First Draft of German Implementation of Global Minimum Taxation Published

The German Federal Ministry of Finance circulated a first discussion draft of the implementation of the OECD-Guidelines for global minimum taxation, after the European Union therefore had published a Directive (Directive (EU) 2022/2523) in December 2022, leading the way for a harmonized implementation of the GloBE-Rules in all member states.

Introduction

The circulated draft of the German Implementation Act of Global Minimum Taxation Act (“Draft”) is applicable to any entity group (multi-national, as well as domestic) with an annual turnover of at least EUR 750 million in at least two of the last four business years. As of December 31, 2023, such entities are subject to global minimum tax. The Draft contains three different mechanisms to ensure a global minimum taxation.

Global Minimum Taxation

In general, the global minimum taxation will be ensured by the Income Inclusion Rule (“IIR”) as the primary Top-up Tax and the Undertaxed Profits Rule (“UTPR”) as a secondary Top-up Tax in case IIR is not applicable. Further on, the Federal Ministry of Finance is introducing a Domestic Supplementary Top-up Tax.

The Income Inclusion Rule is levied from a German Ultimate Parent Entity or Intermediate Parent Entity. Base for the IIR is the Primary Top-up Tax Amount (Primärergänzungssteuerbetrag) in case the effective tax rate is lower than 15%. Pursuant to the Draft, the Income Inclusion Rule (IIR, sec. 8 – 10 Draft) is implemented in line with the European Directive. In case there is no Income Inclusion Rule applicable, as no Parent Entity is located in Germany and the foreign jurisdiction does not apply a qualified IIR, the Undertaxed Profits Rule as a secondary Top-up Tax ensures minimum taxation on the level of Constituent Entities. As for UTPR, the Federal Ministry of Finance decided to implement this secondary Top-up Tax-Rule by a special Domestic Top-up Tax and not by a denial of deduction. The base for UTPR is the Secondary Top-up Tax Amount (Sekundärergänzungssteuerbetrag), which is the proportionate part of the Constituent Entity for the total Top-up Tax Amount allocated to Germany.

Further on Germany made use of the option to introduce a Domestic Supplementary Top-up Tax (Art. 79 et seqq. Draft), leading to a blocker of the IIR in the country of the Ultimate Parent Entity. Base for the Domestic Supplementary Top-up Tax is the Domestic Supplementary Top-up Tax Amount (Nationaler Ergänzungssteuerbetrag) corresponding to the Total Top-up Tax Amount allocated to Germany.

Safe-Harbor-Rules

Unlike the European Directive, the German Draft supplies comprehensive Safe-Harbor-Rules. Pursuant to Sec. 71 Draft, the Maximum Taxation Amount (“Steuererhöhungsbetrag”) is reduced to zero if Germany applies a qualified Domestic Top-up Tax (in the meaning of sec. 7, para. 2 Draft) levied in line with either qualified accounting standards of the Ultimate Parent Company or other accepted international accounting standards.

For the time period between December 31, 2026, until July 1, 2028, additional temporary Safe‑Harbor Rules in case of Country-by-Country Reporting will apply. Although in these cases the Maximum Taxation Amount under certain conditions might be waived, the obligation to file a minimum tax declaration, as well as the submission of the minimum tax report remains unaffected.

Administration

Every taxable entity is obliged to file a minimum tax declaration for every fiscal year under application of the general rules of the Fiscal Code (Abgabenordnung).

In addition, the taxable entity must provide a minimum tax report (Mindeststeuerbericht) for every fiscal year. This obligation shall not apply, if the UPE or another entity (determined by the UPE) already submitted a minimum tax report and Germany agreed with the potential other tax jurisdiction on an automatic exchange of such minimum taxation reports on the basis of a binding agreement. The missing or delayed minimum taxation report might become subject to a penalty fee. The maximum amount of the penalty fee has not yet been determined.

For purposes of the minimum taxation existent Double Taxation Agreements will be overruled (Treaty Override).

Temporary Exemptions

In case of subordinated international activity, the entity group is exempt from minimum taxation in the first five years. The period of temporary exemptions for the IIR begins December 31, 2023, and for UTPR December 31, 2024. An entity group has a subordinated international activity when it has entities in at most six different tax jurisdictions and the total value of all tangible assets in all tax jurisdictions (except for the reference tax jurisdiction) doesn´t exceed the amount of EUR 50 million.

Conclusion and Outlook

Especially at this early stage of the legislation process, it is likely to come further changes to the current draft. The administrative burden for taxable entities that are subject to the global minimum taxation is extremely high and further easements on the administrative procedure will be essential. The development of the international acceptance of US-GILTI-Rules under the GloBE-Rules and the United States’ acceptance of the country-by-country limitation further on will have an important impact on the efficiency of the global minimum taxation. At this point, the taxable entities in Germany need to comply with the high administrative burden and requirements under the upcoming new global minimum taxation act.

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