In 2021, the members of the so-called Inclusive Framework on BEPS reached an agreement in principle with regard to the reform of global taxation and in particular with regard to the introduction of a global minimum taxation. As a result, 138 members have joined the international agreement. On December 15, 2022, the EU member states agreed on a joint directive to implement the reform uniformly within the EU. Now the Federal Ministry of Finance (BMF) has published a discussion draft for a law to implement this directive (Minimum Tax Directive Implementation Act, MinBestRL-UmsG).
The declared aim of the international reform is to promote tax justice and a level playing field. In the following, we present the most important information on the current discussion draft of the Federal Ministry of Finance:
1. Background
In addition to the introduction of a global minimum taxation, the draft law also aims to avoid harmful tax competition and aggressive tax structuring through the retrospective taxation rules it contains and is intended to ensure that the EU’s minimum taxation directive is implemented by the Federal Republic of Germany by December 31, 2023. Unlike EU regulations, EU directives do not have any original binding effect, but must be transposed into national law by the member states. The Directive, and thus the MinBestRL-UmsG, implements the second pillar of the so-called “two-pillar solution” of international agreements regarding base erosion and profit shifting (BEPS).
2. Scope of application
The MindBestRL-UmsG is applicable to groups of companies which have achieved an annual turnover of at least EUR 750 million in at least two of the last four consolidated financial statements of the ultimate parent company. Joint ventures, permanent establishments of a joint venture and joint venture subsidiaries are also to be subject to the minimum tax. The minimum tax is to be applicable irrespective of the provisions of a double taxation treaty. Among others, state entities, international organisations, non-profit organisations as well as pension funds are to be exempt from minimum taxation.
A five-year tax exemption is provided in the transitional phase for enterprise groups with subordinate international activities. Groups of companies have a subordinate international activity if they have business units in fewer than seven tax jurisdictions and the total value of all tangible assets located there does not exceed EUR 50 million.
In principle, the provisions of the Act are to be applied to all financial years beginning after December 30, 2023.
If the effective tax rate of a business unit of a group of companies is below the minimum tax rate of 15 %, the draft provides that the profits that have been taxed too low so far will be taxed in the amount of the difference. The determination of the effective tax rate as well as the amount of the tax increase is regulated accordingly in the draft.
The determination of the amount to be taxed subsequently is extremely complex; essentially, a distinction is made between a primary supplementary tax regime (concerns the low-taxed parent company or a parent company that directly or indirectly holds an interest in a low-taxed business entity) and a secondary supplementary tax regime (concerns the taxation of the business entity and the share of the Federal Republic of Germany attributable to it for the respective financial year). For the determination of the minimum tax profit or minimum tax loss to be taken as a basis for the purposes of minimum taxation, the draft provides for separate, comprehensive regulations. In this context, various options are to be introduced, e.g. for expenses paid for share-based payments or for gains from the sale of immovable assets. According to the draft, taxes recognised in the calculated profit or loss are to be adjusted by various items.
The draft also contains regulations on a so-called substantiated allowance. This is to amount to 5% of the eligible wage costs for eligible employees plus 5% of the eligible material assets.
If there are several taxable units of a group of companies in Germany, a so-called minimum taxation group is formed. The group parent is liable for the tax. This leads to a centralisation of the taxation procedure at the tax office of the group parent.
Taxable entities should also be required to submit a minimum annual tax report to the Federal Central Tax Office, unless the report was submitted by the ultimate parent company or a business unit commissioned by it in the respective state of domicile and there is a corresponding agreement with Germany for the automated exchange of data, which is actually carried out.
The draft also provides for fines if the minimum tax report is not submitted or not submitted on time. The amount of the fine is still open.
The minimum tax is an independent tax on income, irrespective of the legal form, and is levied in addition to income tax and corporate income tax. However, it will be classified a corporate income tax. The taxation is independent of the taxation of the shareholder or co-entrepreneur/partner. Despite the classification as corporate income tax, partnerships can also be the tax subject of the minimum tax.
3. Assessment and outlook
The draft has already been criticised shortly after its publication as being too comprehensive and too complicated. Critics complain that the already complex tax system in Germany would become even more non-transparent through the introduction of another tax law to this extent and would run counter to the original aim of reducing bureaucracy. From an advisor’s point of view, the introduction of minimum taxation in the form set out in the draft also harbours considerable risks, as knowledge in connection with taxation in European and non-European countries will increasingly be required. From the point of view of companies, there are fears of a considerable additional bureaucratic burden, which could weaken the attractiveness of Germany as a business location due to already high costs and tax rates.
On the other hand, there is the desire for tax justice. In particular, multinational corporations should be restricted in their ability to shift profits to low-tax countries in order to keep their tax burden low.
Despite its length, the draft is to be credited for attempting to clarify as many undefined legal terms as possible. It remains to be seen to what extent these text passages will survive the legislative process.
The EU directive must be implemented by December 31, 2023. It can therefore be expected that some more discussions will arise in this context this year.
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