On 15 December 2023, the German Bundesrat passed the Minimum Taxation Directive Implementation Act (Mindeststeuerreichtlinie-Umsetzungsgesetz – MinStG). The Act primarily transposes the EU Pillar Two Directive into national law as the Minimum Tax Act and also includes related adjustments to other tax legislation. The introduction of the Minimum Tax Act (MinStG) is accompanied by a reduction in the minimum tax rate in section 8(5) sentences 1 and 3 of the Foreign Transactions Tax Act and by the introduction of compulsory disclosures in the notes to annual and consolidated financial statements of companies concerned for the first financial year ending from 31 December 2023 under section 285 no.30a and section 314(1) no.22a of the German Commercial Code (Handelsgesetzbuch – HGB).
Implementation of the Minimum Tax Act and accompanying measures
The Minimum Tax Act was passed by the Bundesrat on 15 December 2023 as amended by the Bundestag on 10 November 2023. The main accompanying measures include:
- Reduction of the minimum tax rate for purposes of the controlled foreign corporation rules (CFC rules): The minimum tax rate for the CFC rules, laid down in section 8(5) sentences 1 and 3 of the Foreign Transactions Tax Act, will be reduced from 25 per cent to 15 percent. The aim of this is to achieve parity between the tax rate of the CFC rules and the globally applied minimum tax rate, with respect to foreign activities.
- Reduction of the minimum tax rate for purposes of the royalty deduction limitation rule: Similarly, royalties will in future only be taxed at a lower rate under section 4j(1) sentence 1 of the Income Tax Act (Einkommensteuergesetz – EStG) if regular taxation of the corresponding income is less than 15 per cent. The threshold was also 25 per cent previously.
- Exemption from compulsory late-filing penalties: By including the duty to submit minimum tax declarations under section 95 of the Minimum Tax Act in section 152(3) no.4 of the Fiscal Code (Abgabenordnung – AO), it is not necessary to include a compulsory charge for late filing of minimum tax reports.
These rules will first apply to expenses and to the CFC rules on income realised after 31 December 2023.
Amendments to the Commercial Code: requirements for annual and consolidated financial statements 2023
Based on IAS 12.4A, according to the newly added section 274(3) of the Commercial Code, differences arising from applying the Minimum Tax Act or foreign Pillar Two legislation are not to be taken into account in the recognition and measurement of latent taxes.
Furthermore, new duties to make disclosures in the notes to annual and consolidated financial statements under sections 285 no.30a and 314(1) no.22a have been ratified. According to these, companies concerned must disclose their actual tax expense or tax income resulting under the Minimum Tax Act and foreign minimum tax laws for the financial year. It remains particularly relevant to financial years ending on 31 December 2023 that if the applicable minimum tax legislation has not yet entered into force, companies are to provide explanations backed up with evidence concerning what effect they expect the application of this legislation to have.
If you have any further questions concerning global minimum tax, the measures accompanying it and the requirements on annual and consolidated financial statements that need to be complied with by 31 December 2023, our experts are ready to assist you at any time.