The Corporate Tax Planning Law Review: Germany
When it comes to corporate tax planning in Germany, the focus of multinationals has clearly shifted from offensive (or even aggressive) tax structuring to more robust structures and the reduction of risks and exposures (good corporate tax citizenship). The international tax initiatives against harmful tax planning, such as the Base Erosion and Profit Shifting (BEPS) project, and in its wake the EU anti-tax avoidance directives, have certainly contributed to this development, but it is also owing to domestic tax authorities becoming increasingly inclined to commence criminal tax proceedings in regular tax audits. As a result, multinationals must increasingly consider the reputational implications of their tax structures.
This chapter initially describes the general principles of corporate taxation and corporate tax planning in Germany (see Section II). The next section outlines some of the most important tax-planning developments in the German domestic market (see Section III). Section IV deals with the status of German answers to international tax developments. The chapter concludes with an outlook on what will likely be forthcoming crucial issues.
Corporate tax planning in Germany
Corporate tax planning in Germany must necessarily take into account German corporate income taxation, and to an increasing extent German trade taxes as well, since after the reduction of the corporate income tax rate to 15 per cent in 2008, the overall tax burden is usually (depending on the local trade tax multiplier) almost equally split between corporate income and trade taxes. In structures involving German-situs real property, the German real estate transfer tax also requires careful attention.
i German corporate income taxes
For German tax purposes, a corporation that has either its seat or its place of management in Germany is subject to unlimited liability to corporate income tax as provided for in the German Corporate Income Tax Act, which, in principle, applies to its worldwide income (subject to limitations that Germany may have agreed on with respect to certain types of non-German source income in an applicable double tax treaty). Germany has applied a 'classical' corporate income tax system, pursuant to which corporate income tax is levied at the level of the corporation in combination with a preferential tax treatment for dividends and capital gains from the disposition of shares in a corporation at shareholder level. The corporate income tax rate amounts to 15 per cent (plus 5.5 per cent solidarity surcharge, resulting in an aggregate rate of 15.825 per cent). This rate applies both to resident and non-resident corporations to the extent their income is subject to German tax by assessment; for instance, to income derived through a German permanent establishment of a non-resident corporation.
Dividends received from German and non-German corporations are generally exempt from corporate income tax in the hands of a German corporation or a non-German corporation that holds the relevant shares as part of the assets of a permanent establishment maintained in Germany. This requires, among other things, that at the beginning of the calendar year the shareholding amounted to at least 10 per cent in the share capital of the distributing corporation (special rules apply to participations of at least 10 per cent that are acquired in the course of a calendar year). However, 5 per cent of any dividends received are deemed to constitute a non-deductible expense so that, as a consequence, only 95 per cent of any dividends received are exempt from corporate income tax.
Similar to a dividend received, capital gains from the disposition of shares in a German or non-German corporation are exempt from German tax in the hands of a German corporation, or in the hands of a non-German corporation holding the relevant shares as part of the business property of a permanent establishment maintained in Germany. In this case too, 5 per cent of any such capital gains are deemed to constitute a non-deductible expense so that only 95 per cent of capital gains from the disposal of shares are exempt from corporate income tax. However, unlike the tax exemption applying to dividends received, the exemption from corporate income tax applying to capital gains from the disposal of shares does not hinge on the selling corporate shareholder holding a minimum participation in the equity of the corporation whose shares are sold. Capital losses from the disposition of shares are not deductible. Similarly, no deduction is allowed for a write-down on account of a depreciation in value of shares in corporations.
Dividends distributed are subject to a dividend withholding tax at a rate of 25 per cent (plus solidarity tax at 5.5 per cent thereon, resulting in a total withholding of 26.375 per cent). German-resident shareholders and non-residents who hold the relevant shares as part of the business property of a German trade or business are entitled to a refundable credit of this tax against their final tax liability determined by assessment. A non-resident corporation can request a refund of two-fifths of the taxes withheld under German domestic rules. In addition, non-residents may further be entitled to a full or partial refund under an applicable double tax treaty or the EU Parent–Subsidiary Directive. All refunds are subject to rather strict substance requirements, which recently came under scrutiny in light of their compliance with the fundamental freedoms under the Treaty on the Functioning of the European Union.
