Bundesrat approves the Annual Tax Act 2024

A.    Changes to the Income Tax Act

1.     Transfers of individual assets between sister companies with no effect on tax

Under the current Section 6(5) sentence 3 of the Income Tax Act (Einkommensteuergesetz – EStG), individual assets transferred without compensation between partnerships (co-entrepreneurships) or in return for corporate rights or a reduction in them must be transferred at the tax carrying amount. 

Until now the text of the Act did not cover the case in which an individual asset is transferred directly from the partnership’s collective assets into the collective assets of another partnership with the same ownership structure (a sister company). In the view of the tax authorities, in such cases the hidden reserves in the transferred assets had to be disclosed, with the effect of increasing profit.

In its judgment on 28/11/2013 (2 BvL 8/13), the Federal Constitutional Court decided that this should be seen as unjustified unequal treatment with respect to the legally privileged conditions. The legislature therefore had to reformulate retrospective rules to apply for transfers made after 31/12/2000.

To implement the judgment a new no. 4 has been added to Section 6(5) sentence 3 of the Income Tax Act. This now provides for continuing to apply the carrying amount when individual assets are transferred “without consideration between the collective assets of different co-entrepreneurships held by the same co-owners with identical shareholdings”. But regarding the scope, this has been regulated very tightly. Only transfers made with no compensation are included, while transfers in return for the granting of corporate rights are not included in particular. And a transfer at the carrying amount can only come into consideration if the shareholdings of the sister companies are absolutely identical.

Rules on application: The rule is to apply retrospectively to all open cases. The rule may not be applied to transfers made before 12 January 2024 (date the Federal Constitutional Court decision was published) if all the co-owners make a joint application. This is possible for reasons of protecting legal expectation. This means that hidden reserves still have to be disclosed in these cases – this can be advantageous, e.g. if losses can be used for this.

2.     Tightening up of “corporation clauses”

Section 6(5) sentence 3 of the Income Tax Act regulates the transfer of individual assets at their carrying amount with no effect on tax from or into the collective assets of partnerships (also see 1.). Sentences 5 and 6 of Section 6(5) contain the “corporation clauses”. According to these, assets that were originally transferred at their carrying amount are to be recognised at their going concern value retrospectively inasmuch as the share belonging to a corporation, association of persons or conglomeration of assets in the asset is established directly or indirectly or increased within seven years by transfer.

In the past, it was disputed whether the corporation clause was also to apply when a share of a corporation passed to another corporation. Following the Federal Fiscal Court (BFH) judgment of 15/07/2021 (IV R 36/18), this is to be answered in the negative. The purpose of the rule is to prevent switching from the income tax to the corporate income tax regime. If the corporate income taxpayer changes from one to another, this does not constitute an infringement of the blocked period.

The introduction of Section 6(5) sentence 7 of the Income Tax Act enshrines the tax authorities’ view in law. Hidden reserves are therefore now also to be disclosed when a share in an asset passes directly or indirectly from one corporation, association of persons or conglomeration of assets to another. When the change of status is examined, the relation of this to the taxpayer is also fixed.

The rules governing individual assets on splitting up a partnership into sole proprietorships were also amended in similar fashion. 

Rules on application: The rules apply for the first time to transfers of assets made after 18 October 2024 (date on which the Bundestag passed the Act).

3.     More data to be included in the e-balance sheet 

Until now taxpayers have had to submit the contents of their balance sheet and statement of profit and loss to the tax office under Section 5b(1) of the Income Tax Act, and do so according to the official data set by data transfer. This provision has now been expanded – in future an unabridged list of account balances, the table of changes to fixed assets and the underlying register of assets also have to be submitted electronically. In future, a management report, audit report and list of any diverging exercise of tax options (Section 5(1) sentence 2 Income Tax Act) also have to be submitted electronically, as available.

Rules on application: Submitting an unabridged list of account balances is obligatory for the first time for financial years starting after 31/12/2024. It will be obligatory to submit the other documents for the first time for financial years starting after 31/12/2027.

