Taxes and Depreciation
Depreciation of movable property, plant and equipment is calculated using the straight-line method over the expected useful life of the property, plant and equipment. Depreciation takes into account the residual value of the asset only when it is material, and any gains on sale are treated as normal business income. Some assets with a value of less than 800 euros may be amortized cumulatively in the year of acquisition. Alternatively, certain assets acquired in a financial year, worth less than €1,000 each, may be grouped together as a composite item and depreciated over five years.
In response to the COVID-19 pandemic, for movable property purchased or made after December 31, 2019 and before January 1, 2023, increased depreciation rates were introduced up to 2.5% compared to currently applicable depreciation rates and up to a maximum of 25%for a year. For movable property acquired or produced after December 31, 2022, the normal straight-line method applies.
As a further stimulus measure implemented in the context of the Covid-19 pandemic, the German tax administration allows the taxpayer to assume that, for certain digital assets (software and hardware) for the years ended December 31, 2020, a useful life of only one year for certain digital assets (software and hardware) for tax purposes, resulting in full amortization of acquisition costs in the year of acquisition. The measure is also available for other acquisition costs of assets acquired in prior years.
Buildings are depreciated using various straight-line methods or reduced rates designed to achieve full depreciation over a 25- to 50-year period, depending on the age of the building and whether the taxpayer was the first owner. Due to changes that will take effect January 1, 2023, the normal rate of depreciation for residential buildings commissioned after December 31, 2022 has been increased by 2%for a yearmake 3%for a year
In addition to normal depreciation, in certain limited circumstances (eg small businesses, monuments, buildings in designated urban renewal zones) special depreciation may be deductible for tax purposes.
Acquired intangible assets are amortized using the straight-line method over their estimated useful lives; goodwill is amortized over 15 years.
Assets such as bonds, stocks and bonds, stocks, land and current assets cannot be depreciated as planned.
Start-up and business formation expenses are deductible as they are incurred.
Net annual interest expense (excess of interest paid over interest received) of group companies is only deductible up to 30% of EBITDA for corporate and commercial tax purposes. The 30% limit applies to all interest, whether the debt is provided by a shareholder, affiliate or third party.
This limitation does not apply if the total net interest expense for the year is less than €3 million or if the net amount paid to any shareholder with more than 25% (or related party) does not exceed 10% of the total amount. However, this last authorization is conditional on the demonstration that the ratio between shareholders' equity and gross assets of the company is not lower by more than two percentage points than that of the group as a whole. Unused EBITDA potential can be carried forward for up to five years to cover future interest cost overruns. Non-deductible interest expense can be carried forward indefinitely into future years and will be deducted from future income as if it were interest for the year (ie there is an EBITDA surplus). Otherwise, this transfer is subject to the same rules as a loss transfer, including restrictions in case of change of shareholder(s).
By order of 14 October 2015, the Federal Tax Court declared the maximum interest limit unconstitutional and asked the German Federal Constitutional Court for a final decision. Only the Constitutional Court has the competence to assess whether a regulation is unconstitutional and therefore cannot continue to be applied.
It should be noted that the interest limitation is additional and does not replace the transfer pricing requirement, according to which the financing of related entities is carried out under market conditions.
Following (and in addition to) the OECD recommendations on Action 5 of the Tax Base Erosion and Profit Transfer (BEPS) project, Germany has introduced a cap on the deductibility of certain royalties from related parties. Pursuant to the provisions relating to the limitation of license fees, expenses incurred with the transmission of use or the right to use, namely copyright and industrial property rights, in the field of know-how, technical, scientific and similar knowledge and skills (eg plans, designs, processes) may not constitute a deductible business expense or may be only partially deductible.
The restriction will apply if:
- the recipient of the proceeds from the assignment of rights is a related entity,vis à visdebtor
- income in the hands of the beneficiary (direct or indirect) is subject to a special preferential regime that does not correspond to the OECD Modified Nexus Approach, and
- income obtained from the assignment of rights is taxable at a rate of less than 25% (low taxation) at the level of the recipient (direct or indirect).
If the conditions laid down in the regulation are met, the expenses in question will become proportionally non-deductible. The non-deductible portion of expenses is calculated as follows:
(25% - income tax tax burden in %) / 25%
Hybrid incompatibility arrangements
According to art. 9 and 9b of the EU Anti-Tax Avoidance Directive (ATAD) EU Member States:burysurnamenecessary to avoid the tax deduction of expenses arising from hybrid mismatch findings. Hybrid mismatches can arise (i) if income corresponding to expenses is not taxed (or is taxed at a lower rate) in the creditor's jurisdiction (deduction/non-inclusion; D/NI result) or (ii) if expenses are taxed as deductible in another jurisdiction (double deduction; DD score). An exception may apply if the taxpayer has so-called "dual inclusive income" (ie income included in the ordinary income of two jurisdictions).
In addition, the tax deduction of expenses in the case of non-compliant imported hybrid vehicles is prohibited. An imported hybrid mismatch can arise if a hybrid mismatch between two foreign jurisdictions is transferred ("imported") to another jurisdiction through the use of a non-hybrid instrument (eg a simple loan).
