The regulations on the tax deductibility of interest (so-called interest barrier rule - Zinsschranke) had to be adapted according to the EU Anti-Tax Avoidance Directive (ATAD) by the end of 2023 and thus had to be outsourced together with the necessary adjustments due to the MoPeG into the Secondary Credit Market Promotion Act.

• A definition of "net interest expenses" (Nettozinsaufwendungen) (interest expenses less interest income) was included in Sec. 4h EStG and the concept of interest expenses was expanded. Interest expenses are now also deemed to be "economically equivalent expenses and other expenses in connection with the procurement of borrowed capital". This also includes capitalized interest (e.g. construction period interest) as well as commitment and processing fees and financing costs as part of finance leases.
• The exemptions to the interest barrier have also been modified:
  • According to the so-called stand-alone clause, the interest barrier rule does not apply. In the future, however, this exception will only apply if the taxpayer (or the partnership) is not a related party within the meaning of Sec. 1 para. 2 AStG and does not have a permanent establishment outside the state of its domicile, habitual residence, registered office or management. The exemption from the interest barrier rule therefore does not apply if a shareholder holds at least a 25% interest in the company in question. This significantly extends the scope of application of the interest barrier rule, e.g. to securitization companies
  • The so-called equity escape clause provides that the interest barrier rule does not apply if the equity ratio of a company belonging to the group is not lower than that of the group (a shortfall of up to 2 percentage points is accepted). For the purposes of the interest barrier, a company is only considered to be in a group if it is actually consolidated with one or more other companies in accordance with the underlying accounting standard - the mere possibility is not sufficient. Furthermore, it is not sufficient for an entity to belong to a group if its financial or operating policies are merely determined in a uniform manner with one or more other entities. The reason for exclusion from the equity escape under Sec. 8a para. 3 KStG, i.e. harmful shareholder financing, has also been tightened: the equity escape will no longer apply if interest payments to one or more shareholders with an interest of at least 25% each exceed a total of more than 10% of the company's total interest expenses.
• Interest carried forward from previous years can only be used to a limited extent: interest carried forward can only be offset if sufficient EBITDA is available. Under the new rules, interest carried forward is also lost if a part of the business is given up or transferred or if a partner leaves the business.
• The previous exemption limit for the interest barrier rule of EUR 3 million has been changed to an allowance of EUR 3 million.
• Due to criticism during the legislative process, the so-called anti-fragmentation rule was not adopted. The draft provided for the allowance to be granted only once to similar businesses that are under the uniform management or control of one person/group of persons, in order to prevent the allowance from being claimed more than once by splitting activities between several businesses ("fragmentation").

The MoPeG (Gesetz zur Modernisierung des Personengesellschaftsrechts, BGBl. I 2021, 3436) came into force as of 1 January 2024 and introduced fundamental changes to the civil law of partnerships. A core element is the abolition of the concept of joint ownership (Gesamthand) in the BGB. The MoPeG legislator had made it clear that this would not result in any changes to income tax law. However, there was considerable uncertainty as to what the consequences would be for other types of tax in which references to communities of joint owners were also made. A number of adjustments were therefore made to several tax laws. These are mainly editorial changes. However, there are also substantive changes, the most important of which we briefly present below:

• The new Sec. 14a of the German Tax Code (Abgabenordnung – AO) contains a definition of the term "association of persons" that applies to all tax laws. A distinction is made between associations of persons with legal capacity and associations of persons without legal capacity:

• According to Sec. 14a para. 2 AO, associations of persons with legal capacity are in particular: Partnerships with legal capacity such as civil law partnerships, commercial partnerships (for example oHG, KG), partnership companies, partnership shipping companies and European Economic Interest Groupings; associations without legal personality and homeowners' associations.
• Associations of persons without legal capacity are, in particular, in accordance with Sec. 14a para. 3 AO: Fractional communities, communities of property and communities of heirs.

• The differentiation has procedural significance in particular for the notification and declaration requirements for the separate and uniform assessment:

• In the case of associations of persons with legal capacity, the legal representatives must fulfil the tax obligations (Sec. 34 para. 1 s. 1 AO), also primarily submit the declarations for the separate and uniform assessment (Sec. 181 para. 2 No. 1 letter a) AO). All administrative acts in connection with the separate and uniform assessment must be notified to the company as a matter of priority (Sec. 183 AO). Any late surcharge is also to be assessed primarily against the company (Sec. 152 para. 4 s. 2 AO).
• In the case of associations of persons without legal capacity, the old rules for notification and the obligation to make a declaration remain in place; all parties involved in the assessment are obliged to make a declaration (Sec. 181 para. 2 No. 1 letter b) AO new) and notification of the separate and uniform assessment should be made to a joint authorised recipient (Sec. 183a AO).

• These amended declaration obligations and disclosure regulations generally apply to all declarations and assessment notices to be submitted from 2024 onwards. However, during a transitional period until 31 December 2025, declarations from and notifications to the previously obliged persons will also be accepted (Sec. 39 Introductory Act to the AO).

