Tax Reform Act and Annual Tax Act 2024: Key Legislative Changes

After the Bundestag passed the Tax Reform Act yesterday (December 19, 2024), the Bundesrat gave its approval today (December 20, 2024). The law will now be promulgated and enter into force. The Tax Reform Act provides for relief in the areas of income tax and family tax and builds on the relief granted for 2024 by the Act on the Tax Exemption of the Minimum Subsistence Income. Specifically, an increase in the basic tax-free allowance, which will be EUR 11,784 in 2024, to EUR 12,096 in 2025 and to EUR 12,348 in 2026, as well as an increase in the child allowance, which will be EUR 3,306 in 2024, to EUR 3,336 in 2025 and to EUR 3,414 in 2026. There will also be an increase in child benefit from EUR 250 per month (2024) to EUR 255 (2025) and EUR 259 (2026).

The reporting obligation for national tax arrangements did not make it into the Tax Reform Act. Taxpayers and advisors who are subject to the notification obligation as users (taxpayers) and intermediaries (advisors) can breathe a sigh of relief, at least for the time being. Against the background of the numerous existing notification and reporting obligations, the non-inclusion of the notification obligation is to be welcomed.

In 2024, important tax changes were adopted with the Annual Tax Act 2024 (JStG 2024), which was published in the Federal Law Gazette on December 5, 2024. The following selected changes are worth mentioning:

• Childcare costs (from 2025): The limit on the special expense deduction for childcare costs to two thirds of childcare costs will be raised to 80 percent from 2025. This means that up to EUR 4,800 of childcare costs can be deducted as special expenses in future (note: the maximum amount of childcare costs of EUR 6,000.00 remains in place).

  The increase in deductible expenses is particularly pleasing for self-employed persons who cannot benefit from the exemption provision of Section 3 No. 33 EStG for tax-free employer contributions for childcare and childcare.

• Employee participation (from 2024): As a result of the amendment to Section 19a EStG, from now on it will not only be possible to defer taxation of remuneration from the free or reduced-price granting of asset participations if shares in the employer's company are transferred, but also if shares in affiliated companies are transferred. This is an important change in practice, as key employees and managers often do not hold shares directly in the employer company, but in holding companies above it. This avoids a fragmentation of shares.

• Foreign pensions (from 2025): In future, fully deferred taxation of pensions in accordance with Section 22 no. 5 EStG is also to take place if the contributions on which the pensions are based were tax-privileged under foreign law (e.g. through tax exemption); under the current legal situation, such deferred taxation only takes place if the contributions were tax-privileged under domestic law. This takes account of the idea of intertemporal single taxation - if contributions were made from untaxed income, the subsequent pension benefits must be taxed. Advantages resulting from the fact that domestic pensioners were able to accumulate tax-free pension assets abroad during the entitlement phase and the corresponding pension payments are only taxed at the income rate during the pension phase are eliminated as a result.

• A large number of changes are also planned in the UmwStG. These include, for example, the deadline for submitting the closing balance sheet for mergers (Section 3 (2a) UmwStG) and the application deadline for the carrying amount of the shares of the shareholder involved in the merger (Section 13 (2) sentence 2 UmwStG). According to the new legal situation, the latter deadline runs until the first submission of the shareholder's tax return. Further changes to the UmwStG are intended to prevent existing arrangements, e.g. the sale of an indirect shareholding in partnerships during the five-year lock-up period without incurring trade tax or the contribution of shares received in accordance with sections 20 and 21 UmwStG at book value with the aim of eliminating the lock-up period in accordance with section 22 (2) UmwStG.

In addition to the new laws, the e-invoicing obligation for domestic B2B transactions must be observed from 01.01.2025. Although the active issuing of e-invoices will remain optional until 01.01.2027 or until 01.01.2028 for certain transactions, from 01.01.2025 there will be a passive obligation to use them due to the requirement to receive e-invoices. The invoice recipient must therefore create the technical requirements for receiving e-invoices from 01.01.2025. To do this, it is sufficient for the recipient to provide an email inbox. There are also free tools to visualize the structured invoice formats and make them human-readable (e.g. from the tax authorities; https://www.elster.de/eportal/e-rechnung).
 

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