This obligation was implemented in German law with the introduction in June 2021 of a new section 4k of the Income Tax Act (ITA) applicable to expenses incurred after 31 December 2019. Section 4k of the ITA is accompanied by amendments to other sections of the German ITA and CITA to ensure inclusion in ordinary income in the event of hybrid mismatches being found (eg preventing the application of the German national shareholding exemption).
The principle of seniority exempts certain expenses that were already legally incurred before January 1, 2020.
Bad debts arising from transactions with unrelated parties are deductible when they are found to be bad and all attempts to collect the debt have failed or been abandoned. A provision may be made for future bad debts; general provisions should reflect the company's past experience; specific provisions require a specific justification based on the facts. Expenses for forgiveness of loans or similar obligations owed to shareholders greater than 25% or their affiliates may not be deducted from taxable income unless a third party creditor extends the loan or leaves it unpaid in similar circumstances.Currency losses incurred after December 31, 2021 are no longer subject to the ban on deductions.
Donations to recognized charities, in cash or in kind, are deductible up to a maximum of 20% of taxable net income or 0.4% of total sales and wages paid during the year. Donations to charities registered in other EU/EEA member states are also eligible for the deduction if the recipient organization meets German recognition requirements.
fines and penalties
Fines and other pecuniary penalties imposed by a court or other authority for the purposes of punishment, as well as related costs, are not deductible. On the other hand, payments levied to confiscate ill-gotten gains or to mitigate harm to victims or the public good are deductible. Penalties imposed for attempted tax evasion are not deductible, while late payment surcharges are deductible if the tax (eg VAT) itself is deductible.
All taxes incurred are deductible, with the exception of corporate income tax, business tax and VAT on most non-deductible expenses.
net operating losses
Net operating losses are carried forward indefinitely. For corporate income tax (but not trade tax), there is an optional transfer to the previous year of up to EUR 1 million. For losses incurred from tax year 2022 onwards, the loss carry forward period has been extended to two tax years prior to the tax year in which the losses were incurred.
In response to the COVID-19 pandemic, the maximum amount of losses for companies has been increased from €1 million to €10 million for losses incurred in 2020, 2021, 2022 and 2023.
The amount of credit available in a given year is limited to €1 million plus 60% of current income exceeding this amount. The remaining 40% of income in excess of €1 million is allocated to business and corporate taxes at current rates. This is called “minimum taxation”.
The losses carried forward, as well as current losses for the current financial year accumulated up to the date of the harmful transfer of the shares, are lost if a single shareholder acquires, directly or indirectly, more than 50% of the issued capital (voting rights) in a period of five years.
The forfeiture rule does not apply to the acquisition of shares within the scope of certain internal reorganizations of the group without affecting the sole final shareholder or to the extent that the loss carried forward is covered by implicit reserves in the company's assets, the realization of which, if carried out, will lead to to German taxation. This does not include increases in the value of shares in other companies, as well as corporate assets held in tax-exempt foreign PE companies.
In addition, there is exemption from carryforward tax losses in case of transfer of shares for restructuring of the relevant legal entity.
In some cases, a loss due to an adverse transfer of shares can be avoided after filing the application. An exemption can be granted if the company has only carried out the same activity during a certain observation period and no 'harmful event' has occurred during that period. In this context, harmful events include, for example, cessation of activity, start of additional activity, change of type of activity/sector of activity. If the conditions are met and the company has applied, the full amount of carryforward tax loss available at the end of the tax period in which the detrimental transfer of shares occurred will be classified as a so-called "continuation-related" loss carried forward (continuous loss).
The occurrence of one of the harmful events set forth in this provision will result in the loss of the most recently accrued continuation tax loss, unless the reportable continuation tax loss is offset by hidden reserves under the hidden reserve exception.
By order of 29 August 2017, the Lower Tax Court of Hamburg referred to the German Federal Constitutional Court the question whether the total loss of losses in the event of a harmful transfer of shares exceeding 50% is unconstitutional, which in its view opinion, the opinion of the Hamburg Lower Tax Court. Only the Constitutional Court has jurisdiction to assess non-compliance with a provision of the Constitution.
Payments to foreign branches
A German company can claim deductions for consideration, such as interest (subject to the interest cap), service fees and royalties (subject to the royalty cap) paid to foreign affiliates, provided the amounts are in line with market conditions . This is determined by detailed provisions concerning form and content. In particular, all services must be covered by a prior written contract, and written contracts for the purchase and sale of goods must also be concluded where customary between third parties (eg in the case of volume discounts on sales). Substantive criteria must be met, both in terms of cost-effectiveness and commercial relevance. Thus, the manager of the German subsidiary must be able to demonstrate a relevant commercial benefit from the transaction with related parties. These and all other aspects of business to business (affiliate) trading are subject to strict and extensive documentation requirements, violations of which can lead to severe penalties.
However, payments to foreign subsidiaries may not be deductible if anti-avoidance laws apply, for example in the case of a so-called hybrid asymmetry arrangement (I look up) or if the payments are not deductible under the Law for the Defense of Tax Havens ("Tax haven protection law',see Tax Haven Defense Law atother problemsSection).
Special features for sales tax
There are many differences between income subject to corporate tax and corporate income tax. Most important is the business tax exemption on a quarter of interest costs, including interest from leasing, rental and license fees. Banks have an exception to this denial of interest.