ECOFIN Council places Russia on EU blacklist

On 14 February 2023, the ECOFIN Council updated the EU list of non-cooperative countries ("EU Blacklist") and has now added Russia, Costa Rica, the Marshall Islands and the British Virgin Islands to the list.

As a result, the list now includes sixteen countries. In addition to the jurisdictions listed above, the following countries violate the EU criteria: American Samoa, the U.S. Virgin Islands, Anguilla, Bahamas, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, Turks and Caicos Islands, and Vanuatu.

For Germany, the EU blacklist is particularly relevant for the application of the Tax Havens Defense Act (StAbwG), which provides measures aiming to restrict and sanction business transactions with non-cooperative jurisdictions. Non-cooperative jurisdictions according to the StAbwG are generally based on the EU blacklist, with the relevant countries named in a separate Tax Havens Defense Ordinance pursuant to Section 3 (1) Sentence 1 StAbwG. If, as can be assumed, the Tax Havens Defense Ordinance is thus expanded by the end of 2023 to include the countries newly included in the EU blacklist, the following measures will take effect for business relationships with such countries in accordance with the three-stage plan of the StAbwG:

Stage 1: Measures from 1 January 2024:

• Tougher CFC Legislation: If taxpayers hold more than 50% of a company resident in one of the above-mentioned countries, the foreign company is to be regarded as an intermediary company for all of its low-taxed income. As a result, all of the foreign company's low-taxed income will be added to the German tax base.
• Withholding Tax Measures: The application of Section 50a (2) Sentence 1 EStG, which deducts tax from certain income of non-resident taxpayers, is extended to the following income of residents of non-cooperative countries:
  
  • Provision of services to German residents,
  • Trade in goods or services with German residents,
  • Renting, leasing or the sale of rights entered in a domestic public register,
  • Income from financing relationships with German residents.

If such business relationships exist, the domestic business partners are obliged to withhold tax of 15% plus solidarity surcharge on the amounts and pay it to the domestic tax authorities.
Non-application of double taxation agreements: Treaty benefits are not granted ("qualified treaty override" pursuant to Section 1 (3) Sentence 2 StAbwG).
Increased duty to cooperate: The taxpayer must keep extensive records of business relations with affiliated companies in the respective countries and submit them – without being requested to do so – to the tax authorities within one year of the end of the fiscal year.

Stage 2: Measures as of 1 January 2026

• Measures for profit distributions and share disposals: Section 8b KStG (tax exemption for corresponding income) and relief in accordance with double taxation agreements will no longer apply.

Stage 3: Measures as of January 1, 2027

• Operative expenses and income-related expenses from business transactions with partners resident in the above-mentioned non-cooperative countries will no longer be deductible.

In addition, a DAC6 notification is required for business relationships with affiliated companies domiciled in the aforementioned countries that result in tax-deductible expenses in Germany.

The prerequisite for the envisaged sanctions is that the relevant tax jurisdiction is still listed on the EU blacklist/the German Tax Havens Defense Ordinance at that time.

Due to the intended validity from 1 January 2024, taxpayers should promptly check whether they maintain business relationships with companies in the affected countries. In such cases, we will be happy to determine what tax consequences are imminent and advise you on how you can and should react.

We will keep you informed on the latest developments!