To limit the deductibility of interest and royalties, Germany applies broad and highly complex interest-stripping rules as well as royalty-deduction limitations. These interest-stripping rules apply to the deductibility of any interest payments made by a German-resident borrower to any related or unrelated recipient resident within or outside of Germany. Besides limiting the deduction of interest from the German interest payer's corporate income tax base, they may also affect the deductibility of debt interest from its trade tax base. Under the interest-stripping rules, deductions for interest payments are, in principle, subject to a cap at 30 per cent of the EBITDA (as adjusted for tax purposes) of the borrower. By way of exception, the interest-stripping rules do not apply if the net interest payment amount (interest paid minus interest received) remains below €3 million for the tax year (de minimis exception), if the German interest payer is a stand-alone company (i.e., it cannot be included in a consolidated financial statement prepared in accordance with IFRS principles (stand-alone exception)) and if the debt-financed entity can prove that its equity ratio as per the last balance sheet date was better or no worse than by 2 per cent compared to the equity ratio of the entire group (escape clause). Where none of the above exceptions apply, net interest paid in excess of the cap amount of 30 per cent of the borrower's EBITDA (as adjusted for tax purposes) is disallowed in the current year, but can be carried forward indefinitely to subsequent tax years (subject to restrictions that apply in the case of detrimental transfers of shares in which interest carry-forwards – as loss carry-forwards – fully or partially cease to exist). The same limitations apply in the carry-over year.
ii German trade taxes
A corporation with business activities in Germany is also subject to trade tax, a business tax whose revenue accrues to those local municipalities in Germany where the corporation maintains a permanent establishment. The tax is based on business income. The basis for the trade tax is the net income determined for corporate income tax purposes plus certain additions and minus certain deductions. This is intended to create steadier flows of trade taxes to the local municipalities, but actually makes the system rather complex and inconsistent. For instance, an add-back to the tax base would be required under the following circumstances. After applying the interest-stripping rules for corporate income tax purposes there will likely be amounts of interest that remain currently deductible. For the purposes of computing the corporation's trade tax base, that remaining amount will also generally qualify as deductible. However, 25 per cent of any such interest will have to be added back to the trade tax base (i.e., it will not be deductible for trade tax purposes). This constitutes a definitive disallowance. For trade tax purposes, the disallowed interest amount is also not eligible for a carry-forward to subsequent tax years. Similarly, the 95 per cent exclusion for dividends received would generally not be allowable for trade tax purposes and 95 per cent of the dividend amount received would, therefore, be added back to the trade tax base. Only where the corporation derives the dividends from a 15 per cent or greater stake in the dividend-paying corporation (which deviates in various instances from the relevant 10 per cent threshold for corporate income tax purposes), the add-back is reversed (participation exemption for trade tax purposes). In the case of dividends paid by an EU corporation, a 10 per cent or greater stake qualifies for the participation exemption.
The basic trade tax rates are set by federal statutes and the 'local multiplier' is determined by the municipality and applied to the basic rate. As it is up to the municipalities to determine the local multiplier, no uniform rates exist. Effective rates for trade tax range from approximately 7 per cent to 17 per cent. Trade tax cannot be deducted from its own tax base or for corporate income tax purposes.
iii German real estate transfer tax
German real estate transfer tax (RETT) is imposed on all transactions with the purpose or effect of transferring title to German real estate (the term includes land, buildings, and inheritable building rights). The rates range from 3.5 per cent to 6.5 per cent depending on which state is in charge of levying the tax. The tax is also assessed when 95 per cent or more of the shares in a German or foreign corporation owning German-situs real estate are transferred to one acquirer, or when a shareholder owning less than all of the shares of a corporation subsequently acquires enough shares to bring his or her participation to 95 per cent or more. There is proposed legislation to reduce this threshold to 90 per cent (for more details see Section III.iii). The tax is generally levied on the consideration for the transfer. Where there is no consideration, a consideration cannot be ascertained or there is a deemed transfer (which includes the transfer of 95 per cent of the shares to one person), the tax is levied on the tax value of the real estate, which, as a rule of thumb, is usually lower than the market value. Transferor and transferee are jointly and severally liable for the tax. However, in the case of the aggregation of 95 per cent or more of the shares in a corporation, only the person acquiring such shares is liable for the payment of the tax.
Recent local developments
The tax-efficient repatriation of German-source profits is subject to proposed legislation that would, if introduced as proposed, further tighten the German anti-treaty-shopping rules.
