The legislation uses targeted fiscal measures in its endeavour to deter individuals and companies from investing in tax jurisdictions that fail to satisfy internationally recognised standards in the areas of transparency in tax matters, unfair tax competition and for the implementation of the BEPS Minimum Standards. In this way, these tax jurisdictions would likewise be encouraged to comply with international standards, in the future, in the area of taxation. The legislation should apply from 1.1.2022. For tax jurisdictions that were not yet on the ‘blacklist’ as at 1.1.2021, the legislation shall apply as of 1.1.2023 insofar as these jurisdictions are subsequently added.
Content and consequences of the law
The aim is supposed to be achieved through so-called defensive measures when conducting business in or relating to non-cooperative states. The defensive measures can be classified as follows:
(1) Prohibition on the deduction of business expenses and work-related costs – It would no longer be possible to claim a tax deduction for expenses arising from business transactions relating to natural or legal persons, associations of persons or pools of assets resident or based in a non-cooperative tax jurisdiction.
(2) Stricter CFC rules – If a so-called intermediate company is based in a tax haven, then stricter CFC rules would apply. Companies would thus no longer be able to avoid tax payments by shifting income to a company in a tax haven because the entire active and passive income of the intermediate company would be subject to CFC rules.
(3) Stricter withholding tax measures – These would apply, for example, to interest costs that are paid to persons who are resident in tax havens. As a result, the limited tax liability of persons based in tax havens would be expanded to include certain types of income (in particular, all income from financing fees) that, moreover, would be subject to withholding tax.
(4) Measures relating to profit distributions and sales of shares – In the case of profit distributions and sales of shares, tax exemptions and provisions in double taxation agreements would be restricted or denied if these payments are made by a corporation based in a tax haven, or if shares are sold in a company based in a tax haven.
(5) Extension of duties of cooperation – It is envisaged that, in particular, it will be necessary to provide a detailed presentation and documentation of the business ties and contractual relationships, the significant assets employed, the selected business strategies, the market and competitive conditions as well as of the natural persons that have direct or indirect shareholdings in a company in the non-cooperative tax jurisdiction.
Please note: A tax jurisdiction would be regarded as being non-cooperative where there is either a lack of sufficient transparency in tax matters, where unfair tax competition prevails or if there is no compliance with the BEPS Minimum Standards. There are 17 countries altogether on the EU ‘blacklist’, such as, e.g., Bermuda or the United Arab Emirates.