The Corporate Tax Planning Law Review: Germany

Introduction

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 OECD's Action Plan on Base Erosion and Profit Shifting (BEPS), 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 more and more 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 following 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 (RETT) 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 might have agreed on in respect of 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 thereon, resulting in an aggregate rate of 15.825 per cent). This rate applies both to resident and to non-resident corporations to the extent that their income is subject to German tax by assessment – for instance to income derived through a German permanent establishment (PE) 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 PE 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 is deemed to constitute a non-deductible expense so that, as a consequence, only 95 per cent of any dividends received is 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 PE maintained in Germany. In this case, too, 5 per cent of any such capital gains is deemed to constitute a non-deductible expense so that only 95 per cent of capital gains from the disposal of shares is 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 surcharge 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 Germany. In addition to 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 earnings before interest, taxes, depreciation and amortisation (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 International Financial Reporting Standards principles (stand-alone exception)) and if the debt-financed entity can prove that its equity ratio as per the previous balance sheet date was better or no worse than by 2 per cent compared with 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 PE or PEs. 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) is the add-back reversed (a 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 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.

In principle, German RETT rules apply to the transfer of title in German real estate and to certain changes of a participation in partnerships and corporations with German situs real estate. After a lengthy discussion, Germany has amended the RETT rules, in particular by lowering thresholds and extending observation periods.

In respect of shares in real estate holding corporations, RETT is triggered if one person acquires or unifies in their hands 90 per cent or more in the respective corporation (the 'corporation rule'). Furthermore, 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 controls 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 'new corporation rule').

Addressing 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, Germany also introduced an exemption for listed companies. Otherwise, companies without a stable anchor shareholder with a permanent minimum stake of 10 per cent clearly would have been disadvantaged. However, the exemption requires a listing on stock exchanges authorised under the German Securities Trading Act (or certain equivalent EU, EEA or other stock exchanges) and applies only to trades conducted via such stock exchanges and not to over-the-counter trades.

In addition, the change in 90 per cent of the partners' interest in a partnership with German situs real estate within a 10-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.

The new rules apply to transactions with a closing date after 30 June 2021. Furthermore, the 10-year observation period under the new partnership rule applies to earlier transactions where the former five-year observation period has not expired before or on 30 June 2021. For the purposes of the observation period under the new corporation rule, however, transactions before 1 July 2021 are not considered at all. For structures in which an investor has crossed the new 90 per cent threshold but fell short of the former 95 per cent threshold, a 'windfall profit' should be avoided and the old regime still continues to apply. RETT is triggered if such an investor were to cross the 95 per cent threshold, which continues to apply thus far.

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 90 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 90 per cent or more of the shares in a corporation, only the person acquiring such shares is liable for the payment of the tax.

Local developments

The tax-efficient repatriation of German-source profits is subject to recently introduced legislation further tightening the German anti-treaty shopping rules.

The German foreign-to-foreign intellectual property (IP) taxation continues to be a major issue. The German legislator has extended the procedural reliefs, but, despite the constitutional concerns, rather tightened reporting obligations for foreign-to-foreign IP licence and sales transactions regarding IP registered in Germany.

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, as such capital gains are tax exempt under either German domestic rules (and not even subject to the 5 per cent clawback taxation if the seller does not have a PE 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 (WHT) in Germany. In addition to the disposal of shares to a third person, this beneficial capital gains treatment can also be achieved by way of share buy-backs, which 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 WHT amounting to 25 per cent, plus solidarity surcharge of 5.5 per cent thereon (i.e., effectively 26.375 per cent). Under domestic provisions, WHT can be reduced to 15 per cent 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), Section 50d, Paragraph 3 of the German Income Tax Act (GITA) provides for quite harsh anti-abuse and substance requirements. The recently amended 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 either was not established for sound economic reasons or does not engage in general economic activities with sufficient substance (German substance requirements).

The European Court of Justice (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 Ministry of Finance (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.

With effect from 9 June 2021, the German legislator introduced a reform of the German WHT regime also containing a revision of the anti-treaty shopping rules. The new rules 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 results in a significant tightening of the anti-treaty shopping rules, consequently limits the circumstances in which non-resident companies may qualify for WHT relief and even applies in cases where a double tax treaty already includes a specific anti-abuse rule. In many cases in which full WHT relief was available before, relief will be denied under the new anti-treaty shopping rules. One should additionally take into account that further changes to Section 50d, Paragraph 3 GITA and the German WHT regime might be introduced following the EU's 'unshell proposal'. In particular, it remains to be seen whether the Member States will consider the substance requirements as set up by the unshell proposal to be missed in cases of intra-group outsourcing and how entities that, by the very nature of their business, require hardly any 'substance' would be treated under these new unshell rules.

