Alessandro Di Stefano, Giovanni Consiglio e Giorgia Monica Riviera
A draft law for a “Growth Opportunities Act” was sent to the German Industry Associations for consultation on 14 July 2023. In addition to a new law introducing an investment grant for certain investments aiming to achieve energy savings, various adjustments to national and international tax law provisions are proposed (as briefly summarized hereinafter and without any claim to comprehensiveness).
1. Interest capping rule
Currently, interest expense – net of interest income – is deductible to the extent of 30 percent of the company’s EBITDA. Unused EBITDA and excess interest expense can be carried forward to subsequent tax periods. This regime does not apply (escape rules):
- if the net interest expense does not exceed the EUR 3 million threshold (deductible ex lege following this de minimis threshold);
- if the interest is accrued in relation to debts owed to third parties, i.e., if the company does not belong to the same Group as the lender (stand-alone-test);
- if the company, although part of a Group, meets the equity-ratio-test.
The suggested amendments foresee:
- an allowance of EUR 3 million will be introduced regarding net interest expense that reflects in EBITDA (tightening the threshold related to the current EUR 3 million, as of today a de minimis amount applicable ex ante to the interest deductibility limit);
- the so-called stand-alone-test and the equity-ratio-test allowing for a non-application of the interest capping rules will be deleted;
- the scope of the interest capping rule shall be extended (i.e., also covering other expenses relating to interest expense).
2. Interest rate capping rule
The proposed amendments contain a restriction of interest expense deduction related to the determination of a maximum interest rate applicable to related party loans. The deductibility of interest is capped under this rule at a floating rate which is determined under German law (potentially increased by 2 percentage points as a tolerance threshold). However, the interest rate capping rule will not apply if:
- the effective market value of the interest is higher than that presumptively determined ex lege, or
- if the lender maintains sufficient substance (as defined under German CFC rules). However, if the lender was resident in a territory not participating in the information exchange under the German Tax Haven Defense Tax Act, the aforementioned substance escape would not apply.
For the sake of completeness, it should be noted that this provision does not limit the operation of the interest capping rule mentioned above, but it would apply in addition to the existing interest capping rule.
3. Tax loss carry back/carry forward
From the 2024 assessment period onward, the loss carryback shall be adjusted:
- in the an – losses could be carried back for three years and within the limits of the minimum taxation (see infra);
- in the quantum – the loss carryback shall be limited to an amount of EUR 10 million or EUR 20 million (for joint taxpayers).
Furthermore, concerning the minimum taxation, the suggested amendments foresee:
- the minimum taxation is suggested to be abolished for the fiscal years 2024-2027 (i.e., losses would be deductible up to the total amount of income without any limitations);
- from the fiscal year 2028 onwards, the minimum taxation will be reintroduced (i.e., a carry forward of an amount of EUR 10 million and 60% of the total amount of income exceeding EUR 10 million would be possible).
Observations
The proposed amendments, at first stage and potentially subject to major amendments as well, foresee various changes to the German national and international tax law, capable of affecting (i) the tax policies of German groups with Italian subsidiaries and of domestic groups with German subsidiaries, but also, merely, (ii) transactions with German related parties. It implies, therefore, necessarily:
- the identification of potentially affected transactions and structures;
- the assessment of potential impacts and related remediation;
- the monitoring of the entry into force of the provision and of the legislative dictate that will be potentially approved.
Let’s Talk
For a deeper discussion, please contact:
PwC TLS Avvocati e Commercialisti
Tax Partner
PwC TLS Avvocati e Commercialisti
Director