Germany publishes Discussion draft for a national implementation law

On March 20, 2023, the Federal Ministry of Finance published a discussion draft of the law for the implementation of the EU Directive for a global minimum tax. The publication took place exactly 3 months after the release of the OECD's "Safe Harbours and Penalty Relief" simplifications and the resolution of the corresponding EU Directive, as well as about 15 months after the release of the "Global Anti-Base Erosion Model Rules". The "Transitional Penalty Reliefs" as published by the OECD were not adopted in the discussion draft.

The regulations contained in the discussion draft are to be anchored in a separate new law "to ensure global minimum taxation for corporate groups (Minimum Tax Act - MinStG)". The law is to be applied from the first fiscal year beginning after December 30, 2023, in accordance with the EU Directive. The introduction of the “undertaxed payment rule”, according to which a tax liable subsidiary is taxed instead of the ultimate parent entity for the entire group, is planned for one year later (i.e., for fiscal years beginning after December 30, 2024).

The discussion draft is strongly oriented towards the OECD Model Rules and the corresponding EU Directive, but also contains some German concretizations and amendments. For example, in line with the Model Rules, the discussion draft provides for a domestic minimum tax in the event that a top-up tax arises abroad that is attributable to Germany. This is intended to ensure that even in the (unlikely) event of low taxation in Germany, the additional tax is paid to the German tax authorities - and not to another country.  In addition, national regulations on the taxation procedure were included in the discussion draft, for example the establishment of a so-called minimum tax group (Sec. 3 MinStG), the obligation to electronically submit a "minimum tax report" to the Federal Central Tax Office (Sec. 67 MinStG), tax declaration and payment obligations (Sec. 84 MinStG) as well as a double taxation treaty override ruling (Sec. 88 MinStG).

Many aspects of procedural law remain open

Numerous procedural aspects remain open, such as the exact implementation of subsequent adjustments through tax audits in Germany and abroad or the implementation "Dispute Resolution Mechanism" as proposed by the OECD consultation paper on "Tax Certainty". The OECD's proposals of December 20, 2023 on so-called "Penalty Reliefs" were also not adopted. According to these, affected companies can be exempted from penalties or fines if "the multinational enterprise has taken ‘reasonable measures’ to ensure the correct application of the GloBE Rules”. This would always be fulfilled if the group can prove that it "acted in good faith to understand and comply with the relevant domestic application of the GloBE Rules". Instead, the German discussion draft merely includes general provisions on fines (Section 86 MinStG), which are to apply in the event of intentional or frivolous infringement of the tax obligations. The exact severity of possible sanctions and fine provisions in the event of non-compliance with the regulations remains unclear.

The question of the extent to which the so-called "Undertaxed Payment Rule" would apply was also eagerly awaited. The discussion draft now clarifies that the countries participating in the Pillar 2 concept will tax globally active corporations and groups of companies in full, irrespective of the domicile of the respective parent company, so that in extreme cases even a single German subsidiary will have to bear the worldwide tax burden of the entire group.

Safe Harbour regulations of the OECD adopted

Despite the lack of an EU directive in this regard, the (transitional) safe harbour regulations and simplifications of the OECD have been adopted in the discussion draft. In particular, the transitional safe harbour regulations (Sec. 75 MinStG et seq.) reduce the implementation complexity enormously for most groups during a transitional period of generally 3 years. The same applies to groups with little international activity, which can avoid the application of Pillar 2 regulations for a five-year period (Section 74 MinStG). In addition, a significant simplification of the determination of GloBE income and covered taxes for non-material entities (Sec. 72 MinStG) offers permanent relief.

In view of the narrow time window until first-time application from next year and numerous open aspects, the further legislative process should be closely monitored. Associations, advisors and the industry have the opportunity to comment on the discussion draft within one month.