ATAD Transposition Act - Part I - An overview of the key areas of regulation
The EU Anti-Tax Avoidance Directive 2016/1164 of 12.7.2016 (ATAD) already obliged Germany to transform this secondary legislation into national law and to adapt the respective German tax laws. By specifying minimum standards within the EU, the aim is to uniformly implement some of the outcomes of the OECD BEPS project so as to make it possible to prevent or, at least, restrict tax evasion practices in the form of aggressive tax planning as well as profit shifting.
Besides the changes in relation to CFC rules - which are subsequently discussed separately in our Part II - the Anti-Tax Avoidance Directive (ATAD) regulates the measures for disjunction and conjunction taxes, for exit tax as well as in the case of hybrid mismatch arrangements or where there are taxation incongruities and other rules. Consequently, the ATADUmsG will result in extensive legal changes pertaining to income tax, corporation tax, trade tax, investment tax and international transactions tax.
Disjunction and conjunction of business assets
In the case of a conjunction (Verstrickung), there is already a legal standard according to which the establishment of the German right to tax with respect to an individual business asset that is transferred across the border results in a notional contribution that generally has to be recognised at fair market value. The transposition of Art. 5(5) ATAD means that, in future, the values established for assets by a foreign state for disjunction tax purposes will form the basis up to a maximum of the fair market value. This provision will likewise apply to corporations. Furthermore, there is a provision for asset transfers where the restriction of the German right to tax has been lifted (e.g., the transfer of an asset from a foreign permanent establishment for which the tax credit system applies to a German permanent establishment).
In the case of a disjunction where a business asset is transferred abroad with a loss, or if there is a restriction on the German right to tax, up to now, the statutory provision provided for the creation of an off-balance sheet balancing item for tax purposes, under Section 4g of the Income Tax Act (Einkommenssteuergesetz, EStG), if a noncurrent asset has been transferred by a taxpayer with unlimited tax liability to a different EU member state.
Please note: In future, even those with restricted tax liability will fall within the scope of this provision as well as current assets and situations where there are cross-border transfers to EEA states.
There will also be adjustments resulting from the EU directive and/or ATADUmsG in the area of exit tax within the meaning of Section 6 of the Foreign Transactions Tax Act (Außensteuergesetz, AStG) in the case of natural persons who, for example, hold shares in a GmbH [German limited company] as private assets and who move abroad. In this respect, since Germany loses the right to tax in relation to these shares as a result of the move and the associated change in residency, the final levying of tax occurs on the date of the border-crossing. In view of the fundamental freedoms guaranteed under EU law, up to now, extensive deferral arrangements took effect in the case of a move to a foreign country within the EU/EEA.
In the future, the option of deferring the tax liability, for an indefinite period of time, without interest and without the provision of guarantees will no longer be possible. There will be a tightening of the rules to the effect that, upon application, the tax that is due will have to be paid in seven equal annual instalments and, usually, against the provision of guarantees. However, no interest will be added to the annual instalments in the future either.
Individuals affected by these changes would be those natural persons who were subject to unlimited income tax liability in Germany for a total of seven out of the last twelve years. Up to now, the statutory provision solely took into account that the natural persons were subject to unlimited income tax liability for at least ten years.
Hybrid mismatch arrangements
Articles 9 and 9b of the ATAD - which will be implemented for the first time via a new Section 4k EStG-E that forms part of the draft legislation passed by the German government – are aimed at restricting hybrid mismatch arrangements by not permitting business expense deductions where there are taxation incongruities; this would ensue irrespective of DTA rules.
This provision will have to be applied in the case of related persons within the meaning of Section 1(2) AStG, or between taxable persons and their permanent establishments that use a structured arrangement to obtain a tax advantage that includes a hybrid element based on different residencies and thus, coupled with this, being dealt with by the different tax regimes.
This can be the case if, for example, the business expenses are deducted in Germany but yet not taxed in the foreign state, or other comparable constellations of circumstances in the form of hybrid mismatch arrangements.
It remains to be seen what will appear in the further course of the legislative process in the Bundestag [lower house of German parliament] and the Bundesrat [upper house of German parliament] as well as in the committees. In view of the resolution of the German cabinet in spring 2021, it is likely that the objective of the German government and the Federal Ministry of Finance is, now, to transpose the 2016 EU Directive – where the original implementation deadline was 31.12.2018 – still before the end of this legislative term.
The situation will have to be kept under review to see whether or not this can be achieved and with what potential amendments. In particular, it is to be hoped that the relevant percentage rate for low taxation in the context of CFC rules (more on this in the subsequent report) will be adjusted downwards because a tax rate of 25% seems not to be appropriate and would unjustly cover a great number of taxpayers and situations.
The planned changes for the more broadly defined scope of application of the disjunction of assets that aim also to include current assets and likewise be opened up to those with restricted tax liability are to be welcomed.
Outlook: The legislative process has to be monitored, in particular, with respect to the planned tightening of exit tax in Section 6 AStG. The new rules would be applicable as of the 2022 assessment period. The current rules would have to continue to be applied for the deferrals and deadlines that are still ongoing on 31.12.2021 under the prevailing law.