The draft law deals with the implementation of the EU Minimum Tax Directive (Directive (EU) 2022/2523, Abl L 328, 22 December 2022, p. 1, corrected in OJ L 13, 16 January 2023, p. 9) to ensure a global minimum taxation. The draft, which was adopted in the cabinet meeting on 16 August 16 2023, is based on a discussion draft prepared by the German Federal Ministry of Finance (detailed information on the draft bill can be found here). The government draft now entering the legislative process deviates in certain points from the previous discussion draft. Among others, the following regulations can be found in the draft legislation:
Minimum Tax Act
Groups of companies that have achieved sales revenues of at least EUR 750 million in at least two of the four preceding fiscal years are in principle to be subject to the minimum tax from 2024, insofar as profits of the group members are subject to an effective tax rate of less than 15% in a tax jurisdiction.
The starting point for determining the effective tax rate is the accounting data in accordance with internationally recognized accounting standards, which are to be modified by a number of adjustments in order to derive the so-called minimum tax profit or minimum tax loss of the individual business units of a jurisdiction. Among other things, portfolio dividends from long-term shareholdings (participation rate below 10%, participation period of at least 12 months) as well as certain gains and losses from equity investments are to be excluded from the calculation. In certain cases, the government bill provides for the possibility of waiving these modifications upon application. Also, so-called qualified currency gains and risks can now be excluded from the calculation of the minimum tax profit or minimum tax loss to be determined under certain conditions upon application.
For the calculation of the effective tax rate, the so-called adjusted recognized taxes must also be determined. Of particular relevance here is the extent to which deferred taxes are to be taken into account.
In addition to a five-year tax exemption for corporate groups with subordinate international activities and simplifications for immaterial business units, the government draft also contains further simplifications. The CbCR safe harbor rules, which were already provided for in the government draft and a previous discussion draft, are likely to be of particular relevance for practice.
Further changes to other tax legislation
The government draft also contains other amendments to existing tax laws that are related to the new minimum tax law.
For example, the reduction of the low tax threshold in the context of the German CFC-rules (Sec. 8 (5) External Tax Relations Act) from the current 25% to 15% in the future, which has long been demanded by companies, consultants and associations, is envisaged. At the same time, the low tax threshold regarding the royalty deduction limitation rule (Sec. 4j Income Tax Act) is also to be lowered from 25% to 15%. The discussion bill still envisaged a complete abolition of the royalty cap.
In the previous draft bill, it was initially planned to eliminate the trade tax liability of the add-back amount resulting from German CFC-rules. However, this was dispensed with in the government draft.
Note: In order to enter into force, the draft law must still pass the German legislative procedure in full.