4.     Tax exemption for photovoltaic systems 

Section 3 no. 72 of the Income Tax Act has also been amended. The upper threshold for photovoltaic systems subject to tax exemption according to installed gross output as recorded in the core energy market data register is now up to 30 kW (peak) per residential or commercial unit. The amendment applies to installations that are acquired, commissioned or expanded after 31/12/2024.

B.    Amendments to the Corporate Income Tax Act

Contribution account for tax purposes on restructuring

Repayments of capital with no effect on tax to shareholders in a corporation are ensured by means of a contribution account for tax purposes. If this is deemed to have been used, the shareholder does not report repayment of capital as a distribution. In terms of amount, use is limited to the balance of the contribution account at the start of the financial year. Intraperiod increases to the contribution account are only available from the following year for paying back capital at no tax.

As the law previously stood, notional access of the contribution account was deemed to exist for conversions in which a new corporation comes about with a retrospective effect for tax to 31/12 of the previous year as of the end of the previous financial year (31/12) because the new corporation’s reporting for corporate income tax starts on this date. This means allocations to the contribution account for non-taxable repayments of capital on the occasion of conversions could already be used in the current year.

Through the amendment to Section 27(2) sentence 3 of the Corporate Income Tax Act (Körperschaftssteuergesetz – KStG), on the occasion of new formations due to a conversion, access of the contribution account due to the conversion is reported in the conversion year as on-going access. There is therefore no retrospective effect for tax. The contribution account may therefore only be used for tax purposes in the year following the conversion.

Rules on application: This rule enters into force on the day after promulgation of the Annual Tax Act 2024. It is to be applied for the first time to the tax year 2024.

C.    Trade tax

1.     Apportionment measure for operators of energy storage installations

If a trading operation maintains permanent establishments in several municipalities, the basic trade tax amount is to be apportioned into shares, which are due to the individual municipalities. The measure for apportionment is exclusively the wages incurred by the individual permanent establishments, taking certain modifications into account.

For businesses that only operate installations that generate electricity and other forms of energy and heat from wind or solar power, wages only count as 10% of the total. 90% is determined by the share of the installed output at a permanent establishment as a share of the business’s total installed output.

Under the newly introduced Section 29(1) no. 3 of the Trade Tax Act (Gewerbesteuergesetz – GewStG), this ratio now also applies to businesses that only operate energy storage installations as defined by Section 3 no.15d of the Electricity and Gas Supply Act (Gesetz über die Elektrizitäts- und Gasversorgung – EnWG).

Rules on application: The rule is to apply for the first time for the tax year 2025.

2.     Trade tax: Simple trade tax relief from 2025

The trade tax relief under Section 9(1) sentence 1 of the Trade Tax Act (Gewerbesteuergesetz – GewStG) is a standard way of avoiding double taxation on trading operations, from both trade tax and property tax. The provision has been amended so that from the tax year 2025 the property tax for the real property belonging to the trader’s business assets actually reported as operational expenditure for the tax year is deducted from trading income.

Until the tax year 2024, this relief was to be calculated according to a fixed percentage of the unit’s value, which was determined by the tax office.

D.    Tightened rules on debt financing between related entities with a foreign connection

The Growth Opportunities Act (Wachstumschancengesetz) has significantly tightened the rules on the deduction of operational expenditure from financing relationships with foreign related entities. Companies with a foreign parent or financing company are affected, for example. In essence, deducting operational expenditure from such financing will only be allowed if the taxpayer:

• can satisfactorily show that it could have provided the capital service from the outset,  
• proves that it needs the financing, economically speaking, and
• uses the financing for its actual business purposes. 

The legislation is meant to prevent profits being moved abroad through financing relationships.

This new tighter rule has been provided with transitional rules. In particular, expenses incurred until the end of 2024 are not to be included. This applies if the financing relationship was agreed under civil law before 01/01/2024 and actual performance also began before 01/01/2024. So companies are given a proper way to respond to the tightened new rules by reviewing and adjusting their existing financial relationships as needed.