The German foreign-to-foreign IP taxation has become a major issue. The German Federal Ministry of Finance (MoF) published guidance that, despite the constitutional concerns, foresees a tax assessment of foreign-to-foreign IP licence and sales transactions regarding IP registered in Germany.
The recent local developments also include the proposed reforms regarding RETT and corporate tax as well as certain covid-19 tax reliefs.
i Tax-efficient repatriation of German-source profits
When it comes to inbound tax planning (i.e., investments by a non-German investor into Germany), one of the major tax-planning considerations is usually the tax-efficient repatriation of German-source earnings and profits. Often, such repatriation is structured through the disposal of shares in the German top holding company by the non-German investor, since such capital gains are tax-exempt under either German domestic rules (and not even subject to the 5 per cent claw-back taxation if the seller does not have a permanent establishment in Germany, as recently confirmed by the German Federal Fiscal Court) or an applicable double tax treaty. These capital gains are also not subject to withholding taxes in Germany. Besides the disposal of shares to a third person, this beneficial capital gains treatment can also be achieved by way of share buy-backs that may often economically substitute a dividend distribution.
Dividend distributions are often not the preferred route for the repatriation of earnings and profits from German inbound investments as these distributions are generally subject to German withholding taxes (WHT) amounting to 25 per cent, plus solidarity surcharge of 5.5 per cent thereof (i.e., effectively 26.375 per cent). WHT can be reduced to 15 per cent under domestic provisions, or lower or even to zero under an applicable double tax treaty or the EU Parent–Subsidiary Directive. To tackle abusive tax structuring based on these reductions of WHT (treaty or directive shopping), the German legislator introduced quite harsh anti-abuse and substance requirements (Section 50d Paragraph 3 of the German Income Tax Act (GITA)). The provision excludes the reductions from WHT if, among other things, the ultimate parent would not qualify for the treaty or directive benefits and the interposed recipient of the dividend distribution was either not established for sound economic reasons or does not engage in general economic activities with sufficient substance (German substance requirements).
The ECJ held in two decisions that the German substance requirements violate EU law. Both decisions concerned dividend recipients who were resident in an EU Member State and held a controlling stake. In April 2018, the MoF issued guidelines on the further application of the German substance requirements in light of the first decision of the ECJ (Deister/Juhler) and basically limited the application of the ruling. The guidelines are extensively criticised by commentators, who take the view that the German substance requirements in their current version should in general not be applicable to EU, EEA and third-country investors due to the violation of the freedom of establishment and free movement of capital. It has been emphasised that German tax courts must apply the jurisprudence of the ECJ and can also do so based on the acte clair doctrine in third-country cases. The German legislator was requested to create a permissible regulation.
On 17 March 2021, the German government officially introduced a governmental draft for a reform of the German WHT regime containing also a revision of the anti-treaty shopping rules. The new rules would apply a two-step approach with a general presumption of treaty abuse under certain circumstances and the possibility of a rebuttal of the presumption by the taxpayer under specific conditions. This new regime would result in a significant tightening of the anti-treaty shopping rule, would consequently limit the circumstances in which non-resident companies may qualify for WHT relief and would even apply in cases where a double tax treaty already includes a specific anti-abuse rule. If the revised rules would finally be enacted as proposed, it has to be expected that, in many cases in which full WHT relief is available today, relief could be denied under the new anti-treaty shopping rule.
In the context of a tax-efficient repatriation of German dividends, it should also be noted that the German Federal Fiscal Court held that dividends that are received through a German partnership (which can even be a low-substance partnership with deemed trading activity) will be subject to tax assessment, which effectively means that WHT are refundable at the level of the partnership assessment. This refund by assessment would not be subject to German substance requirements (even if still applicable). While this obviously provides for tax-planning opportunities, the structures should be carefully planned and monitored as the refund by assessment requires that the shares in the distributing corporation can be attributed to the partnership, which might be challenged in case of a low-substance partnership.
ii German foreign-to-foreign IP taxation
In 2020, many foreign companies had to learn (sometimes the hard way) that they might have fallen within the scope of German non-resident taxation with respect to past IP licence or sale transactions, even if only non-German parties were involved. Despite the constitutional concerns, the MoF has issued circulars on 6 November 2020 and 11 February 2021 and takes the view that these foreign-to-foreign IP transactions regarding IP registered in Germany are subject to German tax. The circular as of 11 February 2021 (Circular) provides for merely some relief from overly burdensome tax reporting and payment obligations in case of clearly treaty-protected cases. There is, however, no relief with regard to non-treaty-protected cases. The Circular also does not in general distinguish between licence transactions with third parties and intra-group licence transactions, that is, a preferential treatment is currently not foreseen.
