Improvement of tax loss deduction
The loss carryback period pursuant to Section 10d(1) of the Income Tax Act (Einkommenssteuergesetz, EStG) was already extended in the Fourth German Coronavirus Tax-Related Assistance Act. As of the 2022 assessment period, the previous one year loss carry-back was permanently extended to two years and the maximum amounts for the loss carryback were also increased for 2022 and 2023 to €10m or €20m (where spouses are assessed jointly). Firstly, according to the new draft legislation, as of 2024, the loss carryback period will be extended to three years; secondly, the aforementioned increase in the maximum amount will be retained permanently. It should be noted here that these extensions will also apply analogously for corporations.
An extension is likewise envisaged for the tax loss carryforward pursuant to Section 10d(2) EStG. Up to now, it has been possible to carry forward a basic loss amount of €1m or €2m (where spouses are assessed jointly) into the subsequent assessment periods without any restrictions. The portion of the tax loss carryforward over and above the basic amount is restricted to 60% of the overall amount of income. Under the new draft legislation, for the 2024 to 2027 assessment periods, the percentage limit will be raised temporarily to 80% from the current level of 60%.
Please note: It should be noted that the increase in this percentage limit will be applicable not only for German income tax and corporation tax, but likewise for trade tax (by means of the relevant adjustment to Section 10a of the German Trade Tax Act).
Improvements to depreciation options
Declining balance method of depreciation for residential buildings ...
There are plans for the temporary introduction of the declining balance method of depreciation for new residential buildings pursuant to Section 7(5a) EStG; accordingly, it will be possible to charge depreciation annually in the amount of 6% of the acquisition and construction costs. At the same time, there will also be the right to switch to straight-line depreciation pursuant to Section 7(4) EStG.
The prerequisite for the application of this provision is that a residential building will be constructed and construction will start between 1.10.2023 and 30.9.2029. Alternatively, this depreciation option will also be applicable in the event of an acquisition insofar as the purchase agreement is concluded by the end of the year in which the building is completed and a binding agreement is concluded between 1.10.2023 and 30.9.2029.
… and for long-term movable assets
A further new measure included in the government draft is the temporary re-introduction of the declining balance method of depreciation for long-term movable assets pursuant to Section 7(2) sentence 1 EStG. This depreciation option will be applicable for assets that will be or have been acquired or manufactured between 1.10.2023 and 31.12.2024. The rate will still be, at most, 2.5 times that of the straight-line depreciation percentage rate, but a maximum of 25%.
An overview of other depreciation measures
In addition, the following measures relating to depreciation and proposed by the BMF were adopted in the government draft:
- increase in the limit on low-value assets from €800 to €1,000 (Section 6(2) EStG),
- increase in the value limit for the creation of a compound item from €1,000 to €5,000 as well as a reduction in the reversal period for compound items from 5 years to 3 years for assets that are acquired, manufactured or contributed to business assets after the 31.12.2023 (Section 6(2a) EStG),
- increase in special depreciation pursuant to Section 7g(5) EStG from the current level of 20% of investment costs to 50% of investment costs for movable assets acquired or manufactured as of 1.1.2024. The only businesses that will still be eligible for this concession will be ones that do not exceed a profit threshold of €200,000 in the year prior to the investment.
Outlook: According to the current plans, the aim is for the legislation to be passed by the Bundestag [lower house of German parliament] in November and for the Bundesrat [upper house of German parliament] to give its approval in December. It remains to be seen if and the extent to which the contents of the government draft law will still change in the course of the legislative procedure.