Implementation of the Global Minimum Tax in Germany

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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).