For licence payments that have already been made to the licensor or will accrue until 30 September 2021, the obligation for the licensee to withhold and pay tax and file a withholding tax return has been suspended, if and to the extent the following requirements are fulfilled:
- the licensee is not tax-resident in Germany;
- the licensor is tax-resident in a treaty-protected country, entitled to treaty benefits under the applicable double taxation treaty and the licence payment is also attributable to the licensor for tax purposes; and
- the licensor (or an authorised licensee) applies for an exemption certificate with the German Federal Tax Office by 31 December 2021, whereby the agreements (including sublicensing relationships) as well as translations of the relevant passages must also be disclosed.
The simplifications described above, however, do not apply if the licensor's treaty entitlement cannot be confirmed or is doubtful. This applies, among other things, to hybrid or dual-resident companies or in other cases of conflicts of qualification, that is, the licensees are obligated to file quarterly withholding tax returns and make payments in non-treaty-protected cases.
The applicable procedure for licence payments that will accrue after 30 September 2021 depends on whether the legislator will pass the draft law already passed by the German government on 20 January 2021. Pursuant to this draft law, the German taxation of foreign-to-foreign IP transactions will continue. The new draft bill even tightens the reporting obligations for foreign taxpayers also in cases that, under treaty law, are exempt from German taxation. The German withholding tax payment obligations for IP transactions can only be avoided in treaty-protected cases by applying for an exemption certificate in advance. In addition, starting in 2022, licensees in treaty-protected cases will not be required to withhold withholding tax from royalty payments if the annual royalties do not exceed €5,000. Irrespective of any withholding tax payment obligation, the draft bill, however, further states that licensees are still required to file withholding tax returns. This will even apply to the exemption described above albeit, according to special regulations, a 'zero' withholding tax return will be sufficient.
Furthermore, the seller of a foreign-to-foreign IP sales transaction is obligated to file a tax return if German registered IP is involved. If the seller is tax-resident in a treaty-protected country at the time of the sale and the applicable treaty (at the time of the sale) assigns the right to tax capital gains resulting from the IP sales transaction to the country of residence, a 'zero' tax return may be filed. Even if a treaty-protected seller does not have to provide further information on the determination of the tax base, it is required to also disclose the IP sales transaction agreement (including sublicensing relationships) as well as translations of the relevant passages.
iii German RETT Reform
German RETT rules apply to the transfer of title in German real estate. Furthermore, the change in 95 per cent of the partners' interest in a partnership with German-situs real estate within a five-year observation period is deemed to constitute a transfer of title in the real estate to a new partnership (the Partnership Rule). Hence, RETT is assessed as if title in the property had been transferred. With respect to shares in real estate holding corporations, RETT would only be triggered if one person acquires or unifies in its hands 95 per cent or more in the respective corporation (the Corporation Rule).
The current law is, however, viewed as being prone to circumvention. The Partnership Rule can be avoided by having the purchaser initially acquire a 94.9 per cent interest, while the selling partner remains in the partnership with its 5.1 per cent partnership interest until the expiry of the five-year observation period. The Corporation Rule can be evaded by simple co-investment structures in which an unrelated co-investor acquires 5.1 per cent.
After more than two years of discussions, the main points of the May 2019 draft proposal are very likely to be enacted. In April 2021, the finance committee of the German parliament has passed an amendment proposal that was accepted in the German parliament (Bundestag) on 21 April 2021 and is expected to be accepted in the second chamber (Bundesrat) on 7 May 2021. The proposal is, from a conceptual point of view, generally in line with the previous draft bills.
Under this proposed legislation, it is intended to close or at least reduce these perceived loopholes by a variety of legislative measures. The relevant threshold of 95 per cent will be lowered to 90 per cent, the general observation period will be extended from five to 10 years and a new provision, modelled on the Partnership Rule, will be introduced for corporations (the New Corporation Rule). Under the New Corporation Rule, a change in the shareholder base of property-owning corporations of at least 90 per cent of the company's capital within a period of 10 years will trigger RETT even if there is no single shareholder or group of related shareholders who eventually control the real estate owning company. This means that only an existing shareholder can act as a RETT blocker by remaining invested with more than 10 per cent.
