On 10 July 2023, the German Federal Ministry of Finance released a draft law that would transpose the EU minimum taxation directive into domestic law. EU Member States had reached agreement on 12 December 2022 to implement the minimum tax for multinational groups (and large domestic groups) under the OECD’s Pillar Two model rules or GloBE rules (for prior coverage, see the tax alert dated 22 December 2022). The purpose of both sets of rules is to ensure that covered groups pay an effective tax rate of at least 15% on income arising in each jurisdiction in which they operate.
The proposed measures in Germany’s Minimum Taxation Directive Implementation Act also include revisions to various domestic tax laws that will be necessary as part of the implementation of the directive. The draft rules are in line with the EU directive and the Pillar 2 Model Rules published by the OECD/Inclusive Framework. Germany held a consultation on the proposals earlier this year.
EU member states are required to implement the global minimum tax directive into their national law by 31 December 2023. The act will then largely apply for the first time to fiscal years beginning after 30/31 December 2023. The effective date will therefore start in 2025 against the background of the applicable filing and declaration deadlines.
Overview of key features of the draft legislation
Under the proposed rules, the income of all covered group members would ultimately be subject to tax at an effective minimum rate of 15%. Where the 15% rate is not reached, an additional tax equal to the difference between the actual rate and the 15% rate would have to be paid at the level of the ultimate parent company.
Three mechanisms are included in the draft to ensure global minimum taxation: (i) the primary supplementary tax rule, through which, in principle, a necessary subsequent taxation takes place ("top-down approach"); (ii) the secondary supplementary tax rule for factual constellations in which the primary supplementary tax does not apply ("backstop"); and (iii) a qualified domestic minimum top-up tax. In addition, specific reporting obligations would apply.
Scope of taxation
The proposed minimum taxation rules would apply to business units of large corporate groups located in Germany that report annual group sales of EUR 750 million or more in at least two of the four immediately preceding fiscal years. Both multinational and domestic groups operating only in Germany would be covered, irrespective of the provisions of an applicable tax treaty.
The taxable period for purposes of the minimum tax would be the calendar year, with the minimum tax liability for a fiscal year arising at the end of the calendar year in which the fiscal year ends. The tax liability of business units located in Germany would be independent of their legal form and would be in addition to income tax or corporate income tax.
Corporate groups that fall within the scope of the rules would be subject to minimum taxation on both their domestic and foreign profits. If the effective tax rate of business units within the group is below 15%, the primary supplementary tax rule would require the parent company to calculate and pay the relevant amount to the tax authorities in its jurisdiction. Any subsequent taxation for subordinate business units in the corporate group would take place centrally at the level of the parent company (i.e., the “top-down approach”).
The secondary supplementary tax regulation would be serve as a catch-all for factual constellations in which the low taxation is not compensated by the application of the primary supplementary tax (“backstop”).
In addition, the draft provides for the introduction of a national supplementary tax, which would arise without prejudice to the primary and secondary supplementary tax amounts.
Bases of calculation
In calculating the effective tax rate, the draft adopts the internationally agreed country-specific calculation based on a minimum tax rate of 15%. If the effective tax rate is not at least 15%, an additional tax would be due.
The starting point would be annual profits before consolidation measures derived from the business unit’s accounting data and adjusted to conform to uniform group recognition and measurement rules. This amount would be adjusted for customary differences between the result reported in the annual financial statements and the taxable profit to take account of tax policy objectives (e.g., reduction for generally tax-exempt dividend income or addition of unlawful payments). In addition, profits and losses from international maritime transport, for example, would be excluded from the determination of the minimum taxable profit or minimum taxable loss of a business unit, subject to certain conditions. Special rules would apply to certain income of banks and insurance companies, qualified gains or losses from certain equity investments and qualified reorganisation income.
Safe harbours and simplification rules
Transitional safe harbour rules would be provided for corporate groups with subordinate cross-border activities or when using country-by-country reports of multinational corporate groups (CbCR safe harbor).
The draft also contains the simplification rules agreed on in December 2022. Of particular note is the safe harbour rule in the case of a recognised national supplementary tax, which would not be limited to EU member states but also would apply to third countries, and the simplifications for immaterial business units.
Filing and declaration obligations
For the minimum tax, a tax return in accordance with the officially prescribed data set would have to be submitted electronically to the responsible tax office, in which the taxpayer would have to calculate and self-assess the tax. The tax would be due one month after submission of the return.
In addition, each business unit subject to tax in Germany would have to electronically submit an information report for the relevant fiscal year to the Federal Central Tax Office in accordance with the officially prescribed data set no later than 15 months after the end of the fiscal year (18 months for the first reporting year). The Federal Central Tax Office would then transmit all minimum tax reports it receives to the relevant tax office.
Key changes to other legislation
As noted above, changes to various pieces of tax legislation have been proposed along with the introduction of a global minimum tax, as follows:
- Financial Administration Act: The scope of responsibility of the Federal Central Tax Office would be expanded to include receipt of the minimum tax reports, group leader reports and evaluation of the corresponding information.
- Foreign Tax Act: The existing low tax threshold for additional taxation pursuant to Germany’s controlled foreign company rules in the Foreign Tax Act would be reduced from 25% to 15%. In addition to a considerable simplification and reduction of bureaucracy, the aim is to achieve synchronisation between the additional taxation and the global effective minimum taxation (15%) with regard to the taxation of foreign activities.
- Trade Tax Act: Additional amounts under the Foreign Tax Act currently are also subject to trade tax. This would be abolished with the introduction of the global effective minimum taxation and also would contribute to the coordination of the additional taxation and the global effective minimum taxation with regard to the taxation of foreign activities.
- Income Tax Act: The “license barrier” in the Income Tax Act, which restricts the deductibility of intragroup royalty payments when the recipient is located in a low or no-tax jurisdiction or benefits from a preferential tax regime would be abolished, as the rationale for these measures will become partly obsolete. Instead, undesirable arrangements for profit shifting would be prevented by various internationally coordinated measures, such as global minimum taxation. The proposed changes would also considerably reduce the compliance workload for companies.
The required calculations for the global minimum tax will be complex and will not be able to be made without IT support and the new reporting obligations will add an administrative burden. It is also likely that existing internal systems will need to be adapted so affected companies.
The Federal Ministry of Finance has forwarded the draft to business associations for their comments. A formal bill is expected to be submitted to parliament in August or September, with likely enactment before the end of 2023. It is possible that the text of the proposals still could be revised in the course of the relevant hearings and legislative process. Affected multinationals and domestic groups should monitor developments carefully.
BDO in Germany