The German tax system offers companies tax deduction possibilities to lower their annual tax burden - subject to certain preconditions being met.
As a result of the government’s economic stimulus packages, there are currently improved opportunities for companies to carry back losses and depreciate assets.
Loss Carry-Back and Loss Carry-Forward
Losses for corporate income tax purposes can be carried back for one year, limited to a total loss amount of EUR one million. The maximum amount of a tax loss carry-back has been increased to EUR 10 million for the period between 2020 and 2023. Losses can be carried forward with no time restriction. Up to an amount of EUR one million loss carry-forward is possible - free from any restrictions. For sums in excess of EUR one million, at least 40 percent of the taxable income must remain subject to taxation. In other words, a maximum 60 percent of taxable earnings exceeding EUR one million can be offset against incurred losses.
Deductibility of Interest Payments
Generally, interest payments are fully deductible as operating expenditure. However, some special rules apply for corporate groups. If the amount of interest payments exceeds the amount of interest earnings for more than EUR 3 million, these exceeding interest payments are only deductible up to an amount of 30 percent of the EBITDA (earnings before interest, taxes, depreciation and amortization).
Straight Line Depreciation
Depreciation on movable and fixed assets is calculated on the straight-line method over the asset’s estimated anticipated useful life. Every asset has a different depreciation period, stipulated in a depreciation table (AfA Tabelle) by the the Federal Ministry of Finance. Low value assets – below EUR 800 net value - can be depreciated in full immediately.
Accelerated Depreciation - Temporary Introduced
For moveable assets acquired or made between 2020 and 2022, a temporary accelerated depreciation method according to the declining balance method has been introduced. The applicable depreciation factor is up to 2.5 compared to the currently applicable depreciation rates - capped at a 25 percentage annually. This means that companies will enjoy a higher rate of depreciation in the first years of use of the assets, thereby leading to higher deductible expenses.
Fiscal Unit Concept
The German fiscal unity concept allows for profit and loss pooling of different corporations at the level of a dominant (parent) company to determine the overall profit for taxation purposes. To do so, the dominant company must have its place of business management in Germany and must be subject to taxation in Germany. It can either be a German company or a permanent establishment of a foreign (dominant) company in Germany.
The fiscal unity concept covers corporate subsidiaries from Germany or other EU/EEA member states, if they have their place of business management in Germany. The dominant company in Germany must hold more than 50 percent of the voting rights of the subsidiary/ies.
In addition, a profit and loss pooling agreement must exist with a duration of at least five years. The agreement has to be registered with the commercial register. Further requirements may apply.