The proposal also provides for an exemption for listed companies. This exemption addresses concerns that under the New Corporation Rule, publicly listed companies could become subject to RETT every time their shareholder base changes by 90 per cent. This would place companies without a stable anchor shareholder with a permanent minimum stake of 10 per cent clearly at disadvantage. However, the exemption requires a listing on stock exchanges authorised under the German Securities Trading Act (or certain equivalent EU/EEA/other stock exchanges) and applies only to trades conducted there. OTC transactions shall not be covered.
The new rules are not to be applied retroactively but only for transactions after 30 June 2021. However, transactions signed before 1 July 2021, but closed afterwards, will be subject to the new rules. Furthermore, the 10-year observation period under the new Partnership Rule shall be applied to transactions that are still within the five-year observation period under current law. For the purposes of the watching period under the New Corporation Rule, however, transactions before 1 July 2021 would not be considered at all. For structures in which an investor has crossed the now applicable 90 per cent threshold but fell short of the old 95 per cent threshold, a 'windfall profit' should be avoided and the old regime still continues to apply: RETT is triggered if such investor were to cross the 95 per cent threshold, which continues to apply thus far.
iv Corporate tax reform
On 19 March 2021, the MoF published a draft bill for a law to modernise corporate income taxation that was passed by the Cabinet on 24 March 2021. The core of the bill is the introduction of a corporate income tax option, allowing partnerships and partnership companies to be taxed similar to a corporation. The main intention is to strengthen the international competitiveness of family businesses in the legal form of a limited liability partnership or general partnership. The corporate income tax option shall be effective as of the year 2022. The application required for exercising the option shall be submitted before the beginning of the fiscal year. Furthermore, the transition to corporate taxation is considered a change of legal form.
The reorganisation tax law shall also be globalised. To date, reorganisations of corporations without realisation of hidden reserves have only been possible with regard to certain EU and EEA companies as well as with regard to cross-border mergers. The draft bill includes various regulations to further globalise the reorganisation tax law provided that the contemplated reorganisation has the structural characteristics of a domestic reorganisation and that German taxation rights are not restricted or excluded.
v Covid-19 tax reliefs
The legislator has responded to the challenges posed by the covid-19 pandemic with various tax reliefs. In addition to a sectoral reduction of the VAT rate for the gastronomy as well as tax-related liquidity assistance (e.g., reduction of prepayments, granting of deferrals, waiver of enforcement measures and late-payment surcharges), various provisions provide relief for small and medium-sized enterprises in a general way. Specifically, the Third Corona Tax Relief Act of 26 February 2021 has raised the maximum amount of loss carrybacks for 2020 and 2021 to €10 million and introduced a 'provisional carryback' for 2021. However, the 'provisional carryback' is capped at 30 per cent of the total amount of income. Companies are calling for a significant extension of these rules to higher amounts in order to support larger corporations as well. In addition, retrospective conversion tax periods were, in principle, extended from 8 to 12 months for reorganisations taking place in 2021.
International developments and local responses
As set forth in the EU Anti Tax Avoidance Directive (ATAD II), Germany has to implement new rules to target hybrid mismatches as well as changes to its CFC regime.
In mid-2020, mandatory reporting rules entered into force, which is why any intermediary (i.e., any adviser) who helps taxpayers to set up cross-border arrangements must be aware of the reporting requirements.
While there are still no concrete proposals on what is referred to as the German taxation of the digital economy, German tax authorities have increased their efforts on tax audits performed jointly with the tax authorities of other countries.
i Draft ATAD II Implementation Act
On 17 March 2021, the MoF published a final draft bill to implement Articles 5, 7, 8, 9 and 9b of ATAD II, which was passed by the Cabinet on 24 March 2021. This Draft ATAD Implementation Act (the Draft AIA) therefore includes, inter alia, anti-hybrid provisions to cover hybrid mismatches.
Article 9 Paragraph 2 ATAD II applies to the deduction or non-inclusion of hybrid instruments such as hybrid bonds or participation rights – where payments on hybrid instruments are deductible in the state of the payer (deduction) but the state of the recipient does not qualify the payments as taxable income (no inclusion) (D/NI scenario). In this context, ATAD II recommends as a primary measure (response) denial of deduction at the level of the payer, and as a secondary measure (defensive rule) taxation of payments at the level of the recipient.
