05.06.2026MOF issues draft proposal of Annual Tax Act 2026 seeking input from stakeholders
Proposal includes implementation of key elements of the OECD side-by-side package for Pillar Two purposes
The German Ministry of Finance on 26 May 2026 published a draft proposal of the Annual Tax Act 2026, which includes the implementation of key elements of the OECD Pillar Two side-by-side (SBS) package published on 5 January 2026. The MOF is requesting comments to the draft proposal from industry associations and other interested parties by 12 June 2026. It is then planned to have the draft proposal approved by the government and introduced into the formal legislative process on 1 July 2026. The draft proposal also includes procedural measures and amendments resulting from prior measures and the correction of previous drafting errors.
Introduction of the Pillar Two SBS package
The draft proposal provides for the introduction of a SBS safe harbor and an ultimate parent entity (UPE) safe harbor in sections 81a and 81b of the German Minimum Taxation Act. The SBS safe harbor and UPE safe harbor are both included in the SBS package. Under the SBS safe harbor, an in-scope multinational enterprise (MNE) group’s top-up tax liability under the GloBE (global anti-base erosion) rules would be zero for a fiscal year if the group’s UPE is in a jurisdiction that enforces a qualified SBS regime. The draft proposal includes an authorization for the MOF to determine jurisdictions that apply a qualified SBS regime through administrative ordinance. So far, the US is the only country that has been determined to have a qualified SBS regime. The SBS safe harbor would be applicable for fiscal years that start after 31 December 2025.
The UPE safe harbor replaces the transitional UTPR safe harbor and deems a UTPR tax to be zero for MNE groups headquartered in jurisdictions that apply a qualified UPE regime. The draft proposal includes an authorization for the MOF to determine jurisdictions that apply a qualified UPE regime through administrative ordinance. The UPE safe harbor would be applicable for fiscal years that start after 31 December 2025.
In addition, the draft proposal provides for an extension of the transitional country-by-country (CBC) reporting safe harbor rules for one year to fiscal years beginning on or before 31 December 2027, provided the fiscal year does not end after 30 June 2029. Under the transitional CBC reporting safe harbor, top-up taxes in a jurisdiction will be zero if the taxpayer satisfies one of three tests: the de minimis test, the simplified effective tax rate (ETR) test, or the routine profits test. The transitional penalty relief would not be extended.
The remaining parts of the SBS package (permanent ETR safe harbor and substance-based tax incentive safe harbor) will likely be implemented via administrative ordinance based on the existing authorization in section 99 (4) of the German Minimum Taxation Act.
Other measures
Other noteworthy measures included in the draft proposal are:
- The introduction of an election right for the creation of a VAT consolidated group, provided certain conditions are met (application with the tax authorities would be required). As a reaction to recent jurisprudence from the European Court of Justice, the draft proposal would include the possibility for partnerships to be included as controlled subsidiaries into a consolidated group for VAT purposes.
- Simplification of the procedure for royalty withholding tax relief without treaty clearance procedure with the federal tax office by increasing the annual maximum amount for qualifying royalties from EUR 10,000 to EUR 100,000.
- Increase of the maximum total benefits amount relevant for the research and development (R&D) tax credit. The maximum amount of all governmental benefits available per project for purposes of qualifying for the R&D tax credit would be increased from EUR 15 million to EUR 25 million retroactively starting from 1 January 2026 (this proposal should not change the general maximum amount of the R&D tax credit itself).
- The percentage of interest on late payments, excess payments, and tax refunds would be increased from 0.15% per month to 0.3% per month starting from 1 January 2027.
In addition, the draft proposal includes provisions related to the use of artificial intelligence by the tax authorities, and an expansion of the Platform Transparency Act to facilitate the automatic exchange of information with EU member states, as well as with some non-EU jurisdictions.
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