Revised German draft ATAD implementation bill released
Adoption at short notice probable
As early as in mid-December 2019, the Federal Ministry of Finance (BMF) had published a ministerial draft bill implementing the Anti-Tax Avoidance Directive, ATAD, (ATAD Implementation Draft Bill – ATAD IDB) into national law. The December draft included, among other things, provisions for the neutralisation of hybrid mismatches, adjustments in the area of CFC tax rules, a significant tightening of exit taxation regarding individuals holding substantial interest in corporations, modifications of the exit taxation regarding business assets, as well as far-reaching changes in the area of transfer pricing including a new special regulation for cross-border financing arrangements. See our December 2019 Alert here.
The provisions of the ATAD IDB are mainly, but not exclusively, based on the ATAD, which was essentially to be implemented by 31 December 2018. Only for the regulations regarding the neutralisation of hybrid mismatches, the implementation period expired on 31 December 2019. Despite the opening of infringement proceedings by the EU Commission in January 2020, the German cabinet did not quickly deal with the matter. Now the BMF has revised the original draft bill and sent it to the other ministries for coordination. In particular with regard to the initiated infringement procedure, the Federal Government is likely to decide on the draft bill on 8 April 2020. This should allow the legislative process to be completed before the summer recess, despite the COVID-19 crisis.
Only selective changesLarge parts of the original draft bill remain essentially unchanged, such as the regulations on the deduction of business expenses in hybrid mismatch arrangements, on exit taxation both regarding individuals holding substantial interest in corporations and business assets as well as in the area of transfer pricing including special provisions for cross-border financial arrangements. However, some adjustments as compared to the December draft are contained in the provisions on the CFC regime regarding the income of foreign controlled companies in accordance with section 7 et seq. German Foreign Tax Act (GFTA).
Supremacy of the German Investment Tax ActAccording to the current version of the GFTA, CFC taxation does not apply if the income of the foreign controlled company is subject to the German Investment Tax Act (GITA). The supremacy of GFTA was no longer included in the December draft which led to strong criticism. If this proposal had been implemented, it would have involved, among other things, a considerable administrative burden. This priority is included again in the new draft, but with an ATAD-based restriction. If more than one third of the passive income subject to the GITA is generated by transactions with the party to which the income is attributed to or any related persons, the CFC regime shall still apply.
Adjustments in the list of active catalogueThe revised draft also positively defines which income is considered to be active and thus is not subject to the CFC tax rules. All income not included in this list is considered passive. This does not apply to companies with registered office or place of management in the EU/EEA if they pass a substance test (escape clause). In contrast to the December draft, there have been some adjustments to the list of activities considered active. The latter included a reverse exception for generally active commercial and service activities where the foreign entity used a related party in the EU/EEA area in carrying out those activities. In accordance with the current legal situation, this reverse exception has been reduced to related parties that are subject to taxation in Germany. In addition, the activities of insurance undertakings, credit institutions and financial services institutions shall only be deemed to be active if, irrespective of their registered office, they pass a substance test and no more than one third of the transactions underlying their income are made with related parties. Contrary to the current version of the law, this substance criterion was not included in the December draft and has now been reintroduced.
Low-tax thresholdThe low-tax threshold according to the draft remains at 25%. However, it is clear from the explanatory memorandum to the draft that this limit is intended to be lowered by the end of 2020, in line with the OECD’s global minimum taxation initiative. The lowering of the low-tax threshold is a central demand of the German economy.
Declaration obligationsUnder current law, a detailed declaration for the purposes of the CFC regime must be filed even if the requirements of the substance test are met and consequently there is no attribution for taxation. According to the new draft bill by the BMF, it will be sufficient in these cases in the future to notify the participation in the foreign entity, stating the facts that allow the substance test to be examined. This is intended to reduce administrative burden.
OUTLOOK AND RECOMMENDATION FOR ACTION
The current proposal of the BMF does not contain any significant changes compared to the December draft, except for the above-mentioned points. To the extent the ATAD IDB implements the ATAD into domestic law, its retroactive application as from 1 January 2020 is to be expected. This applies in particular to the rules for neutralising hybrid elements and the exit taxation regarding business assets. Differently from the December draft, however, the other provisions will not apply until 2021. This also holds true as regards the amendments in the draft bill regarding the CFC regime as well as to the special provisions on cross-border financial arrangements.
Undertakings acting internationally should review their structures in a timely manner with a regard to the new provisions and, if necessary, adapt them. This is particularly true in view of the very complex rules for hybrid mismatch arrangements and the CFC tax rules, which in future will also be able to affect persons with limited tax liability having permanent establishments located in Germany. Concerns that the GFTA and the GITA could now generally both be applicable are unlikely to prove true.