Tax changes at the end of the year - ups and downs

The Growth Opportunities Act (WCG), touted as an economic stimulus package, was eagerly awaited. While the government draft still contained a number of tightening regulations in addition to tax relief and investment premiums to promote the economy, these were largely no longer included in the resolution recommendation submitted by the Finance Committee. This applied in particular to the anti-fragmentation provision still provided for in the government draft, according to which the exemption limit to be applied for the interest barrier was no longer to apply per company, but was to be divided between the individual companies in a group of companies with similar activities, with the legal consequence that in many cases the exemption limit was at risk of being exceeded and the interest barrier applied - subject to the other exceptions.

The WCG was passed by the Bundestag on November 17, 2023. However, the Bundesrat did not give its approval and called the Mediation Committee on November 24, 2023. The Mediation Committee convened held its last meeting of the year without compromise. The WCG will therefore not be implemented in 2023.

However, certain provisions from the failed WCG have now been transferred to the Secondary Credit Market Promotion Act, which was passed by the Bundestag on December 14, 2023 and approved by the Bundesrat today (December 15, 2023). It implements (among other things) the changes to the interest barrier, the abolition of the taxation of December 2022 aid and the continued validity of the real estate transfer tax exemption for partnerships (limited until December 31, 2026). The last provision in particular is to be welcomed. In view of the German Act on the Modernization of Partnership Law (MoPeG) and the abolition of the “Gesamthand”, the previous possibility of transferring real estate between partners and partnerships free of real estate transfer tax ceased to apply at the end of 2023; due to the uncertainty about the outcome of the law, many people were considering a transfer in the current year. As a result of the legal regulation, there is now certainty that such tax-free transfers will continue to be possible after 01.01.2024.

Nevertheless, it can unfortunately be stated that, on balance, the legislator has not managed to adopt important regulations for sectors suffering from the high-interest phase. Here, the WCG provided for welcome regulations in the area of loss deduction and declining balance depreciation for newly built or acquired residential buildings (6% p.a.). The latter provision in particular was intended to benefit the struggling construction industry and real estate investors. It is true that depreciation for new residential buildings has already been increased from 2% to 3% from 2023 and special depreciation for efficient buildings has also been introduced. However, depreciation of 3% is not yet attractive enough due to the high proportion of land in the total costs, particularly in large cities. The special depreciation allowance (Section 7b (2) sentence 1 no. 2 EStG) often fails in practice due to the requirement of the “sustainability class” and also provides for a cap on the depreciation assessment basis to a maximum acquisition/production cost of EUR 2,500 per square meter of living space. We can only hope that politicians will not lose sight of the outstanding issues next year.