the income in the hands of the (direct or indirect) recipient is subject to a special preferential regime, which does not correspond to the OECD Modified Nexus Approach, and.the recipient of the income from the assignment of rights is a related party, vis-à-vis the debtor.plans, designs, processes), may not be a deductible business expense or may only be partially deductible. According to the royalty limitation rules, expenses arising for the assignment of use or the right to use rights, in particular of copyrights and industrial property rights, in trade, technical, scientific and similar know-how, knowledge, and skills (e.g. Royalty limitationįollowing (and beyond) the OECD recommendations on Action 5 of the Base Erosion and Profit Shifting (BEPS) Project, Germany has introduced a restriction on the deductibility of certain royalty payments to related parties applicable from 2018 onwards to counter so-called harmful preferential tax regimes. It must be emphasised that the interest limitation is additional to, and not a substitute for, the transfer pricing requirement that related-party finance be at arm’s length. Only the Constitutional Court is authorised to decide if the regulation is unconstitutional and may thus no longer be applied. In a decision on 14 October 2015, the Federal Fiscal Court held the interest limitation to be in breach of the constitution and asked the German Federal Constitutional Court to give a definitive ruling. This carryforward is otherwise subject to the same principles as the loss carryforward, including curtailment on change of shareholder(s). Non-deductible interest expenses can be carried forward without time limit and will be deductible from future income as if it were interest of the relevant year (viz. Unused EBITDA potential may be carried forward for up to five years to cover future excess interest cost. However, this latter concession is dependent on the demonstration that the equity-to-gross assets ratio of the company is no more than two percentage points below that of the group as a whole. This limitation does not apply where the total net interest expense for the year is less than EUR 3 million or where the net amount paid to any one shareholder of more than 25% (or a related party) is no more than 10% of the total. The 30% limitation applies to all interest, whether the debt is granted by a shareholder, related party, or a third party. Interest limitationĪnnual net interest expense (the excess of interest paid over that received) of group companies is only deductible at up to 30% of EBITDA for corporation and trade tax purposes. Start-up and formation expenses are deductible as incurred. small businesses, ancient monuments, buildings in designated renovated city zones).Īcquired intangibles are amortised straight-line over their estimated useful lives goodwill is amortised over 15 years.Īssets such as securities, stocks and bonds, shares, land, and working assets cannot be depreciated according to plan. In addition to normal depreciation, special depreciation is deductible for tax purposes in certain limited circumstances (e.g. The measure is also available for the remaining acquisition costs of the assets acquired in earlier business years.īuildings are depreciated on a variety of straight-line or reducing-rate systems designed to reach a full write-down between 25 and 50 years, depending on the age of the building and on whether the taxpayer was its first owner. In response to the COVID-19 pandemic, enhanced depreciation rates were introduced for movable assets acquired or made after 31 December 2019 and before 1 January 2022 of up to the factor of 2.5 compared to currently applicable depreciation rates and up to a maximum of 25% per annum. In June 2022 the enhanced depreciation rate was extended to include movable assets acquired or produced before 1 January 2023.Īs a further stimulation measure implemented due to the COVID-19 pandemic, the German tax administration allows, for business years ending 31 December 2020 onwards, the taxpayer to assume a useful life of only one year for specific digital assets (software and hardware) for tax purposes, resulting in a full depreciation/amortisation of the acquisition costs in the year of the acquisition. Alternatively, certain assets acquired in one business year worth less than EUR 1,000 each can be pooled together as a compound item and depreciated over five years. Certain assets worth less than EUR 800 can be depreciated in total in the year of acquisition. Depreciation takes the residual value of the asset into account only if it is material, with any gains on a sale being treated as normal business income. Depreciation on movable fixed assets is calculated on the straight-line method over the asset’s anticipated useful life.
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