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Germany: Draft tax law includes BEPS measures including CbCR requirements

Linn-Alexander
Braun-Thorsten-100

Alexander Linn

Thorsten Braun

Germany's Ministry of Finance has issued a draft tax law including measures based on the recommendations in the final reports issued under the OECD base erosion and profit shifting (BEPS) initiative and the amendments to the EU administrative cooperation directive to introduce country-by-country reporting (CbCR).

The draft law, issued on June 1 2016, also includes certain non-BEPS-related measures in response to judicial developments in cases where Germany's Federal Tax Court (BFH) decision went against the views of the tax authorities.

Proposed changes include:

  • CbCR: The proposed country-by-country rules would require multinational companies with consolidated group turnover of €750 million ($830 million) or more to file a country-by-country report including a 'master file' and 'local file' reporting requirement for transfer pricing documentation purposes under certain conditions.

  • Treaty override provision for the application of the arm's-length principle: In 2014, the BFH held that Germany's tax treaties can limit Germany's taxing rights based on section 1(1) of the Foreign Tax Act (FTA) if the treaty contains a provision equivalent to the associated enterprises article in the OECD model treaty and if the prices paid are at arm's-length. The draft law proposes to amend the FTA to eliminate this limitation.

  • Trade tax on income subject to controlled foreign company (CFC) rules: In 2015, the BFH held that passive income of a wholly-owned, low-taxed foreign subsidiary that is subject to the German CFC rules is not subject to German trade tax. The draft law would reverse the BFH's decision.

Another change would only allow exclusion of foreign passive income of foreign permanent establishments for trade tax purposes if the foreign permanent establishment (or partnership) is situated in the EU and has sufficient substance. This change is expected to restrict the use of certain IP structures where license income may not be subject to taxation for trade tax purposes.

The draft law includes the reestablishment of the trade tax on certain dividends distributed by a nonresident subsidiary to a German parent company that is a controlled entity in a German fiscal unity. The draft law would further clarify the application of the participation exemption for banks and financial institutions. Furthermore, the draft law includes amendments to the domestic switch-over and subject-to-tax clauses to prevent the non-taxation or the low taxation of certain items of income of a taxpayer that is subject to unlimited tax liability in Germany.

Alexander Linn (allinn@deloitte.de) and Thorsten Braun (tbraun@deloitte.de)

Deloitte

Tel: +49 89 29036 8558 and +49 69 75695 6444

Website: www.deloitte.de

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