Tax changes at the turn of the year

The year 2023 was eventful in many respects. In terms of financial and tax policy in particular, there was once again plenty of impetus and a need for various adjustments. In particular, the ruling by the Federal Constitutional Court on November 15, 2023, which stated that the reallocation of special funds to later financial years is unconstitutional, ended the year with a significant impact on the budget situation and fiscal policy. The ensuing dynamic discussion about potential budgetary savings is likely to continue well into 2024.

The tax changes at the turn of the year 2023/2024 are therefore in a particularly tense relationship: on the one hand, there is a consensus that the economy must become more digital and sustainable in order to make it easier for innovation-driving research institutions in particular. On the other hand, budgetary policy should attempt to prevent the state from incurring new debt.

The unofficial Annual Tax Act 2023, the Act to Strengthen Growth Opportunities, Investment and Innovation as well as Tax Simplification and Fairness, or Growth Opportunities Act for short, was still in the conciliation process between the Bundestag and Bundesrat at the time this newsletter article was written. The Bundesrat called for a revision as its detailed opinion on the draft bill had only been incorporated into the proposed legislation in certain areas and too many last-minute amendments had been made by the Bundestag's Finance Committee.

Nevertheless, it is worth taking a look at the planned new regulations. In the following, we present an overview of the planned tax law changes without any claim to completeness. They are subject to possible adjustments in the course of negotiations and have not yet been finalized. Please keep an eye on further legislative developments.

The legislator plans to extend the research allowance by amending the Research Allowance Act. Further eligible expenses will be defined for this purpose. In future, in addition to certain salary expenses, the depreciation of depreciable movable fixed assets used in the subsidized research and development project (R&D project) will also be eligible. However, this only applies if the assets are necessary and essential for the R&D project and were acquired or manufactured after December 31, 2023.

In addition, the eligible share of costs for contract research is to be increased from 60% to 70% for financial years beginning after December 31, 2023, and the research and development allowance for small and medium-sized enterprises is to be increased from 25% to 35% upon application.

Finally, the maximum assessment basis for eligible expenses incurred after December 31, 2023 is to be tripled to 12 million euros.

The plan to provide tax incentives for climate protection measures, which became known as "super depreciation" in the coalition agreement, is expected to be incorporated into the law as a "climate protection investment premium". It is a central incentive element for decarbonising the economy. All persons with limited and unlimited income tax liability who earn their income commercially, independently or from agriculture and forestry will be eligible.

The acquisition or production of new depreciable movable fixed assets - including measures on existing assets - is to be considered a subsidised investment, provided they serve to improve energy efficiency in the company. This could be photovoltaic systems, for example. However, the expenditure must total at least 5,000 euros. Furthermore, the climate protection investment premium is only granted with qualitative proof in the form of a savings concept drawn up by an energy consultant.

The funding amount is to be 15 per cent of the eligible acquisition or production costs and capped at a maximum of 30 million euros per eligible person for the entire funding period.

The subsidy period is also limited: The investment premium will only be available for investments that are started after 29 February 2024 and completed before 1 January 2030 - i.e. at the time of acquisition or production. A maximum of four applications may be submitted during the subsidy period.

Utilisation of losses, Section 10d (1) of the Income Tax Act:

- Extended loss carry-back for up to three years for financial years from 2024 and increase in loss carry-back to EUR 10 million also for 2024 and 2025; from 2026: EUR 5 million.

- Loss carryforward: temporary increase in minimum tax base amount from 60 per cent to 75 per cent for 2024 to 2027.

Degressive depreciation for wear and tear (AfA) on movable assets, Section 7 (2) of the Income Tax Act:

- Acquisition after 30 September 2023 and before 1 January 2025.

- Re-introduction of declining balance depreciation up to 25 per cent. Maximum 2.5-fold straight-line depreciation

Low-value assets (GWG) and collective items, Section 6 (2) and (2a) of the Income Tax Act:

- Acquisition or production after 31 December 2023

- Increase in upper limits for low-value assets to 1,000 euros (previously 800 euros) and for the collective item to 5,000 euros (previously 1,000 euros) and reduction of the collective item amortisation period to three years. Previously it was five years.

Gifts, Section 4 para. 5 sentence 1 no. 1 sentence 2 of the Income Tax Act:

- Expenses for gifts to persons who are not employees of the taxpayer may not reduce profits if the gift exceeds the value of EUR 35. From 1 January 2024, this limit is to be raised to EUR 50.

In addition to these impending legislative changes, all legal entities under public law must urgently observe the changeover to Section 2b of the German VAT Act on 1 January 2025. In our opinion, no further postponement is to be expected. We therefore advise that, in particular, projects with which Section 2b of the German VAT Act was implemented but which were interrupted prematurely should be resumed early in order to make the best possible use of the remaining time. In our experience, it is once again time-consuming and labour-intensive to determine input tax potential and timely implementation in the enterprise resource planning systems. In the next newsletter article, we will show you how a time-critical project relating to Section 2b of the German VAT Act can still be successfully completed.

Why research and scientific institutions should also implement a tax compliance management system, how they can combine this with the introduction of Section 2b of the German VAT Act and what simplifications a functioning tax compliance management system offers will also be presented in the next but one newsletter article.