Germany releases draft Growth Opportunities Act: PwC

Germany releases draft Growth Opportunities Act

July 2023

In brief

The German Ministry of Finance on July 14 sent a draft bill, the "Growth Opportunities Act,” to the German Industry Associations for consultation. The bill introduces an investment grant for certain investments aiming to achieve energy savings and proposes adjustments to national and international tax law provisions. This insight focuses on some of the key international tax aspects.

Observation: Businesses should monitor the proposed changes to the interest capping rule and introduction of the interest rate capping rule.

Amendments to the interest capping rule

In light of Anti-tax Avoidance Directive (ATAD) 1, Germany is obliged to adjust its interest capping rule. Currently, an interest expense limitation applies for net interest expense amounts exceeding EUR 3 million. The bill proposes to convert the current EUR 3 million threshold to an allowance. The bill also introduces an anti-fragmentation rule to avoid multiple use of the allowance amount, while deleting the so-called stand-alone-test and the equity-ratio-test. Lastly, the bill extends the scope of the interest capping rule to cover other expenses relating to interest expense.

New interest rate capping rule

The bill introduces a separate interest rate capping rule for interest expense paid to related parties. This rule would apply in addition to the existing interest capping rule. The new rule would limit interest expense deductions if the corresponding interest rate exceeds a floating rate as determined under German law increased by 2%. Interest expense paid on a higher interest rate may be deducted if it can be demonstrated that the ultimate parent entity of the group and the lender could only receive the loan at a higher rate.

If the lender maintains sufficient substance, as defined under German controlled foreign corporation (CFC) rules, the interest rate capping rule would not apply. However, if the lender is resident in a territory not participating in the information exchange under the German Tax Haven Defense Tax Act, the substance exclusion would not apply.

Tax loss carryback/carryforward:

The bill proposes to extend the tax loss carryback period for corporations from the current two years to three years for the 2024 assessment period onward. The loss carryback amounts are subject to minimum taxation limits and are limited to EUR 10 million or EUR 20 million (for joint taxpayers).

The minimum taxation limit is proposed to be abolished for the fiscal years 2024-2027 (i.e., losses would be deductible up to the total amount of income of the following assessment period without any limitations). From the fiscal year 2028 onward, the minimum taxation would be reintroduced (i.e., a carryforward of EUR 10 million and 60% of the total amount of income exceeding EUR 10 million would be possible).