Agreement on the Implementation of the Global Minimum Tax at EU Level
The global minimum tax was adopted by around 140 countries at OECD level in 2021 as part of the BEPS 2.0 project as a so-called second pillar or Pillar Two. At the end of 2021, the EU Commission presented a first draft version of a directive on the introduction of a global minimum tax for multinational groups of companies in the EU.
As a result of opposition from individual EU member states, a unanimous vote on this could not be reached for several months. However, a breakthrough was achieved on 12.12.2022. All EU member states are in favor of the introduction of a global minimum tax on the basis of the draft directive as amended on November 25, 2022.
This was followed on Dec. 16, 2022, by the formal adoption of the minimum tax directive by the Council of the EU, which will enter into force the day after its publication in the Official Journal of the European Union.
The requirements of the directive are to be implemented by the EU member states in their national law by the end of 2023 and are to be applied for fiscal years beginning on or after December 31, 2023.
Main Features of the Minimum Tax
In line with OECD requirements, the new EU directive contains regulations for implementing the global minimum tax to ensure corporate profits will be taxed at an effective rate of at least 15%. The directive applies to groups of multinational enterprises (MNEs) and large-scale domestic groups that have a combined annual group turnover of at least EUR 750 million based on consolidated financial statements in at least two of the four preceding fiscal years. In principle, the global minimum tax is aimed at international groups, but the scope of the directive also covers purely national groups.
Technically, the global minimum tax is implemented by means of a top-up tax at the level of the parent company of the group. This affects profits of group companies resident in tax jurisdictions with an effective tax burden below the minimum tax rate. This is to be achieved through an additional tax levied as the difference between a minimum tax rate of 15% and the lower effective tax rate. In this way, the tax burden is to be pushed up to the minimum tax level.
Note: It should be noted that an examination of the global minimum tax is also appropriate if group members of an affected group of companies are resident in countries that have a tax rate that is nominally clearly above the global minimum tax rate. Due to deviations between the tax base to be determined according to the guidelines and the effective tax rate to be applied, an application case for the global minimum tax could also arise in such cases. Group companies in high-tax countries such as Germany are also affected by the extensive declaration requirements.
A typical application case of the global minimum tax rules could be as follows: A group parent company based in Germany holds 100% of the shares in subsidiaries in France, Ireland, Austria and Switzerland (Canton Zug).
Under the global minimum tax a parent company must examine whether the profits of the group companies in the respective jurisdictions were subject to an effective tax rate of at least 15%. The effective tax rate as defined under the directive is determined by qualifying tax expenses (so-called adjusted covered taxes) divided by qualifying profits. For this purpose, the respective profit of the individual subsidiary according to group accounting standards before consolidation has to be modified by certain add-backs and deductions as determined in the directive. Both qualifying tax expenses and modifications to accounting profits of the individual subsidiary cannot simply be taken from the consolidated financial statements. In a first step a company will analyze which taxes are to be included and, if necessary, how they are to be adjusted.
Regarding the subsidiaries in Ireland and Switzerland in particular, a top-up tax could apply due to the low corporate tax rates there. However, the examination of the effective tax rate is by no means limited to these two countries in our example. Rather, the examination cannot be waived even if the nominal tax rate of the respective state is significantly higher than the minimum tax rate of 15%, as in France and Austria in the example given. Whether an exemption for "nominal" high-tax countries will still be introduced and how this could be structured in the member states will depend on any OECD requirements. Proposals for possible "safe harbor" regulations with at least simplified calculation requirements are currently under discussion.
It should also be noted that, in particular due to the various modifications of the qualifying profits compared to the respective tax base, the effective tax rate of 15% or less may result in certain constellations even in traditional high tax countries.
In addition, the group parent company (and, if applicable, the subsidiaries) would be required to file a special tax return for global minimum tax purposes by 30 June 2026. In principle, the filing deadline is 15 months after the end of the fiscal year, but this is to be extended to 18 months for the first year of application.
Application also in inbound cases
German companies that belong to an international group with a foreign group parent company may also be affected by the planned new regulations. If, for example, the shares in the German subsidiary are held entirely by a parent company domiciled in a third country with no applicable global minimum tax or equivalent regulations, the German group company may be obliged to levy the top-up tax with regard to its downstream group companies. This would be the case, for example, if the group parent company is resident in the USA, as it can currently be assumed that the existing GILTI system in the USA may not be regarded as equivalent to the global minimum tax regulations.
The German group company would have to check whether the profits of its downstream group companies in Germany and abroad are subject to an effective tax rate of at least 15% and would have to comply with corresponding declaration obligations.
Irrespective of a potentially higher tax burden within the group a significantly higher compliance effort is to be expected. First of all, it will be necessary to request a large amount of data from the subsidiaries in order to calculate the effective tax rate under the global minimum tax rules. Not all of this data is readily available from the annual financial statement data submitted by the subsidiaries for the purposes of the consolidated financial statements. Furthermore, any additional tax burden due to the global minimum tax may also have effects on the financial statements. Particularly in the first year of application, affected groups will face the challenge of adapting their work processes at an early stage so that data determination and data processing can be carried out in good time before the end of the declaration period. This will mean that existing IT systems for corporate reporting should at least be supplemented with the new required information and that processes should be adapted and linked in a meaningful way.
Due to the expected mandatory first-time application of the minimum tax from 2024, affected groups of companies are advised to deal with the future challenges in a timely manner. Sound knowledge of the substantive legal requirements of the global minimum tax and IT-supported know-how for process-related implementation should be closely interlinked. We at Ebner Stolz support you with our experts in international tax law and group accounting as well as in the area of tax technology.