Germany’s federal cabinet on March 24 adopted a bill implementing the EU’s Anti-Tax Avoidance Directive (ATAD). The German law contains stricter rules to fight aggressive tax avoidance strategies used by multinational corporations. The bill contains provisions regarding hybrid mismatch prevention, controlled foreign company rules, and exit taxation.
“You can have a fair society only if you have a fair tax system,” Finance Minister Olaf Scholz said. “Large corporations must be stopped from shirking their tax responsibilities. Everyone must pay their fair share. The draft legislation we adopted today shows that we will not relent. We are closing tax loopholes. And Germany is not alone in this effort. We are taking action in concert with our European partners.”
The bill (Gesetz zur Umsetzung der Anti-Steuervermeidungsrichtlinie) further advances the harmonization of corporate tax law in the EU, the German Federal Ministry of Finance said, noting that Germany already fulfills most EU standards on this matter and is now taking steps to do even more.
The rules to eliminate differential tax treatment in connection with hybrid mismatches will prevent companies from deducting business expenses multiple times and deducting business expenses in situations where the relevant income is not subject to tax, the government said.
The bill also further tightens Germany’s controlled foreign company (CFC) rules. “This means that Germany’s efforts to prevent multinational corporations from shifting their profits to low-tax jurisdictions will gain legal certainty and be brought up to date,” the finance ministry said.
The criteria for determining control will be adapted, and in the future, the determination of control will no longer be based on whether a CFC is controlled by a domestic taxpayer but instead will take the overall composition of shareholders into account.
In regards to multi-tier corporate structures, CFC rules no longer will permit the consolidation of losses at the ultimate foreign entity level.
The bill also amends Germany’s provisions on exit taxation to better align them with EU standards requiring the taxation of unrealized gains in cases where a taxpayer transfers assets abroad or moves its tax residence to another country, and which also give taxpayers the option to pay these exit taxes in installments over five years.
In the case of exit taxes payable by natural persons, the bill standardizes deferral rules and provides for measures to improve the rules on taxpayers returning to Germany and prevent tax avoidance in connection with significant profit distributions.