Since 1995, an annual tax act has implemented simple adjustments to Germany’s tax law that have not otherwise been covered in major tax reform laws. Each year, the annual tax act consolidates all the tax measures for the year and updates tax law to reflect contemporary economic trends, tax policies, or judicial rulings. The most recent of these acts is the 2024 Annual Tax Act.

In this article, we’ll look at the key changes introduced in the 2024 Annual Tax Act and explain what businesses in Germany can do to apply them practically and efficiently.

What’s in this article?

• What is the 2024 Annual Tax Act?
  
• Key changes in the 2024 Annual Tax Act
  
• Recommended actions for businesses in Germany
  

What is the 2024 Annual Tax Act?

The 2024 Annual Tax Act (JStG) is a composite act (Artikelgesetz) with amendments that impact all areas of tax law in Germany. In the legislative process of the Bundestag, Germany’s federal parliament, a composite or framework act is used to amend or introduce multiple laws simultaneously. The 2024 Annual Tax Act includes approximately 130 individual measures that impact both businesses and private individuals in Germany. The various regulations included in the act touch on a wide range of themes, with many consisting primarily of technical adjustments.

The goal of the 2024 Annual Tax Act is to align the tax framework with current economic, social, and technological developments, while also modernizing the tax system. For instance, it aims to accelerate digitalization and reduce bureaucracy. Additionally, some regulations were amended in this year’s tax act to align with Europe’s tax law and the rulings of the European Court of Justice, the Federal Constitutional Court, and the Federal Fiscal Court. The 2024 Annual Tax Act also addressed drafting errors, as well as procedural and jurisdictional issues.

The original draft of the 2024 Annual Tax Act by the federal government was extensively revised through numerous amendments by the Bundestag Finance Committee. After the German Parliament (Bundesrat) approved the 2024 Annual Tax Act on November 22, 2024, it was published in the Federal Law Gazette on December 5, 2024.

Key changes in the 2024 Annual Tax Act

Below are some important tax law changes included in the 2024 Annual Tax Act that businesses need to be aware of.

Small-scale entrepreneurship regulation reform

Until now, the small-scale entrepreneurship regulation established in Sections 19 and 19a of the German Value-Added Tax (VAT) Act (UStG) was only available to businesses with registered offices in Germany. With the adoption of the 2024 Annual Tax Act, businesses based in other European Union (EU) member countries can now also benefit from this regulation in Germany.

Additionally, entrepreneurs based in Germany can now apply for tax exemptions in other EU member countries. The Federal Central Tax Office (BZSt) will soon establish a notification process specifically for this purpose. Under Section 19a, paragraph 3 of the UStG, participating businesses must submit a sales report for each calendar quarter. This report must be submitted electronically to the BZSt within one month of the end of the quarter, using the official data set. The new regulation implements EU Directive 2020/285 into federal law in an effort to encourage cross-border trade.

To qualify for small-scale entrepreneur status and the associated VAT exemption, a business’s turnover cannot exceed €25,000 in the prior year or €100,000 in the current year. These thresholds have been raised from the previous limits of €22,000 and €50,000, respectively. This increase allows a significant number of businesses in Germany to take advantage of the VAT exemption.

Additionally, small-scale entrepreneurs are exempt from mandatory e-invoicing. While they must be able to receive and process e-invoices, they are not required to issue them.

Input tax deduction for cash basis taxation

In the future, input tax deduction for invoices that taxpayers apply cash-based taxation to will only be possible once the invoices have been paid. Currently, businesses in Germany are allowed to deduct input VAT on services received, as soon as they receive a valid invoice (i.e., accrual-based taxation). Essentially, the payment time is irrelevant, except for advance or partial invoices. This new regulation could therefore cause cash flow issues, as businesses might have to wait longer to claim input VAT deductions.

The new regulation will take effect on January 1, 2028. From then on, invoice issuers who tax their services based on payments received (cash basis taxation) will also be required to indicate this on their invoices. A new mandatory invoice specification will be introduced for this purpose.

Transfer of book value between partnerships with identical ownership shares

The 2024 Annual Tax Act introduces a new provision within the Income Tax Act that allows the transfer of assets at book value between partnerships with identical ownership shares. The regulation implements a ruling by the Federal Constitutional Court and applies to all pending cases. However, the book value approach might be problematic for some co-entrepreneurs. For this reason, a provision to protect against retroactive legislation has been introduced for transfers that took place prior to January 12, 2024. In these cases, the co-entrepreneurs can collectively request that the new regulation not be applied.

