Germany's industrial wake-up? How the Growth Opportunities Act Aims to Fuel Economic Growth

With the approval of the Growth Opportunities Act in the Federal Council, seven months after its introduction, the German government has managed to take an additional step in its plan to support economic growth.

With its solid industrial base and a reputation for high-quality products, Germany is often perceived as an economic powerhouse, driven by efficiency and competitiveness. In recent years, however, outdated administrative practices have hindered innovation and stifled the growth of startups — risking Germany's economic future.

A new push from the government could either provide business opportunities, foster innovation, and support the revitalisation of the European economy as a whole, or it could create new friction among European partners and widen an already worrying deficit.

Supporting SMEs and Start-ups

In August 2023, the Federal Government presented two legislative proposals, which stood out as indicators of the economic liberal side of the coalition.

• The Future Financing Act proposed to facilitate capital access for small and medium enterprises

• The Growth Opportunities Act aimed at facilitating investments, supporting research and innovation, and simplifying the taxation system

These two proposals would go hand-in-hand as part of a new strategic approach to revive Germany’s entrepreneurship. The initiatives support the government's plans to foster economic liberalism and solidify Germany’s position as an attractive destination for start-ups and businesses seeking growth.

Later in October 2023, the government presented an overarching strategic approach that would support economic growth and industrial development. The concept behind it centred on “More subsidies, less debt brake.” While this is certainly a recipe for an increased deficit, the German economy remains in dire need of gaining a new lease of life.

Propelling Economic Dynamism

To support existing businesses and relieve them of fiscal constraints, the Growth Opportunities Act aims to trigger more economic dynamism, through several new measures aimed at facilitating investments, supporting research and innovation, and simplifying the taxation system.

However, since its inception, the fiscal implications of the bill, in particular for municipalities, have made the Federal Council — the representatives of the Federal States — reluctant to play along. The approval of a compromise version on 22 March 2024 was a strenuous negotiation process and a victory for the government.

Key Provisions of the Growth Opportunities Act

• Increase the depreciation rate for movable assets. The special depreciation currently amounts to up to 20 per cent of the investment costs and applies to companies that do not exceed the profit limit of €200,000 in the year preceding the investment. The bill would provide that up to 40 per cent of the investment costs could be written off.

• Increase loss carryforwards. In the current framework, loss carryforwards are possible without limitation for each loss carryforward year up to a base amount of €1 million. For any excess over this base amount, the loss carryforward is limited to 60 per cent of the total amount of income for the year of loss carryforward. The bill proposes to increase to 70 per cent the rate of tolerated excess loss carryforward.

• Abolish the One-Fifth Method. The method by which extraordinary income, such as severance pay for example, is taxed at a fifth of its real value, will be eliminated to simplify employers' administrative burden.

• In a move to facilitate the administrative work of SMEs, businesses with a turnover below €800’000 or profit below €80,000 will be exempt from preparing yearly financial statements. The current law sets these limits at €600,000 and €60,000 respectively.

• An environmental bonus for energy-efficient companies was originally proposed but removed at the Federal Council's request. The original proposal included direct support of 15 per cent of the costs when investing in energy efficiency. This measure was scraped upon recommendations from the CDU/CSU as a move to reduce the burden that the bill would represent for municipal and regional finances.

Germany’s Growth Opportunities Act: Potential Outcomes

The German government recognises the pressing need for improved capital accessibility for homegrown enterprises. By simplifying investment procedures and fostering a favourable climate for the development of business, these initiatives empower start-ups and SMEs to thrive. Simultaneously, international companies stand to benefit from a robust German market and capitalise on this new wave of economic momentum.

However, this ambitious vision requires substantial capital inflow, making the adoption of the Growth Opportunities Act a crucial step toward overcoming administrative hurdles and attracting sustainable investments.

Germany's economic strategy could pave the way for a more attractive and self-sufficient Europe, inspired by recent geopolitical events and the quest for autonomy. Other European countries may adopt similar measures to attract capital and foster digital innovation. This movement could create a more united Europe while simultaneously reducing reliance on unpredictable international partners.

However, this increasing tendency to find German solutions to European problems might have a wider political impact on the overall cohesion of the Union. Tax systems remain a matter of the member states, and can be a contentious subject because harmonised fiscality would facilitate economic activities across borders. While the Growth Opportunities Act has been substantially toned down, such actions from the side of the German government could be perceived as anti-competitive among EU member states.

The Fine Line: Championing German Innovation within a European Framework

Germany's ambitious agenda represents an awakening to the realities of a rapidly evolving industrial landscape. If the parliament arrives at an acceptable solution, the private sector and, in particular, small and medium enterprises would be getting a breath of fresh air.

However, for this initiative to succeed, Germany must tread carefully and emphasise that its actions are pro-German without being anti-European. The success of this endeavour hinges on European leaders, as their strategic decisions will determine Europe's future trajectory in technological development. It all lies in how this particular initiative enters the general European context. More than ever, the economic input of European leaders will be key to ensuring the success of the technological development future in Europe.

Stay Ahead of Legislative & Regulatory Risks Around the World

You don’t have to spend hours manually reviewing the hundreds to thousands of potentially impactful policy and geopolitical developments facing your organization. FiscalNote’s Global Policy Analysis & Reporting puts what matters in front of you. Our policy experts are ready to act as a force multiplier to identify opportunities, risks, and trends across the globe, and back them up with in-depth analysis.

From monitoring moving legislation and regulations at the local, state, federal, and global levels, to assessing geopolitical risk and making sense of it all with custom analysis, FiscalNote has got you covered every step of the way. With a comprehensive suite of products, space industry professionals can stay ahead without missing a beat.