To date, German tax law 'only' contains a defensive rule, which denies the tax exemption of (95 per cent of) dividends received as far as the payments were tax deductible at the level of the payer.
According to the Draft AIA, expenses on the use of capital are not deductible if the corresponding profits are not subject to a tax, which is comparable to German taxation. In these cases, sec. 4k German Income Tax Code (new) shall deny the deduction at the level of the payer (primary measure by way of denial of deduction). According to the explanatory notes to the Draft AIA, this will also apply to mismatches arising from cross-border compensation payments made in securities lending transactions or repo transactions. Furthermore, the new rules shall also apply to 'hybrid transfers' (i.e., to transactions in which the profit of capital assets is attributable to more than one person participating in the transaction). Within this context, the Draft AIA is criticised by commentators for not providing sufficient legal certainty and for its incomplete provisions on the burden of proof.
The Draft AIA also applies to some other hybrid mismatch scenarios, in particular to another D/NI scenario – where 'reverse hybrid entities' are treated as transparent in their state of residency but are treated as opaque (and taxable entities) in the residency state of their shareholders, to double deduction scenarios – where expenses of the same taxpayer are deductible in two different states, and to imported hybrid mismatch scenarios. However, payments without a hybrid mismatch that benefit from low taxation or no taxation at the level of the recipient under the general tax regime of the state of the recipient should not be affected by the Draft AIA.
Last but not least, the Draft AIA also contains a new, and, unfortunately very aggressive version of the long outdated German CFC rule. The new rule, if implemented, will have a wider scope. Not only the holders of shares but also the holders of certain equity capital instruments will qualify as related parties for CFC purposes. Non-tax resident shareholders can also be subject to the new CFC rule if they hold shares in a foreign corporation in a German PE. Most notably, dividends income constitutes passive income if the payments are tax deductible at the level of the payer or if the taxpayer does not own at least 10 per cent of the shares in the payer. However, the threshold of 25 per cent below which low taxation is assumed will not change (i.e., foreign passive income will be subject to the CFC rule if it is taxed at an effective tax rate below 25 per cent in the source state).
The Draft AIA is expected to be passed by the legislator in summer 2021. While the new rules implementing ATAD II into German tax law shall, in principle, come into force with retroactive effect as of 1 January 2020, the modified CFC rule will apply from the tax assessment period 2022 onwards. The retroactivity of the ATAD II implementation is criticised by commentators and may be amended during parliamentary debate.
ii EU proposals for mandatory reporting of tax planning
On 5 June 2018, amendments to the Directive on Mutual Administrative Assistance 2011/16/EU were finally issued, according to which intermediaries, as well as under certain requirements the users, are obliged to report these arrangements to their domestic tax authorities within a strict time frame (DAC6 Reporting Obligations). An intermediary is any person who designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement, that is, specifically advisors giving tax advice with regard to cross-border arrangements in general qualify as intermediary.
On 21 December 2019, the German legislator passed a bill implementing the DAC6 Reporting Obligations into German domestic law. Although the EU member states were allowed to postpone the implementation of the DAC6 Reporting Obligations due to the challenges posed by the covid-19 pandemic, the MoF decided not to make use of this option. Pursuant to the German law, cross-border arrangements had to be reported to the German tax administration until the end of August 2020 if the first step of the reportable cross-border tax arrangement has been implemented between 28 June 2018 and 30 June 2020. Furthermore, since 1 July 2020, onwards, any reportable arrangement has to be disclosed within 30 days after the arrangement is made available for implementation, is ready for implementation or after the first step of the implementation has been made, whichever occurs first.
