Germany’s Lower House of Parliament of Germany (Bundestag) passed the Annual Tax Act 2024 on 18 October 2024.
The Bundestag has implemented 59 changes to the draft law based on the Finance Committee’s recommendation.
The Annual Tax Act 2024 introduces several legal developments and changes that hold practical importance, particularly in areas such as, minimum tax Act, trade tax, VAT, Controlled foreign company (CFC) taxation, income tax, real estate tax, Tax haven defence Act, Investment Tax Act as well as transformation tax law and tax procedural law.
Minimum Tax Act:
The Bundestag has introduced provisions for a minimum tax group under German Pillar Two rules. This centralises top-up tax payments and filing obligations at the level of a single German-based Constituent Entity, referred to as the minimum tax group leader. A German entity will qualify as the minimum tax group leader for a German subgroup if it is the only business unit operating in Germany. Group leaders are required to notify the Federal Tax Office by 28 February 2025, with this regulation taking effect retroactively from 28 February 2023.
The administrative guidelines for the GIoBE model regulations, adopted by the Inclusive Framework on BEPS on 13 July 2023, will be implemented concerning mobile employees. These guidelines specify that wage costs will be considered in only one tax jurisdiction, meaning no pro rata consideration for employees who perform more than 50% of their work in a single tax jurisdiction. These changes will come into effect on 28 December 2023.
Trade tax:
The resolution introduces changes to trade tax regulations, particularly concerning the tax liability of passive permanent establishment income. The revised Section 7 Sentence 8 of the Trade Tax Act states that income from foreign permanent establishments, which would be taxable under the Foreign Taxes Act as if it were a foreign company, will now be considered as income from a domestic permanent establishment. This amendment clarifies that it also applies in cases where Germany holds taxation rights under double taxation agreements (DTAs), and it will be effective for tax periods prior to 2024.
Additionally, in response to the Federal Council’s request, the resolution establishes a new provision for a simplified trade tax reduction for real property. Starting from the 2025 tax period, the property deduction will be based on the real property tax recognised as a business expense, rather than the assessed value for property tax purposes, aligning the regulations with the property tax frameworks of the federal states.
Value Added Tax:
The resolution introduces updates to Value Added Tax (VAT) regulations, including a new invoice requirement for businesses taxed on a receipts-basis, which mandates the disclosure of tax treatment on invoices effective from 2028. Starting 1 January 2025, the reduced VAT rate for works of art and collectors’ items will be reinstated, excluding rentals. Additionally, small businesses in Germany can claim tax exemptions for domestic turnover under EUR 100,000 for the current year and EUR 25,000 for the previous year, with provisions for tax-free operations in other EU countries. Changes also include updated rules for the location of virtual service provisions and a harmonisation of educational service tax exemptions with EU law. Other measures aim to clarify legal frameworks and streamline administrative processes, including the planned elimination of VAT warehouse exemptions by 1 January 2026, due to limited applicability for most operators.
Controlled foreign company (CFC) taxation:
Under the CFC rules, passive income from foreign permanent establishments is liable to German CFC taxation as stipulated in Section 20 (2) of the Foreign Transactions Tax Act. In addition to corporation tax, this CFC income is also subject to trade tax. The 2024 tax act includes a “clarification” stating that all passive income from foreign permanent establishments will be treated as if it were generated in a domestic permanent establishment. This applies even to income for which Germany already has taxation rights under a Double Taxation Treaty, and it will be applicable to all ongoing cases.
Income tax:
The Bill introduces the option for employers to charge a flat rate of income tax of 25% on transportation allocated to employees that are used for personal use, capped at a benefit of up to EUR 2,400 per year.
The legislation increases the basic tax allowance to EUR 11,784 for 2024 and raises the tax allowance for children to EUR 6,612.
Real estate tax exemptions and regulations:
New regulations will increase the allowable gross output for photovoltaic systems from 15 kW to 30 kW (peak) for each residential or commercial unit. This change will apply to systems that are purchased, commissioned, or expanded after 31 December 2024.
In addition, there will be updates to the real estate transfer tax rules regarding “share deals.” This involves the transfer of shares in companies or partnerships that own real estate. According to the revised Section 1 (2a) to (3a) of the Real Estate Transfer Tax Act (RETTA), the real estate will now be attributed to the company that last acquired it through a standard purchase agreement. As a result, using a share deal to acquire property will not change ownership for transfer tax purposes. These new regulations will take effect immediately after being published, applying to transactions conducted from that date onward.
Tax haven defence Act
Amendments to Section 8 of the Tax Haven Defence Act aim to prevent payments that were intentionally excluded from the scope of the defence measures outlined in Section 10 of the Act—specifically, those that involve withholding tax deductions. This includes certain globally deposited bearer bonds and similar securities, which are now subject to the prohibition on deducting operating expenses or advertising costs under Section 8 of the Tax Haven Defence Act.
Investment Tax Act
The legislation introduces new regulations under Section 6 InvTA concerning exit taxation for investment units as outlined in Section 19 (3) and Section 49 (5) InvTA, applicable to events occurring after 31 December 2024 (Section 57 (10) InvTA). Additionally, the settlement period for investment funds has been extended from five to ten years, as specified in Section 17 (1) Sentence 4 InvTA.