The Growth Opportunities Act, passed in 2024, is designed to help companies in Germany invest in research, development and economic growth in challenging times. Various tax breaks and structural changes are designed to create better conditions for innovation and investment.

Here, we’ll explain exactly what the Growth Opportunities Act does and what it aims to achieve. We’ll also discuss how businesses can take advantage of the Growth Opportunities Act.

What’s in this article?

• What is the Growth Opportunities Act?
  
• What are the goals of the Growth Opportunities Act?
  
• What does the Growth Opportunities Act involve?
  
• Do businesses have to apply for the benefits of the Growth Opportunities Act?
  

What is the Growth Opportunities Act?

On 27 March 2024, the German parliament passed the Act to strengthen growth opportunities, investments, and innovation, as well as tax simplification and tax fairness, also known as the Growth Opportunities Act (Wachstumschancengesetz).

It’s part of the 10-point plan through which the German government aims to strengthen Germany as a business hub and make local companies more competitive. The measures adopted in 35 articles are designed to provide businesses with a total relief of €3.2 billion.

The government’s original draft of the law proposed significantly more measures and a relief volume of €6.3 billion. This was approved by the Bundestag, but initially rejected by the Bundesrat. With the help of a mediation committee, a compromise was reached that was also approved by the Bundesrat on 22 March 2024. Several planned tax relief measures, including the planned climate protection investment allowance, were excluded from the law.

What are the goals of the Growth Opportunities Act?

The primary goal of the Growth Opportunities Act is to strengthen the German economy. It is intended to improve the liquidity of companies, promote growth, and create incentives for investment and innovation.

The Act also aims to further modernise tax law and streamline the tax system in key areas. Small businesses in particular will benefit from reduced bureaucracy through increased flat rates and thresholds. According to the bill’s explanatory memorandum, the measures adopted will primarily focus on improving the region’s competitiveness and growth opportunities.

Additionally, the German government intends to use the Growth Opportunities Act to support the transformation of the economy. This will make Germany sustainable and its economy climate-neutral.

What does the Growth Opportunities Act involve?

The Growth Opportunities Act includes a series of measures intended to simplify operations for German businesses while also introducing new obligations. Here is a summary of the key points:

Mandatory e-invoicing

The Growth Opportunities Act establishes electronic invoices as the new standard in the business-to-business (B2B) sector. Until now, companies have been able to send invoices as PDF files or on paper. From 2028 on, only electronic invoices will be allowed. Transitional rules will apply from 2025 to 2027. Only small-value invoices and invoices for tax-free transactions and tickets are exempt from mandatory e-invoicing (see Section 34 of the VAT Implementation Ordinance). The Growth Opportunities Act specifies that the businesses concerned are not required to create e-invoices themselves, but they must have the technical capability to process incoming e-invoices. This includes the XRechnung format, widely used in Germany, and the hybrid ZUGFeRD invoice. Businesses that adopt e-invoicing as part of the Growth Opportunities Act will need to invest time and resources initially, but they can expect long-term benefits from this integration.

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Improved depreciation options

One of the central points of the Growth Opportunities Act is depreciation. Through depreciation, or Absetzung für Abnutzung (AfA, depreciation for wear and tear), businesses can spread out the deduction of costly acquisition expenses over a longer period for tax purposes (see Section 7 of the Income Tax Act). The most commonly used depreciation method is the straight-line method, which depreciates the asset by equal annual amounts. The second method is the declining balance method, where the annual amount decreases each year. The declining-balance method for tangible personal property was temporarily enacted during the coronavirus pandemic to help businesses make new investments.

The Growth Opportunities Act allows the declining balance method to be used for tangible personal property acquired for business use between 1 April and 31 December. Businesses that acquire such property during this period may elect to depreciate it using either the straight-line or declining balance method. This declining balance depreciation provision of the Growth Opportunities Act allows businesses to incur higher operating expenses in the early years of depreciation and deduct them for tax purposes.

Under certain conditions, a special depreciation allowance of 40% for movable assets can also be claimed retroactively from 1 January 2024 to reduce taxable profits. Previously, only 20% special depreciation could be claimed. Declining balance depreciation is limited to a maximum of 20% of the acquisition cost or residual book value of the asset. In combination with special depreciation, companies can depreciate movable assets by up to 60% in the first year.

Higher turnover and profit limits for cash-basis accounting

Until now, businesses and freelancers were only permitted to use the cash-basis accounting (Einnahmen-Überschuss-Rechnung, or EÜR) if their annual profit did not exceed €60,000 or their turnover did not exceed €600,000. Anyone exceeding these limits was required to maintain double-entry accounts, which includes preparing a balance sheet and a profit and loss statement. The Growth Opportunities Act increases the previous limits to €80,000 profit and €800,000 turnover.