According to the DAC6 Reporting Obligations, any arrangement that fulfils one of the 'hallmarks' of a cross-border arrangement either on a stand-alone basis (for certain hallmarks) or in connection with the main benefit test must be reported, if the arrangement also fulfils the cross-border dimension. Pursuant to the German law, a tax arrangement is also considered a cross-border tax arrangement, if a tax arrangement consists of a series of arrangements and at least one step or partial step of the series fulfills the cross-border dimension. In this case, the DAC6 Reporting Obligations apply with regard to the whole series. The law implementing the DAC6 Reporting Obligations contains numerous hallmarks, which describe all sorts of cross-border tax structures and their essential characteristics. Some of these hallmarks are particularly important for advisers. First, the use of a tax arrangement, which has a substantially standardised documentation or structure and is available to more than one relevant taxpayer without a need to be substantially customised for implementation, is reportable, if the requirements of the main benefit test are fulfilled. Second, tax structures involving deductible cross-border payments between related parties are reportable in many cases. These structures must, inter alia, be reported if the payment is not subject to corporate taxation, for example, because the payment is tax exempt, it benefits from a preferential regime or the recipient-jurisdiction imposes for other reasons no taxes on it. Third, the cross-border transfer of assets is reportable in case the tax valuation of the assets differs significantly in the jurisdictions involved. Although practical experience shows that some hallmarks have a greater practical relevance than others, it should in general be evaluated on a case-by-case basis if certain arrangements also fulfil further hallmarks; for example, the transfer pricing hallmarks and the conversion, as well as circular transaction hallmarks, are also of great practical relevance.
The introduction of the DAC6 Reporting Obligations and its short-term implementation are criticised by commentators in Germany. Many questions have not yet been clarified and in some cases the implementation goes beyond the purpose of the law. As of 29 March 2021, the MoF published a circular with guidance regarding the DAC6 Reporting Obligations. Some questions, however, still remain unclear.
iii EU proposals on taxation of the digital economy
The taxation of income from digital and digitised business activities in the market or user states, in which no taxation can occur due to the lack of a permanent establishment or a permanent representative, is the subject of ongoing tax policy controversy.
To date, there are no legislative initiatives or other concrete legislative projects in Germany for a digital tax or the taxation of a significant digital presence. The German government seems to be hoping that the solutions proposed by the OECD for a global effective minimum taxation will prevail, specifically as the overall outcome of the discussion regarding the implementation of a digital tax (e.g., of 3 per cent) based on a potential EU directive is also still uncertain. The government has recently reaffirmed the support of a globally coherent solution, especially by the Inclusive Framework on BEPS, rather than national approaches.
iv Joint tax audits
The German tax authorities are increasing efforts to realise more and more joint tax audits (i.e., tax audits involving two jurisdictions carried out on the premises of multinational companies). Such coordinated cross-border tax assessments can offer advantages to the taxpayers, especially avoidance of double taxation and certainty for future tax planning. Recent changes to the EU Directive on Administrative Cooperation on 22 March 2021 (DAC7) have brought long-awaited clarity. DAC7 finally rules that, in principle, the applicable law for all officials involved in a joint tax audit shall be the law of the country in which the respective activity takes place. Furthermore, DAC7 includes a legal basis to conduct joint tax audits. Yet, DAC7 does not foresee a formal right of the taxpayer to request a joint tax audit and the final audit report described in DAC7 does not have a legally binding effect. Nevertheless, the growing number of (unsolved) mutual agreement procedures, especially pending in Germany, underlines the necessity for alternative dispute resolution approaches. Joint tax audits may offer such alternative ways to deal with international double taxation.
Outlook and conclusions
It remains to be seen whether draft legislative acts on the corporate tax reform, specifically with regard to the implementation of a corporate income tax option allowing partnerships and partnership companies to be taxed similar to a corporation, will in fact be finalised.
Furthermore, it should be expected that the requirements for a tax-efficient repatriation of profits from Germany into the investor's jurisdiction will remain in focus. Another critical issue in 2021 will very likely be the implementation of the ATAD into German law. The tax-planning community in Germany is excited to see how the German legislator will finally implement the anti-hybrid rules and the changes to the CFC rules into domestic law.
There is also some hope that at least the MoF will issue further and in particular more practical guidance with regard to the the taxation of foreign-to-foreign IP licences and sales transactions but, ideally, the legislator should take this issue off the table. Currently it is open as to whether the proposed changes to the German RETT regime will still be enacted. Nevertheless, they already influence real estate transactions because a retroactive implementation of the new rules cannot be excluded.
At the time of writing, any legislative developments are still subject to measures tackling the covid-19 challenges. Hopefully, this will finally be off the agenda when this chapter is updated next year.
1 Markus Ernst is a tax partner at Hengeler Mueller. The author would like to thank Verena Klosterkemper and Isabella Zimmerl for their assistance.