Germany implements country by country reporting, exchange of tax rulings and other amendments including changes to trade tax and financial sector taxation.
The Government Draft Bill ("GDB") aims at implementing the country-by-country reporting proposal in the final report on Action 13 of the OECD BEPS Project. Furthermore, the GDB will implement amendments to the EU Administrative Cooperation Directive on the exchange of tax rulings. It also provides a number of changes to German domestic tax law to strengthen German taxation rights in certain cross-border situations. The GDB does not, however, contain proposals for the implementation of other BEPS Actions, in particular Action 2 (hybrid mismatch arrangements). Implementation of anti-hybrid mismatch rules at an EU level is currently under discussion in connection with the Anti-Tax Avoidance Directive.
- Amendments to domestic transfer pricing documentation requirements
The proposed amendments to the domestic transfer pricing documentation requirements are intended to implement Action 5 of the OECD BEPS Project. The planned changes provide that companies generating a turnover of at least EUR100 million that are part of a multinational group of companies will have to prepare a so-called Master File and a Local File. The Master File will provide an overview of the nature and structure of the group's worldwide business activities and of the group's transfer pricing principles. The Local File consists of facts and arm's length documentation. The documentation is generally to be submitted within a certain period upon request of the tax authority as part of a tax field audit. The new documentation requirements will apply for the first time to fiscal years beginning after 31 December 2015.
- Implementation of country-by-country reporting in national law
The GDB will also implement in national law the country-by-country ("CbC") reporting standard developed by the OECD and the EU Commission. German group parent companies generating consolidated turnover of at least EUR750 million have to provide CbC reports to the Federal Central Tax Office ("FCTO") within one year from the end of each fiscal year. The reports must include country-specific information about the business operated by the German group through its non-German subsidiaries or permanent establishments. The FCTO will forward the reports by automated data transfer to all countries for which the country-specific reports contain information, provided those countries have entered into corresponding agreements with the FCTO. As far as is currently foreseeable, contracting countries will comprise the EU Member States and the signatories of the OECD Multilateral Competent Authority Agreement on the Exchange of CbC Reports. The reporting requirements shall apply for the first time to fiscal years beginning after 31 December 2015.
- Automatic exchange of Tax Rulings
Moreover, the GDB will implement the amendments to the EU Administrative Cooperation Directive regarding the automatic exchange of cross-border tax rulings and APAs on transfer prices between multinational companies ("Tax Rulings"). The German authority in charge of the exchange is again the FCTO. In this function, the FCTO will have to provide certain information on Tax Rulings issued, amended or renewed from 31 December 2016 to the respective authorities of the Member States and the Commission within 3 months from the end of the calendar year in which the Tax Ruling was issued, amended or renewed. Additionally, the automatic exchange will also comprise Tax Rulings issued, made, amended or renewed from 1 January 2012. Regarding the latter, the information has to be provided before 1 January 2018 and certain exceptions are planned in favor of small and medium-sized enterprises.
- Trade tax treatment of CFC-income
By a judgment of 11 March 2015, I R 10/14, the Federal Tax Court decided, contrary to the position of the German tax administration, that CFC income imputed to a German resident taxpayer pursuant to German CFC legislation is not subject to trade tax in Germany. The GDB provides that the Trade Tax Act be amended such that CFC income of German taxpayers will become subject to trade tax as from 1 January 2017. The proposed amendment will increase the overall German tax burden on CFC income imputed to German corporations from the current level of 15.825 percent to approximately 31 percent.
- Trade tax treatment of certain passive income derived from a foreign fixed place of business or from foreign partnerships
Under current rules, income derived by German taxpayers through a foreign fixed place of business and/or partnership is fully exempt from trade tax in Germany. Under the new law, passive income in terms of the German CFC legislation (e.g., royalty income from acquired IP or IP developed in Germany) derived by a German resident taxpayer through a foreign fixed place of business and/or partnership will, as a general rule, no longer benefit from the trade tax exemption. As a counter exception, however, passive income shall nevertheless continue to benefit from the trade tax exemption, if the activities performed in the foreign fixed place of business and/or partnership meet the Cadbury Schweppes test. The amendment is planned to become effective as of 1 January 2017.
- Trade tax treatment of dividends received by subsidiaries in a fiscal unity
By a judgment dated 17 December 2014, the Federal Tax Court decided, contrary to the position of the German tax administration, that dividend income received by a controlled entity in a fiscal unity ("Organschaft Subsidiary") is fully exempt from German trade tax if the head of the fiscal unity is a corporation or will ensure that dividend income received by Organschaft Subsidiaries shall benefit from a maximum of 95 percent trade tax exemption. The amendment will apply for the first time to dividends received by Organschaft Subsidiaries after 31 December 2016.
- Modification to the interpretation of the arm's length principle
The Foreign Transactions Tax Act ("FTTA") will be amended in order to establish the rule that the arm's length principle in Tax Treaties is to be construed and applied in accordance with the domestic principles of the FTTA – irrespective of whether this is in line with the provisions of the applicable Tax Treaty. The proposed amendment is intended to become the legal basis for a general treaty-override in the field of transfer prices. It will enter into effect on the day following the announcement of the law as passed by Parliament.
- Fallback of taxation right in certain cross-border situations
German tax law operates a unilateral switch-over provision to ensure that the application of the exemption method in Tax Treaties does not lead to (double) non-taxation or low taxation of income derived by German resident taxpayers in a foreign state. The German tax administration has held the view so far that this switch-over shall apply if only part of the income is not subject to tax or subject to tax at a low rate in the other state. In two recent decisions, however, the Federal Tax Court refused to apply the switch-over in such cases. The new law intends to codify the tax administration's position by clarifying that the switch-over applies even if only a portion of the income is not subject to tax or subject to low tax in the other state. Furthermore, the proposed amendments intend to ensure that same applies for "subject-to-tax" clauses in Tax Treaties. The proposed amendments are planned to become effective as of 1 January 2017.
- New rules for the treatment of income from investments for credit institutions, financial services institutions and financial institutions
The participation exemption for capital gains and dividend income does not apply to credit institutions and financial services institutions, if the capital gain and/or the dividend income is derived from shares that are attributable to the so-called "trading book". In this case, dividends and capital gains are fully taxable and current expenses and losses incurred with shareholdings are fully tax deductible. The legislator maintains this objective but, in the future, the relevant provisions will no longer refer to the "trading book" but to the "trading portfolio" in terms of section 340e (3) of the German Commercial Code. This change is intended to prevent abusive tax planning. Corresponding provisions apply to so-called "financial enterprises" which have acquired shares with the purpose of realizing proprietary trading gains in the short term. Under the current law, an "industrial" holding company outside the financial services sector can also qualify as a financial enterprise . In future, however, the wording of the relevant provision shall be amended to cover only those financial enterprises in which a financial institution or a financial services institution directly or indirectly holds more than 50 percent of the shares. The intended changes shall apply for the first time to shares that will be recorded as addition to the business assets after 31 December 2016.
The GDB was agreed within the Federal Cabinet and submitted to Parliament. Following the introduction of the Government Draft Bill, the Federal Council and the Federal Parliament will have the opportunity to provide their comments. It is to be expected that the legislative procedure will be concluded in the second half of the year.