Upper house of parliament approves Annual Tax Act 2024

Legislation will enter into force after signature of the president and publication in the federal gazette 

The upper house of the German parliament on 22 November 2024 approved the Annual Tax Act 2024 (“the Act”), following approval by the lower house of parliament on 18 October 2024. The Act will enter into force after being signed by the president and published in the federal gazette, both of which are mere formalities and are expected to take place in late November/early December 2024. The Act likely is the last tax legislative measure of the current government before the planned snap elections on 23 February 2025. All pending legislative proposals are automatically terminated when a new parliament is elected.

The approved law incorporates a variety of technical updates and amendments based on EU law developments and EU jurisprudence, as well as decisions from the federal tax court and the federal constitutional court. In addition, the Act includes several streamlining measures and technical corrections that are required as a result of previous tax law changes. The Act does not include any comprehensive tax reform measures or changes in tax rates.

The most significant measures included in the Act are the following:

• As a result of jurisprudence of the federal constitutional court from November 2023, the Act includes a provision allowing the tax neutral transfer of single assets between partnerships with identical partners holding the same interest percentages. The updated provision applies to all open cases; however, upon application, a taxable transfer will be possible where the asset transfer took place before 12 January 2024.
• For VAT purposes and pursuant to implementation of Council Directive (EU) 2020/285, the threshold for qualifying as a small entrepreneur will be increased from EUR 22,000 to EUR 25,000 for the preceding fiscal year, and from EUR 50,000 to EUR 100,000 for the current fiscal year. Additional measures are included to fully implement the directive into German VAT law.
• Several technical updates are included to the Corporate Income Tax Act, Trade Tax Act, Foreign Tax Act (FTA), and Reorganization Tax Act, as well as other tax laws.
• For real estate transfer tax (RETT) purposes, the concept of a “deemed or fictitious real estate-owning entity” as introduced by the federal tax court in two decisions from December 2022, and confirmed by the tax authorities in a 16 October 2023 decree, is abolished. The concept provided significant additional complexity to the RETT rules and could have resulted in triggering RETT twice for a single transaction. The elimination of the deemed or fictitious real estate-owning entity concept becomes effective on the day after the publication of the Act in the federal gazette. Calls for a retroactive elimination of the concept did not make it into the final law.
• For purposes of the newly introduced transfer pricing rules in Section 1 (3d) FTA (debt capacity/business purpose test and maximum arm’s length interest rate test, see GTLN dated 22 April 2024) a limited grandfathering rule is introduced. Based on this rule, the new Section 1 (3d) does not apply to expenses incurred before 31 December 2024 related to intercompany financing arrangements that were concluded and executed before 1 January 2024. Where financing arrangements are substantially amended in 2024, the newly introduced transfer pricing provision in Section 1 (3d) only applies to related expenses that are incurred after the amendment of the financing arrangement in 2024.
• The German Pillar Two Implementation Act is amended such that the early reporting requirement of the minimum group tax leader for Pillar Two purposes (see GTLN dated 16 October 2024) also applies where there is only one German constituent entity.
• The originally proposed wage tax relief for certain benefits in kind (“mobility allowance”) did not make it into the final law.

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