Germany’s Bundesrat – the upper house of Parliament – on 26 May 2021 passed the Act to Modernise Relief from Withholding Tax and the Certification of Capital Gains Tax (AbzStEntModG). The legislation was then promulgated in the federal gazette on 8 June 2021. Essentially, the Act intends to reduce and streamline the existing procedures for relief from withholding tax and tax deduction in accordance with §50a of the Income Tax Act (EStG) for foreign taxpayers, as well as to digitalise the relief procedure at the Federal Central Tax Office (BZSt) for application, tax certification and assessment. On 19 May 2021, the Finance Committee also recommended a resolution on the government bill for a law to implement the EU Anti-Tax Avoidance Directives (ATAD-UmsG), which was promulgated on 30 June 2021.
The new legislation also includes amendments in other areas, such as a regulation in the Reorganization Tax Act (UmwStG) to prevent abusive tax arrangements and on transfer pricing in §1 and §1a of the Foreign Tax Act (AStG), which was taken from an earlier draft of the ATAD-UmsG. Conversely, expected amendments, such as to §49 No. 2f EstG on linking the right of taxation to the mere registration of rights in Germany, are not included, and further regulations in the area of transfer pricing, such as on group financing, have not been taken up either. Among other things, the regulations on the annual electronic submission of the master file were not adopted from the draft ATAD-UmsG. Conversely, new regulations on the term "related party" are included.
According to the ATAD-UmsG, certain constellations of multiple voting rights or voting trust agreements are to be defined as related parties in the future. Triangular cases and networks are also included, although certain franchise companies will not be affected, according to the explanatory memorandum.
The arm’s length principle is concretised and expanded in the new legislation. For example, the hierarchy of transfer pricing methods is abandoned. The new legislation adopts the guidance included in the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017, whereby taxpayers must choose the most appropriate transfer pricing method.
The importance of economic analyses of actual circumstances is strengthened (functional and risk analysis). The interquartile range, which is common in practice in situations with limited comparability, is given legal status. The hypothetical arm's length comparison is to be carried out using economically recognised valuation methods.
The new legislation includes legal definitions of the transfer package and intangible assets. The period for price adjustments for transfer packages is reduced from 10 to 7 years. In this context, a price variation of 20% would not be subject to mandatory correction. Two of the escape clauses are repealed, but the most relevant exception in practice under the currently applicable §1 paragraph 3 sentence 10 of the AStG (the so-called 25% rule) will continue to apply. However, the legislature is apparently attempting to limit its application to contract manufacturers or similar entities that are remunerated based on the cost-plus method.
The OECD's DEMPE approach to intangible assets, whereby an analysis of the individual functions of development, enhancement, maintenance, protection and exploitation must be carried out, has been adopted. The DEMPE analysis will help determine what portions of the value added are to be allocated to which enterprises engaged in performing services or exercising function in relation to intangible assets.
The new legislation introduces a national legal basis for advance pricing agreements that applies to all international cases with countries with which a double taxation treaty has been concluded and where double taxation is imminent. The new provision replaces an administrative instruction on the subject. The new rules also include provisions to allow the extension of an APA both forward and retroactively. The application fee is increased to EUR 30,000 (previously EUR 20,000). The new §89a AO will enter into force as soon as the law is announced and thus will apply to all applications filed thereafter.
The new legislation was promulgated on 8 June 2021. Most provisions will enter into force on the day after promulgation; the new regulations of §1 and section 1a AStG will apply for the first time in 2022. The ATAD-UmsG was promulgated on 30 June 2021.
Groups of companies operating across borders should examine the possible effects of the new rules on their business. An analysis of DEMPE functions in particular should be considered.