16.12.2024Ministry of Finance issues final decree on the interpretation of the German anti-hybrid rules
The final decree includes additional guidance compared to the draft version published on 13 July 2023
On 5 December 2024, the German Ministry of Finance (MOF) published a long-awaited final version of a decree on the interpretation of the German anti-hybrid rules, which are based on the EU anti-tax avoidance directive I and II (ATAD I and ATAD II) and were introduced on 25 June 2021 (with retroactive effect as from 1 January 2020) (see GTLN dated 06/25/21 and GTLN dated 07/19/23). The final decree consists of 53 pages with 19 examples and provides the final view of the German tax authorities on the interpretation and application of the rules.
The most noteworthy amendments in the final version as compared to the draft version of the decree are the following:
- For the definition of “nontaxation” in terms of the anti-hybrid rules, it is confirmed in the updated recital 30 that the inclusion of income related to the respective expenses into tax basis under a CFC tax regime should generally be sufficient in order to be taxed. The final decree, however, clarifies that a CFC tax regime that consolidates the income, losses, and taxes of several or all CFCs (“blending”) and therefore allows for a consolidation among several legal entities (and as the case may be also among jurisdictions) does not qualify as a CFC tax regime in terms of this rule. As a result, the income inclusion solely for purposes of such a CFC blending tax regime cannot be taken into account for purposes of determining whether income is being taxed in terms of the anti-hybrid rules. The final decree then provides that the income inclusion for purposes of a CFC tax regime that is based on ATAD I generally results in taxation for purposes of the anti-hybrid rules. As a consequence of the updated guidance, it is now clear that the German tax authorities would consider income inclusion for purposes of the US global intangible low-taxed income (GILTI) rules or the global minimum taxation rules of Pillar Two not to be sufficient in order to avoid the application of the German anti-hybrid rules.
- Consequently, the final decree in the updated recital 75 confirms that the recognition of expenses for purposes of a CFC tax regime or a CFC blending tax regime should not result in a double deduction (DD) situation for purposes of section 4k (4) of the Income Tax Code (ITC). Considering expenses of a German entity for German tax purposes and for US GILTI purposes at the same time should therefore not result in a DD situation.
- For purposes of the dual income inclusion (DII) rule, the final decree in the updated recital 53 states that related party income that is subject to actual taxation at the level of the receiving (German) entity and is not recognized as an expense outside of Germany due to the hybrid character of the receiving (German entity) should in particular cases generally qualify as DII provided all further conditions as provided in the anti-hybrid rules are given. The final decree describes such a situation as a “no-deduction/inclusion” situation. The final decree also highlights that this view of the tax authorities is provided as a mere “equitable measure.” The updated guidance in the final decree should be of relevance for structures where a German entity qualifies as a disregarded entity for US tax purposes (under the US “check-the-box” rules) and receives (e.g., cost-plus) payments from the US owner that are disregarded for US tax purposes. It was unclear in the past whether in such a situation the disregarded payment from the US could be taken into account as DII. The guidance now provided by the tax authorities should be a relief for affected taxpayers, even if the description as a mere “equitable measure” by the tax authorities results in remaining questions and may give rise to uncertainties in more complex cases.
- For purposes of the DD rule of section 4k (4) ITC, the final decree provides that, in the case of (tax) consolidation regimes (specific reference is made to “contribution regimes” and “surrender regimes”) where expenses at the level of a German taxpayer at the same time are allocated to a foreign taxpayer that is part of such a foreign tax consolidation regime and, where as a result of the foreign tax consolidation regime, the expenses are negated and the transaction does not result in an increase of the foreign income of the tax consolidated group, the conditions of the DD rule are fulfilled. The updated guidance, in a newly introduced example 15, refers to the economic result of such a structure, which, based on the view of the tax authorities, is comparable to a DD situation.
The final decree does not include any additional guidance or relief when it comes to the application of the imported mismatch rules of section 4k (5) ITC. Taxpayers were hoping to get additional clarity from the German tax authorities on how to apply the overly broad provision in practice and how to minimize the risk related to this provision. The final decree, however, does not include any significant changes compared to the draft decree in this regard.
From an overall perspective, the final decree provides the view of the tax authorities on two of the most pressing issues in the application of the German anti-hybrid rules: the treatment of the inclusion for US GILTI and Pillar Two purposes and the treatment of disregarded intercompany payments as DII. This is a welcome development, even if the number of unresolved issues related to the application of the anti-hybrid rules remains high. It remains to be seen whether the “de-cluttering” initiative of the European Commission might result in a relaxation of the anti-hybrid rules that are based on ATAD I and ATAD II, at least for companies that are subject to GloBE (global anti-base erosion) rules.
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