Viper, it's very strict in Germany and it's getting stricter from what I hear since the current examiners don't all have the knowledge and interest in old cars and don't want to take responsibility.
But basically you have to get all modifications examined except for simple stuff where a general allowance exists (exhausts, lights, some rims, seats and so on). But engine mods are hard to legalize. If you up the power alot you'd have to get a piece of paper from the manufacturer which says that the car can take the additional stress, which is only really possible when larger engines were used in the car. The manufacturer then lists necessary mods (brakes, struts etc.). Other than that you'd have to get it examined in detail, which is very costly.
Legaly sticking a V8 in would be very much impossible.
Another thing are the benefits for old cars (cheaper taxes, insurance and legally driving into larger German cities without catalytic converters), which you would lose with a much more modern engine. The old X1/9 engine might work.
It's all very boring, I know.