• The distinction between legally capable and non-legally capable associations of persons is also important for the enforcement procedure (Sec. 267 AO) and for the right of appeal (Sec. 352 AO).
• The regulations on legal standing before the tax courts have also been adapted to this differentiation (Sec. 48 Fiscal Court Code - Finanzgerichtsordnung).

• According to Sec. 39 para. 2 No. 2 AO, the joint ownership principle is expressly continued for tax purposes, including the pro rata allocation of assets. Furthermore, it is stipulated that partnerships with legal capacity are deemed to be communities of joint owners for income tax purposes. This was already provided for in the explanatory memorandum to the MoPeG, but had not been included in the letters of the law itself. This clarification applies to all tax types in which the so-called economic approach in accordance with Sec. 39 para. 2 AO is recognised.

• As the economic approach is not generally applied in inheritance and gift tax law, the new Sec. 2a of the Inheritance and Gift Tax Act (Erbschaft- und Schenkungsteuergesetz – ErbStG) contains a corresponding provision. Accordingly, partnerships with legal capacity (Sec. 14a para. 2 No. 2 AO) continue to be recognised as communities of joint owners for the purposes of the ErbStG. It therefore remains "as before".

However, it remains to be seen whether the tax exemption for the so-called family home (Sec. 13 para. 1 No. 4a, 4b, 4c ErbStG) also applies if the family home is held via a civil-law partnership, as is often the case in practice. Proceedings are currently pending before the Federal Fiscal Court (Bundesfinanzhof – BFH, case no. II R 18/23).

 

• With regard to Real Estate Transfer TaxAct (Grunderwerbsteuer – GrEStG), the explanatory statements to the Growth Opportunities Act led to considerable uncertainty (see our blog post from September 2023).This concerned the tax exemption for real estate transfers between a partnership and its partners or vice versa in accordance with Sec. 5, 6 or 7 para. 2 GrEStG. The new Sec. 24 GrEStG now stipulates that partnerships with legal capacity within the meaning of Sec. 14a para. 2 No. 2 AO are deemed to be a community of joint owners for the purposes of the GrEStG. This means that - initially for a transitional period of three years - the previous legal situation will now remain in place. 

The time limit of three years has been set against the background of a planned comprehensive amendment of the GrEStG. The legislator has now gained some time to finalise the comprehensive amendment, which may place the rules for the taxation of real estate transfers law on a completely new foundation.

The so-called Future Financing Act (Zukunftsfinanzierungsgesetz) has significantly extended the scope of tax relief for employee share ownership programs in Sec. 19a Income Tax Act (Einkommensteuergesetz – EStG) (see our blog posts from September 2023 and May 2023).

• All companies with less than 1,000 employees, an annual turnover of no more than EUR 100 million or an annual balance sheet total of no more than EUR 86 million that were founded no more than 20 years ago will fall within the scope of Sec. 19a EStG. This means that more employees will be able to purchase shares in their employer's company at a reduced price.
• The problem of taxing the benefit from the discounted transfer of an employee's shares to the employee without an inflow of income to cover the tax (so-called dry income) has been solved by deferring taxation for up to 15 years or by taxing it only when the employee sells the shares. If the employment relationship is terminated, the tax is no longer immediately payable if the employer irrevocably assumes liability for the wage tax.
• The tax-free allowance for employee shares has also been increased from EUR 1,400 to EUR 2,000.

The Future Financing Act extends the VAT exemption to fund management services for the management of all alternative investment funds in the meaning of Sec. 1 para. 3 KAGB (AIF) irrespective of the regulation of the AIFM (financial investment management company) as well as the qualification of the investors as opposed to only certain investment funds (previously the VAT exemption applied to the management of funds under the OGAW-directive and comparable AIFs as well as venture funds only). The German law is thereby adapted to the VAT provisions of other EU member states, such as Luxembourg.

The Minimum Tax Act came into force on 1 January 2024. In case an international group of companies is subject to an effective profit tax rate of less than 15% outside of its jurisdiction, then a top-up tax on profits in countries where the effective tax rate is below 15% will be triggered resulting in a global minimum tax rate. The effective minimum tax rate amounts to 15%. The Minimum Tax Act is a rather complex law. It consists of more than one hundred sections. Technically, it is made up of three components: the primary additional tax, the secondary additional tax and the national additional tax.

The minimum taxation regime applies to groups of companies in which the consolidated financial statements of the ultimate parent company shows a worldwide turnover of EUR 750 million in at least two of the previous four financial years. The starting point of the minimum taxation regime is the determination of the so-called effective tax rate for the business units in the various countries, which follows a separate system set out in the MinStG. The Federal Ministry of Finance has not yet published a decree on the MinStG, which means that there are currently still numerous questions of doubt that require careful review and a pragmatic approach in order to cope with the considerable additional administrative burden.