The change in the law also applies to businesses within the new profit and turnover ranges that have been instructed by the German tax authority to switch to double-entry accounting as of 1 January 2024. Businesses may submit an application to the tax authority to request withdrawal of the requirement for double-entry accounting.

Higher turnover limit for cash-basis taxation

The two possible taxation methods, accrual and cash-basis taxation, determine when businesses must remit the value-added tax (VAT) incurred to the tax office. With accrual taxation, VAT is remitted to the tax authorities immediately after the service is provided. It doesn’t matter whether an invoice is issued and/or the customer pays later.

Previously, businesses with a turnover of less than €600,000 in the previous year could opt for cash taxation. In this scenario, VAT is paid to the tax authorities only when the service is paid for. The Growth Opportunities Act increases the turnover threshold from €600,000 to €800,000 from 2024.

This change means that more businesses in Germany will be eligible for cash-basis taxation. It also ensures greater liquidity and provides particular protection for smaller businesses, as they will no longer be burdened with additional VAT in the event of late payment.

Higher exemption limit for gifts

The Growth Opportunities Act increases the gift tax exemption to €50 net. Previously, gifts such as those given to business partners or customers could only be claimed as a business expense up to €35 per recipient per year. Above this limit, business expense deductions and input tax refunds were no longer available. Now, businesses have more flexibility in choosing gifts and may be able to claim more input tax refunds.

No VAT returns for small-scale entrepreneurs

For small-scale entrepreneurs, the Growth Opportunities Act means less red tape: starting in the 2024 tax year, small-scale entrepreneurs won’t have to file a VAT return. Previously, this was mandatory, as the tax office had to check whether the turnover met the legal requirements. For small-scale entrepreneurs, the turnover must not exceed €50,000 in the current tax year. In addition, the previous year’s turnover must not exceed €22,000.

The Growth Opportunities Act should ease accounting requirements, ultimately saving time and money for small-scale entrepreneurs. This will be particularly beneficial for those who have previously prepared their own VAT returns and for those who have outsourced this task to third parties.

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No liability risk with the one-fifth method

The Growth Opportunities Act also introduces a change in the so-called “one-fifth method” (Fünftelregelung). Section 34 of the Income Tax Act states that employees who receive multiyear compensation, severance pay, or other extraordinary income may benefit from reduced taxation.

The one-fifth method treats large one-time income as if it were spread evenly over the next five years. This, in turn, avoids a high one-time tax burden. Previously, reduced taxation could be applied when calculating income tax. This also meant that employers were liable for wage tax if wage tax audits revealed that the conditions for reduced taxation were not met.

Under the Growth Opportunities Act, the one-fifth method will no longer apply to payroll tax deductions from 2025. As a result, there is no further liability risk for employers. Employees will not suffer any tax disadvantages as a result of this change. The only change for them is that they will have to apply for the one-fifth method with their tax return.

Higher loss carryforward

If expenses exceed income, self-employed individuals can use the loss from one tax year against positive income in the following year. This is called a loss carry forward. Previously, a maximum of €1 million plus 60% of total income per year could be used to offset losses. The Growth Opportunities Act temporarily increases this value: from 2024 to 2027, any loss carryforward that exceeds €1 million can be used up to 70% of income.

Support for electric vehicles

The Growth Opportunities Act also adjusts the taxation of company cars: if employees use an electric vehicle for both business and private purposes, they will only have to pay tax on 0.25% of the gross list price. Until now, such a subsidy only applied to electric cars with a maximum gross list price of €60,000. This limit will be increased to €70,000 as part of the Growth Opportunities Act. The new regulation applies to all vehicles purchased after 1 January 2024.

Extended research funding

A key feature of the Growth Opportunities Act is research funding. The research allowance will be expanded with several measures that have been adopted. For example, the threshold for tax deductible research expenses will be significantly increased from €4 million to €10 million per year. In addition, for the first time, a proportion of the acquisition and production costs of plant and equipment required for research and development projects will be eligible for funding. For small and medium-sized enterprises (SMEs), the funding rate has been increased from 25% to 35%, and the research allowance has been raised to €3.5 million per year.

Do businesses have to apply for the benefits of the Growth Opportunities Act?

Businesses do not have to specifically apply for most of the benefits and advantages of the Growth Opportunities Act. Instead, all businesses automatically benefit from the new provisions of the Act. This includes tax breaks and enhanced depreciation allowances. Only grants, such as those for research and development, must be applied for.