16.12.2024MOF issues revised draft bill with further proposed updates to minimum taxation rules
Revised discussion draft includes updates to implement OECD Pillar Two administrative guidance from June 2024
The German Ministry of Finance (MOF) on 5 December 2024 published a second discussion draft of the Minimum Tax Adjustment Act, which aims to incorporate certain June 2024 OECD guidance into the domestic legislation implementing the Pillar Two rules. The first discussion draft was published on 20 August 2024 and included OECD guidance related to the Pillar Two rules that was published in December 2023 (public comments were accepted until 6 September 2024). The second discussion draft was published together with several stakeholder responses that the MOF received during the public consultation on the first discussion draft. The second discussion draft is open for public comments until 31 January 2025.
The main purpose of the first discussion draft was to implement the country-by-country (CbC) reporting safe harbor rules as described in the December 2023 OECD guidance. More specifically, the first discussion draft included further details related to the use of qualified financial statements/reporting packages for CbC reporting safe harbor purposes (proposed update of section 87 of the Minimum Taxation Act (MTA)), purchase price accounting adjustments in qualified financial statements (proposed new section 87a MTA), and the implementation of rules related to hybrid arbitrage arrangements (proposed new section 87b MTA). The first discussion draft also included rules on the CbC reporting safe harbor in situations where no obligation to prepare a CbC report exists (proposed update of sections 80 and 84 MTA). In addition to the proposed implementation of the CbC reporting safe harbor rules, the first discussion draft also provided for the inclusion of deferred taxes that are not included in the adjusted covered taxes as a result of an election right or an offset in the full global anti-base erosion (GloBE) calculation (proposed update of section 50 (1) sentence 3 and section 82 (1) sentence 6 MTA). In addition, certain minor amendments of the MTA rules were included in the first discussion draft.
The second discussion draft includes certain updates of the already proposed measures (see above) as a result of editorial changes and comments received during the consultation period. In addition, it includes amendments to implement the OECD guidance released in June 2024, which relate to the accrual and dissolution of deferred taxes (proposed new section 50 (1a) MTA), amendments to the deferred tax liability recapture rules (proposed new section 50a MTA), and rules related to the treatment of transparent entities in certain structures (proposed update of section 7 (32) MTA). In order to simplify certain reorganizations and to prevent unintended Pillar Two consequences resulting from conversions, it is also proposed that takeover gains would generally not be recognized for Pillar Two purposes; takeover losses would also not be considered (proposed update of section 66 (2) sentence 2 MTA).
The second discussion draft also includes regulations for the exchange of information on minimum taxation reports between Germany and other EU member states in anticipation of the proposed Council Directive (EU) 2022/2523 (ninth directive on administrative cooperation in the field of taxation or “DAC 9”).
Accompanying measures that are included in the second discussion draft for the purpose of reducing bureaucracy are the following:
- Elimination of the double deduction rule for partnerships where certain interest expense that qualifies as special business expense at the level of a non-German partner in a German partnership is considered for German and foreign tax purposes at the same time (section 4i of the Income Tax Code (ITC)). Such a situation should now be covered by the general anti-hybrid rules that came into effect in 2020 after the double deduction rule for partnerships in 2017.
- Elimination of the royalty barrier rule of section 4j ITC. The royalty barrier rule that has been effective since 2018 limits the deductibility of related party royalty payments that result in the “low taxation” of the royalty income at the level of the recipient as a result of the application of a preferential tax regime (e.g., IP box, patent box, license box) in situations where the preferential regime is not based on the “nexus approach” as described under action 5 of the OECD BEPS project. The threshold for the application of the royalty barrier rule was reduced from 25% to 15% as from 1 January 2024.
- Elimination of the application of the controlled foreign company (CFC) rules for intermediary companies generating specific investment income (Zwischeneinkünfte mit Kapitalanlagecharakter), even absent control of the foreign company in terms of section 13 of the Foreign Tax Act (FTA). The elimination of this rule would bring the CFC rules in line with the minimum standard of the EU anti-tax avoidance directive and avoid a more burdensome rule than in other EU member states.
- Increase of the relative and absolute exemption thresholds for the application of the CFC rules according to section 9 FTA. Based on the current thresholds, the CFC rules do not apply if the deemed passive income of a non-German company does not exceed 10% of the total income of the respective company and the deemed passive income also does not exceed the amount of EUR 80,000 (section 9 FTA). These thresholds would be increased to 33.3% and EUR 250,000, respectively.
- Elimination of the 5% addback and resulting double taxation in case of dividend distributions and capital gains from non-German subsidiaries if the respective income was already subject to taxation based on the CFC rules in prior years (section 11 FTA).
Based on the looming snap elections in Germany that are currently planned to take place on 23 February 2025, the fate and timing for introducing the draft Minimum Tax Adjustment Act into the legislative process are unclear. However, introduction into the legislative process before the snap elections early next year is unlikely.
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