The regulation on asset transfers only applies if the partnerships involved have virtually identical shareholdings. A shareholding is no longer considered identical if a natural person or a corporation holds a share in only one of the two businesses, even if they are doing so commercially or acting as a trustee.

However, zero-percent shareholdings—i.e., when a person or corporation holds less than 1% of the shares in one of the two businesses—are considered exceptions and therefore are not problematic. This minimal type of shareholding does not affect the regulation mentioned above, which otherwise requires the shareholdings in both businesses to be identical.

Changes to trade tax

With the adoption of the 2024 Annual Tax Act, business owners in Germany will notice two significant changes with respect to trade tax. First, the trade tax real estate reduction, which allows businesses to deduct a portion of their profits from trade tax when they own real estate, will now be tied to the actual real estate tax paid. Businesses must therefore record real estate tax as an operating expense to take advantage of this reduction.

Secondly, the act specifies that income generated by businesses from passive foreign permanent establishments will now be treated the same as income from domestic permanent establishments. Passive foreign permanent establishments—known as “Passive ausländische Betriebsstätten” in German—are businesses that operate abroad but do not actively engage in economic activity in that country. Instead, they primarily generate income from passive sources such as interest, license fees, or dividends. The 2024 Annual Tax Act’s change means that while Germany typically wouldn’t have the right to tax income made with a passive foreign permanent establishment due to a double taxation agreement, it will now be able to do so—the income will be treated as if it originated from a permanent establishment in Germany. The regulation also applies to businesses with limited tax liability in Germany.

Real estate transfer tax: Definition of property that belongs to a company

The 2024 Annual Tax Act defines which properties are considered part of a company’s assets. A property is considered to belong to the company that most recently made a relevant acquisition of that property. A relevant acquisition means the execution of a taxable event according to Section 1, paragraph 1 of the Real Estate Transfer Tax Act (GrEStG), which is not then followed by a reversal of the acquisition (see Section 16, paragraph 1 GrEStG).

Changes to corporate income tax

With the adoption of the 2024 Annual Tax Act, when a newly formed corporation is converted, an initial assessment of the tax contribution account no longer needs to be carried out. The contribution account is now regarded as part of the current financial year and cannot be used for offsetting in the first year following the conversion.

For an indirect tax group, changes to transfers—such as reduced or increased transfers—must also be monitored at the intermediate company level. This means that if a business is indirectly part of a group of businesses, any changes to the tax contribution account must be recorded step by step, to include any hidden contributions or profit distributions. Increases or decreases in the contribution account must be considered not only for the main company but also for the intermediate company. This regulation applies retroactively from 2022.

Relevant changes in the 2024 Annual Tax Act for businesses

Recommended actions for businesses in Germany

The 2024 Annual Tax Act introduces several changes for businesses in Germany, impacting both tax responsibilities and operational procedures. Businesses need to incorporate the relevant changes into their tax strategies and accounting practices as soon as possible. Doing so allows businesses to take advantage of the new regulations and prevent potential tax disadvantages.

Below are some general recommendations for businesses in Germany based on the 2024 Annual Tax Act.

Seek tax advice

Many of the tax law changes are complex and require specialized expertise to ensure all necessary measures are implemented correctly. It can therefore be helpful for business owners in Germany to consult with tax advisors during the process. This is especially true for businesses that operate internationally or engage in cross-border commerce.

Utilize technological solutions

Changes in tax law can easily cause errors in a business’s accounting processes. To reduce the likelihood of human errors, it is recommended that businesses use automated processes instead. With modern software solutions such as Stripe Tax, businesses can automatically calculate, collect, and report taxes for global payments. Tax calculates the correct amount of tax in real time, helping businesses to consistently meet their tax obligations. This is especially helpful for businesses operating internationally or dealing with varying tax rates.

Review and update internal processes

With the adoption of the 2024 Annual Tax Act, business owners must revise their internal operations. Accounting processes, for instance, might need to be updated. Businesses must adjust their invoicing and payment processing as well to comply with the new regulations and ensure accurate tax collection and reporting. An example of a change that could affect businesses’ processes is the later deduction of input tax, which could result in higher administrative costs.