We have already reported on the measures accompanying the Act in our news report on 13 July 2023. The purpose of the draft bill is to implement the rules on global minimum taxation (Pillar Two) in Germany. In doing so, the bill essentially picks up from the discussion draft of 20 March 2023 and expands or clarifies the details of this in selected places. The draft bill contains 95 sections in total; the discussion draft contained 89. The bill also includes substantial accompanying measures, such as the abolition of the royalty deduction limitation rule or licence barrier (‘Lizenzschranke’) (section 4j German Income Tax Act (Einkommensteuergesetz – EStG]), as well as a reduction to 15 per cent of the low taxation threshold in section 8(5) of the German Foreign Transactions Tax Act (Außensteuergesetz – AStG), and the abolition of the associated requirement to file CFC amounts for trade tax. Further details on the various accompanying measures, which are also to apply to entities not affected by Pillar Two, can be found here.
An overview of the most importance updates
In relation to the Minimum Taxation Act, the draft bill also contains the following new features in particular:
- Claims to offsetting within a minimum taxation group (section 3(6) MinStG-E):
The draft bill provides for the formation of a minimum taxation group whenever more than one taxable constituent entity is located in Germany for the purposes of Pillar Two. If this is the case, the tax liability of the entire group is concentrated in the ‘group responsible entity’ (Gruppenträger). The top-up tax contributions of all the group members are then allocated to this entity, by which this entity is (initially) exempted from its minimum tax liability. The objective of this rule is to simplify the process of collecting and declaring the minimum rate of tax. The newly created claims to offsetting which the company paying the minimum rate of tax has against the exempted companies relieve the group responsible entity of its burden with respect to the other group members. This applies both to tax liabilities as well as to refunds.
- Initial definition of net income/loss for the financial year adjusted for the minimum tax rate (section 15(1) MinStG-E):
The draft bill contains a definition of the terms ‘net income/loss for the financial year adjusted for the minimum tax rate’ for the first time. In content this is congruent with the previous reference to ‘financial statements adjusted to conform to uniform group accounting policies’ or ‘HB2’, but constitutes a clarification in practical application.
- Tax liability of portfolio dividends (section 35 MinStG-E)
The draft bill now provides for an option not to apply a curtailment of portfolio dividends from long-term investments (investments of at least 12 months) in determining the profit/loss adjusted for the minimum tax rate, which in practice may simplify determining profit adjusted for the minimum tax rate from insubstantial investments. The option may, however, only be exercised uniformly for all such investments and is binding for five years.
- Tax liability of profits or losses from equity holdings (section 36 MinStG-E):
The draft bill provides for an option to include certain profits or losses from equity holdings so that they are covered equally by covered taxes and profit/loss adjusted for the minimum tax rate.
- Transitional rules for mixed tax regimes (section 84 MinStG-E):
Section 84 MinStG-E provides for a transitional allocation to the foreign entities of taxes from mixed CFC regimes (particularly GILTI) for financial years beginning by 31 December 2025.
- Definition of penalty provisions (section 92 MinStG-E):
The penalty provisions have been defined and ‘penalty relief’ included for the first time. Under these rules, it will not be assumed during the transitional period that an administrative offence has been committed if certain steps are taken. These include, for example, establishing appropriate compliance systems (cf. basis for conclusions for section 92 MinStG-E). The minimum level of taxation in section 152(3) no.4 of the German Fiscal Code (Abgabenordnung – AO) has also been supplemented, with the result that late-filing penalties do not necessarily have to be charged if the report is filed late.
- Further rules:
Furthermore, the draft bill implements other options from the administrative guidance on administrating the GloBE Model Rules adopted in the Inclusive Framework on BEPS on 2 February 2023, such as the tax liability of profits and losses from equity holdings (section 36 MinStG-E), the hedging of currency risks in inter-corporate investments (section 37 MinStG-E) and tax exemption for qualified restructuring income (section 38 MinStG-E).
With the publication of the draft bill, the implementation of global minimum tax in Germany has become more definite. Affected companies should prepare themselves accordingly in time for initial application in 2024. We will be pleased to lend you our support.