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 WHTs are refundable at the level of the partnership assessment. This refund by assessment would not be subject to German substance requirements (even if they are still applicable). Although, obviously, this 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 in respect of past IP licence or sale transactions, even if only non-German parties were involved. Although the MoF has provided for some relief in cases of licensors that are tax resident in a treaty-protected country, new legislation consolidates German tax claims on foreign-to-foreign IP transactions. Despite the constitutional concerns, the MoF issued circulars on 6 November 2020, 11 February 2021 and 14 July 2021, sustaining the view that these foreign-to-foreign IP transactions regarding IP registered in Germany are subject to German tax. The circulars of 11 February 2021 and 14 July 2021 (the Circulars) provide merely for some relief from overly burdensome tax reporting and payment obligations in cases of clearly treaty-protected cases. There is, however, no relief with regard to non-treaty-protected cases. The Circulars also do not in general distinguish between licence transactions with third parties and intra-group licence transactions (i.e., a preferential treatment is currently not foreseen).

According to the Circulars, for licence payments that have already been made to the licensor or that will accrue until 1 July 2022, the obligation for the licensee to withhold and pay tax and file a WHT return has been suspended, if and to the extent that the following requirements are fulfilled:

  1. the licensee is not tax resident in Germany;
  2. the licensor is tax resident in a treaty-protected country and is entitled to treaty benefits under the applicable double taxation treaty and the licence payment is also attributable to the licensor for tax purposes; and
  3. the licensor (or an authorised licensee) applies for an exemption certificate with the German Federal Tax Office by 30 June 2022, 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. In such cases, the licensees are obligated to file quarterly WHT returns and make payments in non-treaty-protected cases.

The applicable procedure for licence payments that will accrue after 1 July 2022 is subject to the slightly amended and even stricter rules pursuant to the Deduction Tax Relief Modernisation Act. Pursuant to the new law, the German taxation of foreign-to-foreign IP transactions will continue. The new law even tightens the reporting obligations for foreign taxpayers in cases that, under treaty law, are exempt from German taxation. The German WHT payment obligations for IP transactions can be avoided only 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 WHT from royalty payments if the annual royalties do not exceed €5,000. Irrespective of any WHT payment obligation, the new provision, however, further states that licensees will still be required to file WHT returns. This will even apply to the exemption described above, albeit, according to special regulations, a 'zero' WHT 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 double tax 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 disclose the IP sales transaction agreement (including sublicensing relationships) as well as translations of the relevant passages.

iii Corporate tax reform

On 25 June 2021, the German Parliament passed legislation to modernise corporate income taxation taking effect from fiscal years beginning on or after 1 January 2022. The core element 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 application required for exercising the option must be submitted before the beginning of the fiscal year in which the partnership wishes to be treated as a corporation. Furthermore, the transition to corporate taxation is considered a change of legal form (which triggers certain lock-up and retention periods under the German

Reorganisation Tax Act).

In addition, the legislation includes various regulations to further globalise German 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.

iv Covid-19 tax relief and further plans of the new government

The new German government, the 'traffic light coalition', which has been in office since December 2021, plans to introduce further changes to corporate and income taxation. Primarily, certain covid-19 tax relief will be extended, especially the rules on loss carry-backs. Although the maximum amount of loss carry-backs for 2020 and 2021 was raised to €10 million in 2021 and a 'provisional carry-back' was introduced for 2021 with a cap at 30 per cent of the total amount of income, the new coalition has proposed to extend these rules to fiscal years 2022 and 2023. Furthermore, the corporate tax reform described above will be reviewed and transactions involving real estate tackled by further changes to the German RETT rules and extended documentation obligations.

International developments and local responses

After lengthy discussion, Germany has implemented new rules to target hybrid mismatches as set forth in the EU Anti Tax Avoidance Directive (ATAD II), as well as changes to its controlled foreign companies (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.

Although there are still no concrete proposals on what is referred to as German taxation of the digital economy, German tax authorities, also in light of amendments to the relevant EU directive, have increased their efforts on tax audits performed jointly with the tax authorities of other countries.

i ATAD II Implementation Act

On 25 June 2021, the Bundesrat, Germany's second parliamentary chamber, passed a bill to implement Articles 5, 7, 8, 9 and 9b of ATAD II. This ATAD Implementation Act (the 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.

According to the new Section 4k, Paragraph 1, GITA, expenses on the use of capital are not deductible if and to the extent that the corresponding profits are not subject to such a tax that is comparable with German taxation. In these cases, the provision denies the deduction at the level of the payer (primary measure by way of denial of deduction). According to the explanatory notes to the AIA, Section 4k, GITA also applies to mismatches arising from cross-border compensation payments made in securities lending transactions or repo transactions. Furthermore, the new rules apply to 'hybrid transfers' (i.e., transactions in which the profit of capital assets is attributable to more than one person participating in the transaction).

