What is the starting position?
As part of the OECD's BEPS 2.0 project, in 2021 around 140 countries have agreed to introduce a global minimum tax, also known as "Global Anti-Base Erosion Rules" (GloBE) or Pillar 2.
In order to ensure a uniform introduction and design of the application of the global minimum tax in the EU area, the Council of the European Union adopted the Minimum Tax Directive on 15 December 2022 (Directive (EU) 2022/2523, Abl L 328, 22 December 2022, p. 1, corrected in OJ L 13, 16 January 2023, p. 9). This obliges the EU member states to transpose the requirements of this directive into national law by 31 December 2023.
The discussion draft of a law for the implementation of the Directive to ensure a global minimum level of taxation for multinational groups and large domestic groups in the Union (Minimum Taxation Directive Implementation Act), which has now been presented by the German Federal Ministry of Finance on 20 March 2023, represents the first implementation step in Germany. In doing so, the draft includes the introduction of a new parent law to ensure global minimum taxation for groups of companies (Minimum Tax Act, or MinStG for short).
What is at stake?
Large corporate groups are to be required to ensure, for the first time in the business year beginning after 30 December 2023, that the income of all group members is subject to taxation at an effective minimum rate of 15 % in the jurisdictions of their countries of residence. If this effective minimum tax rate is not reached, an additional tax amounting to the difference to the minimum tax rate of 15 % is to be paid at the level of the ultimate parent company.
Who is affected?
Multinational as well as national groups with total annual sales of at least EUR 750 million in at least two of the four preceding business years are subject to the global minimum tax. If a corporate unit of such a group is located in Germany, the new MinStG generally applies. However, non-profit organizations, government units, international organizations and pension funds are excluded from the scope of application.
What needs to be determined?
In order to determine whether the business units of the group of companies located in a tax jurisdiction are subject to a tax burden of at least 15 %, the adjusted recognized taxes and the profit adjusted for minimum tax purposes (so-called minimum tax profit or loss) must be taken into account. The ratio of these gives the effective tax rate. Several business units in one tax jurisdiction are to be combined for this purpose (jurisdictional blending).
The taxes recognized and the minimum tax profit or loss are determined on the basis of the result (net income or net loss) reported in the consolidated financial statements prepared in accordance with recognized accounting standards. However, numerous adjustments still have to be made. The recognized taxes reported in net income or net loss according to the consolidated financial statements must be modified to include deferred taxes, among other things. Numerous adjustments must also be made to the result reported in the consolidated financial statements in order to calculate the minimum tax profit or loss.
Note: The concrete implementation of the discussion draft is based on the OECD Model Rules for the implementation of GloBE, taking into account the recently published OECD Administrative Guidance. Thus, among other things, relief for companies with direct pension obligations to (former) employees is taken into account: Expenses from direct pension obligations to (former) employees do not have to be added for the determination of the minimum tax profit or loss - contrary to what the direct wording of the OECD Model Rules suggests. The corresponding addition standard is to be applied only with respect to pension obligations that are outsourced to a pension fund. In other cases (e.g. direct commitment, direct insurance, pension fund, support fund), the expenses are always fully taken into account in the year in which the expenses were taken into account in the net income of the consolidated financial statements, according to the explanatory memorandum of the discussion draft.
How does the minimum taxation take place?
If the effective tax rate of business units of the Group in a tax jurisdiction falls below the minimum tax rate of 15 %, the so-called primary supplementary tax regulation generally requires the ultimate parent company to pay a corresponding amount of tax increase. In the case of a top-level parent company located in Germany, it would thus be obliged to pay tax to the German tax authorities.
The discussion draft also makes use of the option to introduce a national supplementary tax. If the business units located in Germany are subject to an effective tax of less than 15 %, the national supplementary tax will apply. This national supplementary tax is then to be offset at the level of the ultimate parent company.
If the primary supplementary tax regulation does not apply because there is no corresponding regulation in the country of residence of the ultimate parent company and the minimum taxation does not take place at the level of an intermediate parent company, the discussion draft provides for the secondary supplementary tax regulation as a fallback regulation, which is to be applied for the first time to fiscal years beginning after 30 December 2024. For this purpose, a pro rata tax increment for the entire group is to be allocated to the business unit subject to tax in Germany.
Which declarations are to be submitted?
Each German taxable business unit must generally submit a minimum tax report to the German Federal Central Tax Office no later than 15 months (or 18 months in the first year of application) after the end of the fiscal year. This must contain all information required for the calculation of any tax increase amount.
A parent company resident in Germany that is the group parent of a so-called minimum tax group (consisting of all business units located in Germany) must submit a tax return for all domestic business units by the expiry of the aforementioned deadline, in which it must calculate the tax increase amount itself and pay it within one month of submitting the return.
Is there any relief available, if applicable?
Safe harbor rules that apply to country-by-country reporting (CbCR) data provide that, upon request of a business unit, which has to submit a minimum tax report, a tax increment amount of EUR 0 is assumed for the tax jurisdiction, in which it is located, if one of the following three tests is met for that tax jurisdiction:
- De minimis test: revenues of less than EUR 10 million and profit before tax of less than EUR 1 million according to CbCR.
- Simplified Effectice Tax Rate test (ETR test): Effective tax rate calculated on the basis of the CbCR data (plus certain modifications, in particular to account for deferred taxes) of at least 15 % (in 2024), 16 % (in 2025) and 17 % (in 2026), respectively.
- Substance test: Profit before tax according to CbCR corresponds at most to the so-called substance-based allowance (determined on the basis of wage costs and tangible assets).
These reliefs, which do not completely exclude the business unit from the duty to file a tax report, are provided for a transitional period covering financial years ending before 1 July 2028.
In addition, if the group of companies only carries out international activities to a subordinate extent, an exemption is provided for in the first five years of application of the minimum tax. The discussion draft also contains simplification provisions, among other things, for the case that a foreign national supplementary tax is already levied at the ultimate parent company.
What are the practical implications?
Affected companies should intensively deal with the requirements for determining the calculation basis for the examination of the effective tax rate. In this context, the nominal tax rate provided for in the respective tax jurisdiction cannot provide more than an indication of any supplementary taxes to be paid. This is because the extensive adjustments to both the relevant profit and the taxes to be taken into account can result in significant deviations here. In order to determine the basis for calculation, a correspondingly adjusted internal group reporting system that goes far beyond the previous reporting packages in connection with group accounting will be essential. Extensive declaration obligations will also arise for the entire Group even if no supplementary tax is payable as a result.
If you have any questions regarding the intended legislative implementation of the minimum tax as well as the practical implementation, please do not hesitate to contact us. We would be pleased to support you in the context of selected workshops on the topic of the global minimum tax.