This is probably the biggest tax reform in recent decades with a completely new and, in parts, highly complex set of rules. Affected companies are faced with comprehensive and resource-intensive compliance obligations.
What is the starting position?
As part of the OECD's BEPS 2.0 project, around 140 countries have agreed to introduce a global minimum withholding tax in 2021, also known as "Global Anti-Base Erosion Rules" (GloBE) or Pillar 2.
To ensure a uniform introduction and implementation of the application of the global minimum tax in the EU area, the Council of the European Union decided on 15 December 2022 to adopt the Minimum Taxation Directive (Directive (EU) 2022/2523, OJ L 328, 22.12.2022, p. 1, reported in OJ L 13, 16.01.2023, p. 9). This directive obliges the EU member states to transpose the provisions of this directive into national law by 31 December 2023.
The act to implement the Council Directive (EU) 2022/2523 to ensure global minimum taxation and other accompanying measures (Minimum Tax Directive Implementation Act) regulates how the global minimum tax is applied in Germany.
In addition to the introduction of a new basic law to ensure global minimum taxation for corporate groups (Minimum Tax Act, or MinStG for short) the act also reduces the threshold of low taxation from 25 % to 15 % in the context of German controlled foreign corporation rules (sections 7 et seq. of the German Foreign Tax Act) and the license barrier (section 4j of the German Income Tax Act).
What is the global minimum tax about?
Large corporate groups are obliged to check for the first time in the financial year beginning after 30 December 2023 whether the profits of all group members in the jurisdictions in which they are domiciled are subject to taxation of at least 15 %. If this effective minimum tax rate is not exceeded, an additional tax in the amount of the difference to the minimum tax rate of 15 % is generally payable at the level of the ultimate parent company.
Who is affected?
The global minimum tax applies to multinational and national corporations with a total annual turnover of at least 750 million Euro in at least two of the four preceding financial years. If a group unit of such a group is located in Germany, the new German Minimum Tax Act generally applies. However, non-profit organizations, state-owned entities, international organizations, and pension funds are excluded from the scope of application.
What needs to be determined?
To be able to check whether the business units of the group of companies that are resident 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) are to be used. The ratio of the two results is the effective tax rate. Several business units in one tax jurisdiction are to be combined for this purpose (jurisdictional blending).
The adjusted recognized taxes and the minimum tax profit or loss are determined based on the result reported in the consolidated financial statements prepared following an accepted accounting standard (e.g. IFRS or German Commercial Law). However, numerous adjustments still need to be made. The taxes recognized in the financial statement also include deferred taxes. Current and deferred tax items must be modified by numerous additions and deductions. Numerous adjustments must also be made to the result reported in the financial statement to calculate the minimum tax gain or loss.
Note: In addition to the draft, the act that has now been passed by the German legislator includes several regulations that take into account the guidelines and announcements that have since been issued at OECD level. In addition, opening clauses have been added to easily adapt the MinStG to future internationally agreed standards.
How is minimum taxation applied?
If the effective tax rate of the Group's business units in a tax jurisdiction does not exceed the minimum tax rate of 15 %, the minimum tax rate is to be applied by the so-called Income Inclusion Rule. Under the Income Inclusion Rule, the ultimate parent entity is generally obliged to pay a corresponding tax increase amount. In case of an ultimate parent entity located in Germany, it would thus be obliged to pay tax to the German tax authorities.
The MinStG also makes use of the possibility of introducing a Qualified Domestic Minimum Top-up Tax. If the domestic income of a foreign group is to be subject to an effective tax of less than 15 %, the Qualified Domestic Minimum Top-up Tax is applied. At the level of the ultimate parent entity domiciled abroad, this Qualified Domestic Minimum Top-up Tax can then be offset.
If the Income Inclusion Rule 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 law provides for the Undertaxed Profit Rule 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 top-up tax increase amount for the entire group is to be allocated to the business unit subject to tax in Germany.
Which declarations must be submitted?
Each taxable business unit in Germany must generally submit a minimum tax report to the German Federal Tax Authority 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 the information required for the calculation of any tax increase amount.
A parent company resident in Germany that is deemed to be the head of a so-called minimum tax group (consisting of all business entities operating in Germany) must submit a tax return for all domestic business entities by the expiry of the aforementioned deadline, in which it must calculate the amount of tax increase itself and pay it within one month of submitting the declaration.
Are there any simplifications?
According to temporary safe harbour regulations, which relate to data from the Country-by-Country Reporting (CbCR), = a tax increment amount of zero Euro is applied upon request for a tax jurisdiction if one of the following three tests is met for that tax jurisdiction:
- "De minimis test": Revenue of less than 10 million Euro and profit before tax of less than 1 million Euro according to CbCR
- "Simplified Effective Tax Rate Test": Effective tax rate calculated based on the CbCR data and the relevant income tax expense (plus certain deductible items) of at least 15 % (in 2024), 16 % (in 2025) or 17 % (in 2026)
- "Substance test": Profit before taxes according to CbCR corresponds to the so-called substantial free profit (calculated based on wage costs and measured asset values).
These reductions apply for a transitional period that generally covers the financial years 2024, 2025, and 2026.
If the group of companies only carries out international activities to a limited extent, an exemption is also provided for in the first five years of the minimum tax being applied, subject to certain conditions. In addition, a safe harbour provision was adopted for cases in which a Qualified Domestic Minimum Top-up Tax is already levied at the level of foreign subsidiaries. Compared to the draft version, the act provides for some stricter conditions for this safe harbour regulation in the case of a Qualified Domestic Minimum Top-up Tax.
Note: Even if these temporary simplification regulations apply, the declaration obligations described above must still be fulfilled. Nevertheless, the MinStG provides for an opening clause, according to which the German Federal Ministry of Finance can regulate the scope and details of the minimum tax report with the approval of the Federal Council. At OECD level, simplifications in the depth of declaration were already decided in July 2023, which are to be applied in particular if the above-mentioned CbCR-based safe harbour regulations can be used. It is to be hoped that the Federal Ministry of Finance will implement the OECD requirements accordingly.
For an unlimited period of time, it is also envisaged that the tax increase for immaterial business units will be reduced to zero Euro if an application is made and the requirements are met. An immaterial business unit is a company that is not included in the audited consolidated financial statements due to materiality considerations. In addition, one of three alternative tests must be fulfilled, which in turn are based on simplified calculations based on CbCR data. However, these open-ended tests only correspond at first glance to the time-limited CbCR-based safe harbour regulations.
What does this mean in practice?
If they have not already done so, affected companies need to familiarise themselves intensively with the requirements for determining the basis for calculating the effective tax rate. In this context, the standard tax rate specified in the respective tax jurisdiction cannot provide more than a rough indication of the supplementary taxes that may have to be paid. This is because the wide range of adjustments to both the relevant minimum taxable profit and the taxes to be taken into account may result in significant deviations. To determine the accounting bases, it will be essential to have a correspondingly customized internal group reporting system that goes far beyond the existing reporting packages in connection with group accounting.
Whether one of the simplification rules based on CbCR data is applicable can be assessed practically and efficiently using our tool-based assessment approach to the CbCR-based safe harbour rules (find out more here).