New Minimum tax law in Germany - Introduction
On December 27, 2023, the Implementation Act for the Minimum Tax Directive (Minimum Tax Act for short) was promulgated.
The Bundestag had previously passed the law on November 10, 2023 and the Bundesrat subsequently gave its approval on December 15, 2023.
The new Minimum Taxation Act serves to implement the
EU Minimum Taxation Directive, which the EU member states were obliged to implement by the end of 2023.
Content of the new minimum tax law
The core of the transposition law - which in its full name is the "Law on the implementation of the Directive to ensure global minimum taxation for multinational enterprise groups and large domestic groups in the Union" - is the regulation of effective minimum taxation at a global level.
It is intended to counteract threats to competition and aggressive tax planning.
To this end, the international community (G20 countries in cooperation with
the OECD) has taken certain measures to combat profit reduction and profit shifting.
The new minimum tax law applies to all financial years beginning after December 31, 2023, with the exception of the secondary supplementary tax regulation.
The secondary supplementary tax regulation only applies to financial years beginning after December 30, 2024.
The two-pillar solution
The Minimum Taxation Act is part of the so-called two-pillar solution and is aimed in particular at implementing the second pillar ("Pillar Two").
The first of these two pillars ("Pillar One") of the international agreements on which this is based provides for new tax nexus points and regulations for the distribution of profits between several countries.
Particularly due to advancing digitalization, companies would otherwise often operate in other countries without having a physical presence in that country.
As a result, profits could be taxed in a place where they were not generated. In this respect, the first pillar affects the question of the "where" of taxation. The first pillar is currently still the subject of political debate.
The second pillar concerns regulations for the introduction of effective minimum taxation at a global level and therefore the question of how high taxation should be. Corresponding regulations are intended to counteract aggressive tax planning and harmful competition.
Irrespective of how an individual state structures tax liability and the extent to which tax concessions are to be granted, for example, a general minimum threshold for taxation should apply. This should make tax planning less risky. In order to close gaps in taxation, certain options for subsequent taxation should apply.
The second pillar and the associated provisions of the Minimum Tax Act are intended to remedy this. The new Minimum Tax Act obliges larger companies to pay tax on profits in certain cases. Any negative difference to the specified minimum tax rate must be retaxed in the home country.
Adjustment of income and foreign tax regulations
The adjustment of income tax and foreign tax must be accompanied by the introduction of the Minimum Tax Act.
Who is affected by the Minimum Taxation Act?
The new minimum taxation law binds large nationally or internationally active companies or groups of companies with a turnover of at least EUR 750 million in at least two of the last four financial years. The legal form of the company or group of companies is irrelevant.
There is an exception to this in accordance with Section 83 of the Minimum Taxation Act if the company's international activities are subordinate. This is the case if the company has business units in no more than 6 tax jurisdictions and the total assets of these business units do not exceed EUR 50 million. In this case, these are not taxable business units.
The provisions of the new minimum tax law pose major challenges for the companies concerned with regard to the necessary procurement and evaluation of the extensive data. The prescribed calculation system can only be complied with if these large volumes of data are comprehensively evaluated. Companies often lack this data, have not collected it in the past or it is not or not fully stored in the relevant IT systems.
However, the new minimum tax law provides for certain simplifications and transitional regulations for the first three years. Specifically, this relates to the simplified materiality test, the simplified effective tax rate test and the substance test.
There are also other simplifications without time limits, such as in Section 80 of the Minimum Tax Act for immaterial business units upon application.
Concept of minimum tax
General
The minimum tax applicable under the new implementation law is made up of three factors:
- the primary,
- the secondary; and
- the national supplementary tax amount.
Primary and secondary
The primary and secondary supplementary tax amounts relate to the difference in the event of under-taxation of a business unit.
The parent companies of the corporate group are generally subject to the primary supplementary tax regulation.
The secondary supplementary tax regulation serves as a subsidiary catch-all provision for cases that are not already covered by the primary supplementary tax amount.
National Supplementary Tax
The national supplementary tax amount is the increase amount determined in the Federal Republic of Germany for the respective business unit.
The tax increase amount is calculated on the basis of a minimum tax rate of 15 percent.
Overall, the minimum tax is a separate tax that applies in addition to the income and corporation tax that is due anyway, irrespective of income and legal form.
New Minimum tax law in Germany - Conclusion
Germany's enactment of the Minimum Tax Act marks a significant step towards aligning with the EU's directive for global minimum taxation, aiming to curb aggressive tax planning and ensure fair competition.
Effective from the fiscal year beginning after December 31, 2023, this legislation targets large multinational and domestic corporations, setting a minimum tax rate of 15% to prevent profit shifting and reduce tax evasion.
With its comprehensive approach and inclusion of transitional simplifications, the law represents an important shift in international tax policy, reinforcing Germany's commitment to the OECD and G20's two-pillar solution for global tax reform.
Final thoughts
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