Germany is among the first EU countries to release a discussion draft regarding the Minimum Tax Directive Implementation Act.
On March 20th, 2023, the German Ministry of Finance (MoF) published a draft legislation considering the Pillar Two Global Anti-Base Erosion (GloBE) Rules, which ensure that multinational enterprises with a consolidated annual revenue exceeding EUR 750 million are subject to an effective tax rate (ETR) of 15% on a jurisdictional level.
Pillar Two Model Rules Implementation
OECD’s Pillar Two Directive defines standard measures or rules for the minimum effective taxes of major domestic groups and multinational enterprise (MNE) groups.
The primary measure, Income Inclusion Rule (IIR), will be applicable from 2024 at the level of the ultimate parent entity (UPE). The UPE is responsible for the calculation and payment of its allocable share of top-up tax in regard to the low-taxed income entities of the group.
The secondary measure is the Undertaxed Profit Rule (UTPR). This rule ensures that if a share of the top-up tax regarding any of the group entities was not charged under IIR, the tax will be increased at the level of the subsidiary. This allocation is based on a formula proportional to the relative share of assets and employees. Jurisdictions can implement this formula through a denial of deductions or through an equivalent local adjustment.
Finally, jurisdictions may apply a qualified domestic top-up tax (QDMTT) on the excess profit of all low-taxed domestic constituent entities.
The proposed German legislation closely adheres to the Pillar Two Directive. The draft legislation does introduce a QDMTT to prevent foreign jurisdictions from taxing the low-taxed German profits.
Safe Harbor rules
The OECD BEPS Inclusive Framework agreed on Safe Harbor rules that mitigate the complexity of the Minimum Tax Directive. Three (temporary) CbCR Safe Harbors will be available between the fiscal years that begin on/or before December 31st, 2026, and end before July 1st, 2028:
- De-minimis test: the Average GloBE Revenue of a jurisdiction is less than EUR 10 million, and the Average GloBE Income is less than EUR 1 million;
- Simplified ETR test: the ETR of the jurisdiction is equal to or greater than the Transition Rate. The Transition Rate is 15% for Fiscal Years beginning in 2023 and 2024, 16% for Fiscal Years beginning in 2025, and 17% for Fiscal Years beginning in 2026;
- Routine profits test: a jurisdiction’s substance-based income exclusion (SBIE) amount equals or exceeds its profit (loss) before income tax.
If any of the three reliefs are met for a jurisdiction, a top-up tax of EUR 0 is assumed. The German draft legislation also introduces a QDMTT Safe Harbor that will apply not only to EU Member States but also to non-EU countries.
Furthermore, the German draft legislation includes an exemption for the first five years of application of the minimum tax, if the group of companies’ tangible assets outside a reference jurisdiction do not exceed the EUR 50 million threshold and if the group has constituent entities in no more than six jurisdictions.
When will it be applicable?
IIR and QMDDT – Fiscal years starting after December 23rd, 2023.
UTPR – Fiscal years starting after December 23rd, 2024.
Filing Requirements Timeline
The information return shall be filed with the tax administration of the jurisdiction no later than 18 months after the last day of the reporting fiscal year, which is the transitional year.
The draft legislation introduces a minimum tax group including all domestic constituent entities. The parent entity of the group will be responsible for electronically filing the tax return.