Is Your Business Ready for Germany’s 2024 Tax Reforms?

AGN EMEA Tax Committee News

Introduction

In March 2024, the business tax reform bill (“Growth Opportunity Act”), which has several changes, was introduced and legalized.

Overview of the Main Changes

• Interest deduction limitations – Changes to the rules for determining the arm’s length principle for intercompany financing relationships
• Minimum Taxation Rules
• Increased R & D Allowances
• E-Invoicing

Actions to Consider

Companies should review and evaluate the changes on the new rules. This applies in particular with regard to the interest deduction and e-invoicing.

The Changes in Detail

1. Financing Relationships
   The law includes amended transfer pricing rules for cross-border financing arrangements within multinational groups under the Foreign Tax Act. The rules require a test based on the arm’s length principle:
   • Debt capacity test: The borrower must provide plausible evidence as to the ability of the taxpayer to repay the debt -both interest and principal- during the entire term of the debt;
   • Business purpose test: The borrower must provide plausible evidence as to the taxpayer’s need for financing and the business purpose for the loan together with
   • Maximum interest rate test: The interest rate must generally be determined based on refinancing conditions that would apply to an unrelated third party and must also be based on the credit rating for the entire multinational enterprise group. An escape clause allows the borrower to argue that, based on the relevant facts, an interest rate higher than the one on the group’s credit rating could be at arm’s length -a derivative group credit rating.

The intercompany provision of financing services, back-to-back financing arrangements, and treasury functions are generally deemed to be low-function risk services for purposes of the arm’s length principle and for calculating an arm’s length remuneration. The taxpayer may prove the contrary, i.e., that a higher remuneration would be justified based on the taxpayer actually bearing a higher risk.

The amended rules are limited to cross-border financing arrangements and do not affect purely domestic financing arrangements and are effective as from fiscal year 2024.

2. Minimum Taxation Rules
   The minimum taxation rules limiting the offset of tax losses carried forward against current year profits has been amended for the period 2024 to 2027. During this period, a taxpayer is allowed to offset 70% (up from 60%) of current year income exceeding EUR 1 million against tax losses carried forward. The amended rules apply for individual and corporate income tax purposes only i.e., there are no changes for local trade tax purposes, i.e., the 60% limitation still applies for local trade tax purposes.
   
3. Increased R&D Allowance
   The maximum assessment basis for the research and development (R&D) allowance has been increased from EUR 4 million currently to EUR 10 million, while the proportion of eligible costs for contract research will increase from 60% to 70%. These and other changes were applicable as of 28 March 2024.
   
4. E-Invoices in Germany
   The VAT Act introduces mandatory electronic invoicing for domestic business-to-business (B2B) transactions as from 1 January 2025. The new law indicates that an e-invoice is an invoice issued, transmitted, and received in a structured electronic format that enables further electronic processing, and which complies with or is compatible with, the EU standard format CEN 16931.

Who is it relevant for

The mere registration for German VAT purposes does not lead to the obligation to issue or receive e-invoices according to the new German law.

Transitional Provisions and Exceptions

The new rule includes transitional provisions for issuing e-invoices. As an exception to the general rules, tickets and small-value invoices of up to EUR 250, may continue to be issued as hard-copy invoices. For all other invoices, businesses should be mindful of the following:

• Hard copy invoices and other invoices that do not comply with the relevant format are allowed to be sent for domestic B2B transactions carried out in 2025 and 2026. Invoices that do not comply with the CEN 16931 standard are permissible during this period. The consent of the invoice recipient is still required for this. However, the ability to withhold consent does not apply if hardcopy invoices are used.
• For B2B transactions carried out during 2027, other invoices (non-CEN 16931 compliant invoices) may only be issued with the consent of the invoice recipient under certain conditions. Additionally, the invoice issuer’s turnover for the previous year must not exceed EUR 800,000. Businesses with turnover above this limit, and those with no compatibility with the standardized format during 2026 and 2027, may issue invoices via the electronic data interchange (EDI) procedure.
• From the beginning of 2028, compliance with the new requirements for e-invoices and their transmission is mandatory. The EDI procedure can continue to be used as long as invoices are compatible with the CEN 16931 format.

However, as from January 1, 2025, businesses in Germany will be obliged to receive e-invoices.

Brought to you by the AGN EMEA Tax Committee

If you have any questions in relation to this article, please get in touch with Christine.

Christine Ries
Tax Consultant | Certified Advisor in International Taxation
WirtschaftsTreuhand GmbH

Christine.Ries@wirtschaftstreuhand.de