Shortly before the end of the current legislative period, the lower house of the German Bundestag (Bundestag) passed two major tax laws: on May 21, 2021, both the ATAD Implementation Act (ATAD-IA) and the Corporate Income Tax Modernization Act (CIT-MA) have been approved. The required approval of the Upper House of the German Bundestag (Federal Council) is considered a formality and is expected by the end of June this year.
The implementation of the EU Tax Avoidance Directive 2016/1164 (A LITTLE BIT) in German tax law has long been controversial from a political point of view. The Federal Ministry of Finance (BMF) had already presented a draft law in December 2019 (for further details see here), followed by a revised version in March 2020 (for further details see here). According to reports, the two main points of contention within the governing coalition were the low tax threshold within the “Add Back Taxation” rules (i.e. the foreign companies controlled by Germany or “CFC” rules) (Section 8 (5) German Foreign Tax) act (GFTA)) and the comprehensive revision of the so-called “departure taxation rules” according to § 6 GFTA, which were not required by the ATAD. If, under the rules of departure taxation, the unrestricted German tax liability ends due to expatriation (or the implementation of substitute provisions), this leads to an assumed sale of shares in a company of at least 1% that is held as private assets. In March 2021, the governing parties agreed on both points to the detriment of the taxpayer. Following the decision of May 21, 2021, the legislative process is about to be completed. The House of Commons essentially followed the government draft published in March 2021.
The most important aspects are:
- Anti-hybrid regulations: The core of the ATAD implementation is the introduction of regulations for the regulation of hybrid non-conformities (in particular § 4k EStG) (GITA)). Hybrid agreements are based on so-called “qualification conflicts”. In the case of hybrid financial instruments, for example, there is a qualification conflict where a cross-border payment in Germany can be viewed as interest for the payer, but the payment is treated as receipt of a dividend for the payee under the laws of the other country. In this case, the business expense deduction for the interest in Germany may not be matched against a corresponding tax amount in the payee’s jurisdiction (which is common because some jurisdictions have extensive tax exemptions on dividends). In such situations, Germany will refuse to deduct business costs in accordance with the new section 4k GITA. The ATAD-IA introduces provisions that eliminate the consequences of qualification conflicts in both incoming and outgoing cases. The new provisions apply retrospectively from December 31, 2019. Section 4k GITA generally applies to all expenses incurred after December 31, 2019. An exception applies if the legal basis for these expenses was established before December 31, 2019. These expenses only fall within the scope of the anti-hybrid rules if they are based on an ongoing obligation (e.g. loan or license agreement) and could have been avoided without significant disadvantages.
- Add Taxation / CFC rules: The aim of the add-back taxation rules is to counteract the shift of passive income to a low-tax country through the use of subsidiaries. In Sections 7 to 13 of the GFTA, the ATAD-IA provides for various “technical” adjustments to these provisions that have existed since 1972. Otherwise, the basics of the German CFC rules are retained. Due to the add-back taxation rules, the low-taxed passive income is included in the tax base of the domestic shareholders. It was politically controversial whether the proposed international low tax threshold of 25%, which is very high by international standards, should be lowered. In the end, the legislature decided to keep the level at 25%. The new regulations apply for the first time to the tax year 2022.
- Departure and departure taxation: The German departure control rules applicable to corporate assets will be adapted to the requirements set out in the ATAD. More important, however, is the complete revision of Section 6 GFTA. In the event of the termination of an individual’s unrestricted tax liability due to resignation (or various substitute provisions), the revised provision assumes a sale of qualifying interests in companies of at least 1%. In the case of relocations within the EU / EEA, the tax was set beforehand, but then accrued without interest or securities until the investment is actually sold. Instead, for removals after December 31, 2021, payment must now be made in seven annual installments (generally against security) in EU / EEA cases.
Corporate tax modernization
In addition, the lower house of the German Bundestag has also passed the CIT-MA. This means that a German partnership is to be treated as a corporation from January 1, 2022 upon request. The change should be relevant for both German companies and inbound investors (see here for more details).
Outlook and recommendations for action
The new tax laws discussed above still require the approval of the Upper House of the German Bundestag. In both cases, however, this is considered a formality and is expected by the end of June. As a result, there is now a need to review existing structures, particularly with regard to the anti-hybrid rules and the rules for tax refunds, and to restructure them if necessary. Since the anti-hybrid rules apply retrospectively from January 1, 2020, these rules must also be taken into account in the tax returns for the 2020 tax year. From a business perspective, the tax climate in Germany is becoming more and more complex. This has already been shown by the new German anti-contract purchasing provisions, which have an impact on the withholding tax relief under tax treaties or EU directives (see here for more details). Taxpayers must therefore organize their activities with regard to German tax law even more carefully in order not to suffer any disadvantages through the application of one of the meanwhile numerous provisions to combat abuse of law. This increasingly complex tax landscape requires that taxpayers have robust tax compliance systems in place to ensure correct application of the law.