The conference committee, however, was not able to find a compromise before the last 2023 session of the upper and lower houses of parliament on 15 December 2023. It is expected that negotiations about the content of the bill will resume in the new year, but the outcome of these negotiations remains unclear. The key measures still to be negotiated include the introduction of a climate investment grant, changes to the existing research and development tax incentive, changes to the net operating loss (NOL) carryback period, minimum taxation rules in regard to the use of NOL carryforwards, and the amendment to the arm’s length requirement for financing relationships in the Foreign Tax Act. If the bill is passed in 2024, the rules might apply with retroactive effect as from 1 January 2024.
Minor technical amendments with regard to the interest deduction limitation rules and real estate transfer tax (RETT) were, however, approved by the lower house of parliament on 14 December 2023 and by the upper house of parliament on 15 December 2023 as part of an omnibus bill (“Secondary Credit Market Promotion Act”) that is unrelated to business tax reform.
In regard to the amendments to the interest deduction limitation rules:
- The definitions for interest expense and interest income have been broadened so that they are aligned with the requirements as provided in the EU Anti-Tax Avoidance Directive.
- The conditions for the application of the stand-alone clause have been tightened. Under the stand-alone clause, the general 30% EBITDA (earnings before interest, taxes, depreciation, and amortization) limitation does not apply to companies that are not part of a group.
- The escape clause has been updated in order to introduce the opinion of the tax authorities regarding the “harmful shareholder financing criterion” into the interest deduction limitation rules in order to react to a 2015 taxpayer-friendly decision of the federal tax court. Under the escape clause, the interest deduction limitation rules do not apply where a German borrower’s equity ratio does not fall short by more than 2% compared to the group’s worldwide equity ratio.
For purposes of the exemption from RETT for certain transactions between a partnership and its partners (sections 5 and 6 of the RETT Code), the application of the current rules has been extended through 31 December 2026. There has been some doubt whether these exemption rules would still be applicable after a change in the commercial law and a resulting change in the legal characteristics of partnerships. The three-year period is aimed at providing additional time for the legislator to perform a more detailed analysis of the consequences of the change in the legal characteristics of partnerships and to find a comprehensive solution.