Major changes to international tax law as of 1.1.2024
Minimum tax rate will apply to large companies
Background
The OECD developed a two-pillar model for reforming internationally applicable tax law. The objective behind Pillar One is the expansion and reallocation of taxing rights among the home countries and market jurisdictions for groups of companies with consolidated annual revenues of at least €750 m. Pillar Two provides for a global minimum tax rate for such groups of companies.
A discussion draft on the German domestic implementation of the Pillar Two directive was published in March 2023; this was criticised, in particular, for the numerous content-related ambiguities and the lack of subsequent amendments to other tax legislation. The draft act now includes a number of revisions.
Minimum taxation regulations
According to the draft act, the minimum tax will be implemented as a separate tax in the Minimum Tax Act (Mindeststeuergesetz, MinStG). This should ensure that the consolidated income of all the business units of a group of companies will be taxed at a rate of at least 15%. If this minimum tax rate is not achieved in the course of the normal taxation of earnings then additional tax would be charged.
The tax would be levied irrespective of the legal form. Within a group of companies it will be possible to assert rights to compensation that will not increase or reduce income under either the Income Tax Act (Einkommensteuergesetz, EStG) or the Corporation Tax Act (Körperschaftsteuergesetz, KStG).
Please note: Business units whose top-up tax amounts are attributed to the tax group parent would then be obliged to make compensation payments to the business units that pay the minimum tax rate.
New regulations for internationally-oriented companies
Abolition of ‘royalty barrier’ rule
Moreover, the draft act provides for the abolition of the so-called ‘royalty barrier’ rule, stipulated in Section 4j EStG, with effect for expenses that arise after 31.12.2023.
Please note: Irrespective of any existing DTA, the ‘royalty barrier’ rule, which has been applicable since 1.1.2018, means that royalties may only be deducted as business expenses if the income of the related party that is the royalty creditor has been taxed at a rate of at least 25%. Given that the minimum tax rate has been specified at 15%, the abolition of this provision is logical and thus a welcome development.
CFC rules
The CFC rules aim to prevent profits generated from passive operations evading taxation in Germany by shifting them to a country with low taxes. For example, interest income in Germany is subject to tax once again if the tax rate in the foreign country is below a certain level.
Up to now, this tax rate was 25%. As of the 2024 assessment period, this low tax threshold in Section 8(5) of the Foreign Transactions Tax Act (Außensteuergesetz, AStG) will be reduced to 15%. This should bring about substantial simplification and de-bureaucratization. Furthermore, this should establish coherence between German CFC rules and the global minimum effective tax rate with reference to the taxation of foreign operations.
As a consequence of this reduction of the low tax rate to the currently applicable corporation tax rate, the CFC income will likewise cease to be subject to trade tax. In this respect, the draft act provides for the cancellation of sentences 7-9 in Section 7 of the German Trade Tax Act and, thus, terminates the liability for trade tax of AStG-related CFC income.
Please note: This adjustment likewise aims to establish coherence between minimum tax and taxation of CFC income because the minimum tax rate will not result in an increase in trade tax.
Outlook: It is thus likely that the German cabinet will adopt the draft act by a resolution in September 2023 already. The new rules will be applicable as of the 2024 assessment period.