E.     Amendments to the Reorganisation Tax Act

1.     Electronic submission of closing tax balance sheets

For mergers, divisions and changes of form, transferring corporations must prepare a closing balance sheet as per the transfer date for tax purposes (Section 3(1) sentence 1 Reorganisation Tax Act (Umwandlungssteuergesetz – UmwStG)) 

Under the newly introduced Section 3(2a) of the Reorganisation Tax Act, the closing balance sheet is to be submitted electronically to the tax office. This should be done by the deadline for submitting the transferring company’s corporate income tax return (Section 149 Fiscal Code (Abgabenordnung – AO)) for the assessment period in which the transfer date for tax purposes falls. The principles for e-balance sheets apply accordingly.

Rules for application: The rule applies in all cases in which an application is made to register the conversion in the commercial register after the day on which the Annual Tax Act 2024 is promulgated.

2.     Carrying amount applications for shareholders

Under Section 13 of the Reorganisation Tax Act, when mergers take place among shareholders, the share in the transferring corporation (disclosing hidden reserves) is deemed as disposed of at fair market value. Until now shareholders were able to avoid taxation of the hidden reserves by making an application under certain conditions, without the application being tied to any deadline.

Under the newly introduced Section 13(2) sentence 2 of the Reorganisation Tax Act, the application is now to be filed by the time the first tax return is submitted and at the tax office responsible for the shareholder.

Rules on application: The rule applies initially to conversions whose transfer date for tax purposes is after the promulgation of the Annual Tax Act 2024.

3.     Trade tax burden on indirect transfers

As a rule, profits of natural persons originating from the disposal or surrender of co-owners’ shares are not liable to trade tax. There is an exception when a corporation was merged in the past into a co-entrepreneurship (the receiving partnership).

In these cases, if the co-owner’s share is disposed of or surrendered within five years from the transfer date for tax purposes, natural persons’ profits are also liable to trade tax (Section 18(3) Reorganisation Tax Act).

The addition of a new sentence 3 to Section 18(3) of the Reorganisation Tax Act means that in future disposals of shares in superordinate partnerships will also be liable to trade tax. This rule applies if the seller had a shareholding in the receiving partnership indirectly or via one or more partnerships. Trade tax in these cases is incurred by the superordinate partnership whose shares were sold.

Rules on application: This rule applies to conversions whose transfer date for tax purposes is after 17/05/2024 (publication date of the draft bill of the Annual Tax Act 2024).

4.     No negative acquisition costs on contributions

Under certain circumstances operating entities and shares in partnerships can be contributed to corporations with no effect on tax. In these cases, the acquisition costs for the shares in the corporation which the contributor has obtained correspond to the capital account for tax purposes of the operating entity or contributor at the partnership on the transfer date for tax purposes. This can be up to eight months in the past (retrospective period). 

As the law currently stands, contributions and withdrawals during the retrospective period result in an increase or reduction of the costs of the shares obtained as part of the contribution with no effect on tax. This can result in withdrawals during the retrospective period exceeding the capital account for tax purposes as of the transfer date for tax purposes. 

In the tax authorities’ view, in these cases taxable carrying amounts should be replenished to prevent acquisition costs becoming negative. The Federal Fiscal Court has refused to go along with this. It confirmed that negative acquisition costs for the obtained shares may occur on withdrawals during the retrospective period (judgment of 07/03/2018, I R 12/16).

The newly introduced sentence 5 to Section 20(2) of the Reorganisation Tax Act has now enshrined the tax authorities’ view in law. According to this, withdrawals and contributions during the retrospective period are to be taken into account in calculating the business assets that were contributed by the transfer date. This may result in (proportionate) hidden reserves having to be disclosed.

Rules on application: This rule applies in cases of universal succession for initial contributions for which the resolution on converting the company was passed after 31/12/2023. In all other cases, it is to apply when the contribution agreement has been concluded after 31/12/2023.

5.     Section 22(2) of the Reorganisation Tax Act – no lifting of the blocked period for further contributions with no effect on tax

If shares in a corporation from private tax assets are to be sold, there is the question whether these shares can be contributed to an investment company before the disposal so that they can be sold from it almost tax-free. However, a long run-up is needed in this case owing to the seven-year block for contributions made at the carrying amount. So models were designed to get around the blocked period by making a double contribution (the double holding model). The legislature has now acted against these models. It has expressly laid down that the blocked period only ends when a further contribution is made if the hidden reserves are also disclosed.