Germany: Legislation transposing ATAD measures (exit taxation, CFC rules, hybrid mismatches)

A bill that is intended to implement ATAD provisions in German tax law was passed by the Bundesrat.

A bill that is intended to implement ATAD provisions in German tax law was passed

Legislation (known in English as the “Act Implementing the EU Anti-Tax Avoidance Directive (ATAD)” [ATADUmsG]) was passed by the Bundesrat (upper house of the German parliament) on 29 June 2021.

The bill is intended to implement the following ATAD provisions in German tax law:

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

Transfer taxation

When a taxpayer moves assets or a corporation relocates to Germany, the principles governing the initial valuation of the transferred assets would be changed. The initial valuation would correspond to the valuation in the other country, and the assets would be assessed at the value that the other country takes as a tax base—hence, the “exit taxation”—but not to exceed the fair market value.

The legislation provides for a separate timeframe for application of the new provisions, according to which these would be applied retroactively for financial years ending after 31 December 2019.

Non-resident taxpayers would be able to assert a “balancing item” on transferring assets to an EU/EEA permanent establishment, and this would no longer only be limited to fixed assets. The catalogue of circumstances leading to an immediate reversal of the balancing item would be extended. However, the tax-neutral reversal of a balancing item when retransferring the assets would be discontinued. The new provision would be available in all open cases.

Reform of CFC rules

The CFC rules are intended to prevent the tax-induced shifting of passive income to low-tax jurisdictions. The legislation would substantially revise the CFC rules, including measures concerning:

  • Change of the control criterion as well as introduction of a shareholder-based approach
  • Elimination of the concept of lower-tier intermediary companies (direct income inclusion concept)
  • Revision of the catalogue of active income
  • Revision and extension of the motive test for certain passive income also to third countries
  • Notification requirement (instead of a tax return requirement) to the extent that the motive test can be performed
  • Earlier date for inclusion of foreign income in the German tax base

The legislation does not provide a new low tax rate limit. If the income tax burden is lower than 25%, low taxation continues to be applicable for the time being. According to an explanatory memorandum, this is intended “not to pre-empt the outcome of promising consultations regarding the introduction of a global minimum tax rate (GloBE) at OECD level by unilateral regulations.”

The amendment of the CFC rules would first be applicable 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.

Hybrid mismatches

Hybrid mismatches are based on differences in the legal characterisation of payments (financial instruments) or companies or permanent establishments between two countries. This may result in tax deductions in both countries (so-called “double deduction”) or a deduction in one country without inclusion in the tax base of the other country (“deduction/non-inclusion”).

It is against this background that the ATAD sets out rules to neutralise the effects of tax mismatches (Articles 9 and 9b ATAD). The legislation would transpose these provisions in German tax law through a new § 4k EStG-E (draft income tax law). The scope of application would be limited to intercompany transactions between related parties (as defined by § 1 (2) AStG) or between an enterprise and its permanent establishment as well as to structured arrangements. In addition, ATAD requirements on hybrid mismatches with so-called “reverse hybrid entities” (Art. 9a ATAD) would be transposed by creating a new non-resident tax status.

The new provisions would be applicable for the first time to expenses arising after 31 December 2019. Expenses, however, that already “legally caused” before 1 January 2020 would only be subject to the new provision under certain additional conditions.

For reverse hybrid mismatches, the catalogue of domestic income (non-resident tax liability) would be expanded. Income from a majority interest in a domestic partnership would also be subject to limited tax liability insofar as this income:

  • Is not subject to taxation in the partner's country of domicile due to tax treatment of the partnership that deviates from German law (i.e., treatment as a non-transparent entity in the other state/country)
  • Does not already fall under another item of the catalogue of income (e.g., income of permanent establishments)
  • Is not subject to taxation in any other state/country

The provision would be effective for income accruing after 31 December 2021.

Filing dates and grace period

The filing date for assessment period 2020 would be extended by three months (i.e., for taxpayers using a tax advisor until 31 May 2022 and for taxpayers not using a tax advisor until 31 October 2021) and the interest-free grace period would be extended by three months to 18 months.

What’s next?

The next step is the legislation to be published and promulgated in the federal law gazette. The law then would be enacted and with an effective date of the day after its promulgation. The specific provisions governing the application dates of individual laws are to be observed.

Read a July 2021 report [PDF 384 KB] prepared by the KPMG member firm in Germany


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