Germany: Draft bill to implement ATAD measures including exit taxation, CFC rules

Germany: Draft bill to implement ATAD measures

The German federal government on 24 March 2021 adopted a draft bill to implement the EU Anti-Tax Avoidance Directive (ATAD).

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The lower house of the German parliament (Bundestag) must pass the draft bill before the end of the legislative period (that is, before the constituent meeting of the new Bundestag after the federal elections on 26 September 2021); otherwise, the draft bill is subject to discontinuity. The final scheduled meeting week of the Bundestag is set for the week from 21 to 25 June 2021.

The draft bill is intended to implement the following ATAD provisions in Germany:

  • Exit taxation (Article 5 ATAD)
  • Controlled foreign company (CFC) rules (Articles 7, 8 ATAD)
  • Hybrid mismatches (Articles 9, 9b ATAD).

Compared to the ministerial draft, there are certain changes reflected in the draft bill, including:

  • Changes to the arm’s length principle under §§ 1,1a,1b of the Foreign Transactions Tax Law and the legal basis for advanced pricing agreements to be transferred to the draft of a Withholding Tax Relief Modernisation Act
  • Reinforcing the German right to tax transferred assets, with application of the corresponding valuation only upon request
  • CFC rules, delay of the first application by one year (generally as from 2022)

The other changes are mainly “technical” in nature.

Exit taxation

The so-called “exit taxation” is intended to apply in situations when a taxpayer moves assets or its registered office to another country, the hidden reserves can be taxed even though they have not yet been realised. The existing provisions in income and corporation tax law on exit taxation would remain fundamentally unchanged.

In a reverse transfer (when a taxpayer moves assets or a corporation relocates to Germany), the principles governing the initial valuation of the transferred assets would be changed. In future, the initial valuation would need to correspond to the valuation in the other country. The assets would be assessed at the value which the other country takes as tax base (or exit taxation), however, not exceeding the fair market value.

In situation when the German right to tax is "reinforced" (i.e., when the restriction on the German right to tax no longer applies, such as with the transfer of an asset from a foreign permanent establishment to which the tax credit method applies to a domestic permanent establishment), a withdrawal followed by an immediate contribution to the assets would be assumed. Here also, the valuation abroad, but at most the fair market value, would be relevant. Any resulting gain on withdrawal would be taxable by crediting or deducting foreign tax. This provision is designed to be an option in the government bill, in that it only would apply at the request of the taxpayer. If the taxpayer does not submit an application, no hidden reserves would be disclosed domestically (in Germany) if the foreign country applies a higher value than the German book value in its exit taxation. At the same time, however, no additional depreciation potential would be generated in Germany.

The government bill does not provide any particular timeframe for applying the new rules.

CFC rules

The amendments to the CFC rules are essentially unchanged compared to the ministerial draft bill. They would apply for the assessment or tax collection period for which intermediary income is to be added that accrued in a fiscal year of the intermediary company beginning after 31 December 2021.
 

Read an April 2021 report [PDF 342 KB] prepared by the KPMG member firm in Germany
 

Other topics addressed in this report include:

  • BMF guidance on German CFC rules – Expanding “motive test” to third country situations
  • BMF guidance on continuation-linked loss carryforward
  • BMF guidance on useful lives of computer hardware and software

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