Section 4k GITA 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 (Paragraphs 2 and 3), to double deduction scenarios where expenses of the same taxpayer are deductible in two different states (Paragraph 4) and to imported hybrid mismatch scenarios (Paragraph 5). Such imported mismatch scenarios might arise if deductible expenses and corresponding income cause a mismatch in another state that is not eliminated by that state but 'imported' to Germany via one or more transactions. 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. Section 4k GITA is criticised by commentators for not providing sufficient legal certainty and for being incomplete in terms of burden of proof. It remains to be seen whether administrative guidelines and jurisdiction on the various covered scenarios will bring more clarity to Section 4k GITA as it stands.

Last but not least, the AIA also contains a new – and, unfortunately very aggressive – version of the long-outdated German CFC rule. The new rule has a wider scope. Not only the holders of shares but also the holders of certain equity capital instruments 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 remains unchanged (i.e., foreign passive income is subject to the CFC rule if it is taxed at an effective tax rate below 25 per cent in the source state). Due to Section 4k, Paragraph 6, GITA, the extended definition of 'related parties' applies also to the new anti-hybrid provisions of Section 4k GITA as described above.

The new legislation based on the AIA has basically come into force with effect as of 26 June 2021, with Section 4k, Paragraph 6, GITA in connection with the modified CFC rule, however, applying with retroactive effect as of 1 January 2020.

ii Mandatory reporting of tax planning

Following amendments to the Directive on Mutual Administrative Assistance 2011/16/EU regarding tax arrangements (DAC6) in 2018, the German legislator introduced rules requiring intermediaries as well as, under certain requirements, users 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 (i.e., specifically, advisers giving tax advice with regard to cross-border arrangements in general qualify as an intermediary). The reportable cross-border arrangements have to be disclosed within 30 days after the arrangement is made available for implementation or 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 has a 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 fulfils 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 that 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. The main benefit test requires that obtaining a tax benefit is the main goal or one of the main goals of the respective arrangement. 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 (e.g., because the payment is tax exempt, if it benefits from a preferential regime or if for other reasons the recipient jurisdiction imposes 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 their short-term implementation, despite the covid-19 pandemic, have been criticised by commentators in Germany. The answers to many questions have not yet been provided and in some cases the implementation goes beyond the purpose of the law. On 29 March 2021, the MoF published a circular with guidance regarding the DAC6 Reporting Obligations. Some answers, however, still remain unclear. It also remains to be seen whether the new German government will extend the DAC6 Reporting Obligations to national arrangements as has been proposed within the (non-binding) coalition agreement.

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 PE 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 for the taxation of a significant digital presence. The German government seems to be hoping that the solutions proposed by the OECD for 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 and beyond

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. Changes to the Directive on Mutual Administrative Assistance 2011/16/EU 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 on which to conduct joint tax audits within the European Union. However, 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. Finally, Germany has joined the circle of countries taking part in pilot projects and first cases of the OECD's International Compliance Assurance Programme (ICAP). ICAP is a risk assessment programme especially for transfer pricing issues that tries to increase cross-border tax certainty by granting an 'assurance letter' to audited multinational enterprises jointly signed by the involved jurisdictions.

v Tax Haven Defence Act

The Tax Haven Defence Act of 25 June 2021 contains several measures applicable from 1 January 2022 rendering it more difficult for individuals and companies with business relationships with states and territories that are on the EU list of non-cooperative tax jurisdictions ('the black list') to avoid paying taxes in Germany. The measures include, for example, the denial of tax benefits and deductions. Quite a few questions regarding the Tax Haven Defence Act are unanswered (e.g., its applicability to partnerships) and it remains to be seen whether the German tax authorities will issue further guidance.

Outlook and conclusions

It will be interesting to see whether 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 remain untouched or be revised by the new German government.

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 2022 will very likely be the practical consequences of the ATAD implementation. The tax planning community in Germany is excited to see how the German tax authorities will execute the new anti-hybrid rules and the changes to the CFC rules.

There is also some hope that at least the MoF will extend the procedural relief and issue more practical guidance with regard to the taxation of foreign-to-foreign IP licences and sales transactions, especially with regard to third-party transactions, but, ideally, the legislator should take this issue off the table. Although the long-discussed changes to the German RETT have finally been introduced, some practical questions remain and further amendments seem possible (especially regarding further documentation obligations).

Footnotes

1 Markus Ernst is a tax partner at Hengeler Mueller. The author would like to thank Verena Klosterkemper and Isabella Zimmerl for their assistance.

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