On 14 December 2023, upper house of parliament (Bundesrat) granted approval to the Secondary Credit Market Promotion Act. The Act had already received approval from the German Bundestag (lower house of parliament) on 13 December 2023 and is currently awaiting the final steps of being signed into law and published in the Official Gazette.
Key revisions are introduced in Section 4h of the Income Tax Act (EStG), notably impacting the interest deduction restriction. These amendments were previously part of the Growth Opportunities Act, with further discussions slated for 2024 regarding pending issues from the same Act.
The key changes include:
- Carryforward of Excess Interest Expense: Section 4h of the EStG now explicitly states that the carryforward of excess interest expense will not occur in financial years where interest expense does not surpass interest income.
- Exemptions to Interest Deduction Restriction: Several exemptions have been modified under the Act, such as:
- The EUR 3 million safe harbor is now clarified, exempting companies with a net interest expense below EUR 3 million.
- The definition of interest expenses and income is expanded to include various financial components, aligning with Council Directive EU 2016/1164 (ATAD).
- Group equity ratio determination rules are amended, removing the requirement to increase equity “by half of special items with a reserve component.”
- Partnerships or joint ventures are now specifically mentioned in the exemption, replacing the reference to “taxpayer.”
- The exemption for companies not belonging to a group is replaced by an exemption for a taxpayer not affiliated with any person under the Foreign Tax Act and lacking a permanent establishment outside their domicile state.
- Loss of Unused EBITDA and Interest Carryforward: In cases of business discontinuation or transfer, unused EBITDA and interest carryforwards will be lost on a pro-rata basis.
- Exemption for Public Infrastructure Projects: A notable addition is the exemption for interest expense or income related to loans financing long-term public infrastructure projects. This exemption is applicable if funds originate from the public budgets of the European Union, the Federal Government, the Federal States, or municipalities. Specific criteria, including the project’s location, operator’s residence, and income taxation in a European Union Member State, must be met.
Furthermore, related amendments to Section 8a of the Corporate Income Tax Act (KStG), which references the interest deduction restriction rules in Section 4h of the EStG, will come into effect on 1 December 2024. These comprehensive changes aim to enhance clarity and effectiveness in Germany’s taxation landscape.
