German Ministry of Finance draft bill (Pillar 2) to ensure a global minimum taxation for groups of companies

The main topics and changes are:

• A top-up tax compensation mechanism within the minimum tax group; 
• The addition of various provisions from the Administrative Guidance of the Inclusive Framework published in February 2023; and
• Details on penalties.

Furthermore, the draft bill provides for accompanying measures to align the implementation of a global minimum tax with current German tax rules. The impacts include the following:

• These measures would abolish the German royalty deduction limitation rule;
• The low-tax threshold for German controlled foreign company (CFC) tax purposes would be lowered from 25% to 15%; and
• There would be a carve-out of CFC income from German trade tax.

Top-up tax compensation mechanism

The initial Pillar 2 draft already provided for the introduction of a minimum tax group comprising all German resident constituent entities. The minimum tax group parent is responsible for the submission of the tax return and owes any German top-up tax. For this purpose, any German top-up tax due is allocated from the German constituent entities to the German minimum tax group parent. 

The new draft bill confirms that German constituent entities whose top-up tax amounts are allocated to the minimum tax group parent have a legal obligation to pay compensation to the minimum tax group parent. Correspondingly, top-up tax refunds are remitted to the minimum tax group parent, which must be compensated by the latter to the constituent entities.

Provisions from the Administrative Guidance

Election to include all dividends from portfolio shareholdings in the computation of Global Anti-Base Erosion (GloBE) income or loss;Equity gain or loss inclusion election;Election to exclude the amount of a debt release included in the financial accounting net income or loss from the computation of GloBE income or loss;Transitional rules for allocating taxes arising under blended CFC tax regimes.

Provisions on penalties

The penalty provisions will impose penalties up to EUR 30,000 per instance of failure to properly submit the minimum tax report. However, no penalty will be applied if the taxpayer proves that reasonable measures have been taken to justify a late or incorrect submission of the minimum tax report.

Accompanying measures

The draft with changes to existing German tax rules regarding the global minimum tax begins to apply from 2024. Companies that are not in-scope of the global minimum tax will also benefit from the accompanying measures.

Abolition of the German royalty deduction limitation for tax purposes

The German royalty deduction limitation rule disallows the deduction of related-party royalty payments preferentially taxed at the recipient level under a non-OECD (non-nexus) compliant, preferential tax regime at an effective rate of below 25%. With the introduction of the global minimum taxation agreement, the German royalty deduction limitation rule would be abolished. This is justified due to the numerous internationally coordinated measures against profit shifting, such as the global minimum taxation agreement.

Reduction of the low-tax threshold for German CFC purposes

The low-tax threshold for German CFC purposes in the German Foreign Tax Act is currently set at 25%. A reduction of the low tax threshold to the future global minimum tax rate of 15% is foreseen. It is intended to align German CFC taxation with global minimum taxation regarding the taxation of foreign activities.

Exclusion of CFC income from German trade tax

Today, CFC income is subject to both German income tax and trade tax. To harmonise German CFC taxation and global minimum taxation regarding the taxation of foreign activities, the draft bill excludes CFC income from taxable income for trade tax purposes.

The bill will likely not become law before December 2023.