All questions

Introduction

When it comes to corporate tax planning in Germany, the focus of multinationals has clearly shifted from offensive (or even aggressive) tax structuring to more robust structures and the reduction of risks and exposures (good corporate tax citizenship). The international tax initiatives against harmful tax planning, such as the OECD's Action Plan on Base Erosion and Profit Shifting (BEPS) and the Pillar One and Two initiative, as well as the EU Anti-Tax Avoidance Directives, have certainly contributed to this development, but it is also owing to domestic tax authorities becoming more and more inclined to commence criminal tax proceedings in regular tax audits. As a result, multinationals must increasingly consider the reputational implications of their tax structures.

Entity selection and business operations

Corporate tax planning in Germany must necessarily consider selecting suitable legal forms for entities, characteristics of domestic income taxation, and to an increasing extent German trade taxes as well, as after the reduction of the corporate income tax rate to 15 per cent in 2008 the overall tax burden is usually (depending on the local trade tax multiplier) almost equally split between corporate income and trade taxes. In structures involving German situs real property, the German real estate transfer tax (RETT) also requires careful attention.

i Entity forms and general rules of German taxation of businesses

As in most jurisdictions, German taxation of corporations and partnerships differs, which in turn influences the selection of a legal form for a specific entity based on the transaction at hand. As part of this selection, the following rules may be of interest.

German tax-resident corporations are subject to German corporate income taxation in terms of their worldwide income. Foreign tax-resident corporations are subject to German taxation if and to the extent income can be attributed to a German permanent establishment (PE) or permanent representative, and with other German-source income (subject to limitations in DTAs). German corporate income tax is levied at a rate of 15 per cent (plus 5.5 per cent solidarity surcharge), resulting in an aggregate rate of 15.825 per cent. There is a preferential regime for dividends and capital gains (see below). Corporations with German PEs are also subject to trade tax (details below). The tax basis for trade tax is the net income plus or minus certain additions and deductions. The tax rate depends on the multiplier of the local municipalities at the place of business; effective rates range from 7 per cent to approximately 17 per cent.

(Deemed) trading partnerships' profits are subject to (corporate) income tax at the level of the partners. For partners subject to corporate income tax, see above. For individuals, the income tax rate is up to 47.475 per cent, plus church tax, if any; there is a preferential regime for dividends and capital gains (26.375 per cent flat tax or exemption of 40 per cent or non-deductibility of 60 per cent). Profits of (deemed) trading partnerships are also subject to trade tax at the level of the partnership if and to the extent that business activities are performed in Germany. Trade tax can be credited against the income tax of individuals (but not corporations) up to a maximum trade tax rate of 14 per cent.

From 2022, partnerships and partnership companies may apply to be taxed similar to a corporation (corporate income tax option). The main intention is to strengthen the international competitiveness of family businesses in the legal form of a limited liability partnership or general partnership. The application to exercise the option must be submitted before the beginning of the fiscal year in which the partnership wishes to be treated as a corporation. Furthermore, the transition to corporate taxation is considered a change of legal form (which may trigger certain lock-up and retention periods under the German Reorganisation Tax Act).

ii Focus on German trade tax (including tax incentives)

A corporation with business activities in Germany is also subject to trade tax (i.e., a business tax whose revenue accrues to those local municipalities in Germany where the corporation maintains a PE or PEs). The basis for the trade tax is the net income determined for corporate income tax purposes plus certain additions and minus certain deductions. This is intended to create steadier flows of trade taxes to the local municipalities but actually makes the system rather complex and inconsistent. For instance, an add-back to the tax base would be required under the following circumstances. After applying the interest stripping rules for corporate income tax purposes (see below), or the purposes of computing the corporation's trade tax base, the remaining amount will also generally qualify as deductible. However, 25 per cent of any such interest in excess of €200,000 has to be added back to the trade tax base (i.e., it is not deductible for trade tax purposes). This constitutes a definitive disallowance. For trade tax purposes, the disallowed interest amount is also not eligible for a carry-forward to subsequent tax years. Similarly, the 95 per cent exclusion for dividends received (see below) would generally not be allowable for trade tax purposes and 95 per cent of the dividend amount received would therefore be added back to the trade tax base. Only where the corporation derives the dividends from a 15 per cent or greater stake in the dividend-paying corporation (which deviates in various instances from the relevant 10 per cent threshold for corporate income tax purposes) is the add-back reversed (a participation exemption for trade tax purposes). In the case of dividends paid by an EU corporation, a 10 per cent or greater stake qualifies for the participation exemption. Trade tax cannot be deducted from its own tax base or for corporate income tax purposes.

iii Focus on German real estate transfer tax

German RETT is imposed on all transactions with the purpose or effect of transferring title to German real estate (the term includes land, buildings and inheritable building rights). The rates range from 3.5 per cent to 6.5 per cent depending on which state is in charge of levying the tax.

In principle, German RETT rules apply to the transfer of title in German real estate and to certain changes of a participation in partnerships and corporations with German situs real estate. After a lengthy discussion, Germany has amended the RETT rules in 2021, in particular by lowering thresholds and extending observation periods.

In respect of shares in real estate holding corporations, RETT is triggered if one person acquires or unifies in their hands 90 per cent or more in the respective corporation (the 'corporation rule'). Furthermore, a change in the shareholder base of property-owning corporations of at least 90 per cent of the company's capital within a period of 10 years will trigger RETT even if there is no single shareholder or group of related shareholders who eventually controls the real estate-owning company. This means that only an existing shareholder can act as a RETT blocker by remaining invested with more than 10 per cent (the 'new corporation rule').

Addressing concerns that under the new corporation rule publicly listed companies could become subject to RETT every time their shareholder base changes by 90 per cent, Germany also introduced an exemption for listed companies. Otherwise, companies without a stable anchor shareholder with a permanent minimum stake of more than 10 per cent clearly would have been disadvantaged. However, the exemption requires a listing on stock exchanges authorised under the German Securities Trading Act (or certain equivalent EU, EEA or other stock exchanges) and applies only to trades conducted via such stock exchanges and not to over-the-counter trades.

In addition, a change in 90 per cent of the partners' interest in a partnership with German situs real estate within a 10-year observation period is deemed to constitute a transfer of title in the real estate to a new partnership (the 'partnership rule'). Hence, RETT is assessed as if title in the property had been transferred.

The new rules apply to transactions with a closing date after 30 June 2021. Furthermore, the 10-year observation period under the new partnership rule applies to earlier transactions where the former five-year observation period has not expired before or on 30 June 2021. For the purposes of the observation period under the new corporation rule, however, transactions before 1 July 2021 are not considered at all.

RETT is generally levied on the consideration for the transfer. Where there is no consideration, if a consideration cannot be ascertained, or in the event of a deemed transfer (which includes the transfer of 90 per cent of the shares to one person or entity), the tax is levied on the tax value of the real estate, which, as a rule of thumb, is usually lower than the market value. Transferor and transferee are jointly and severally liable for RETT. However, in the case of the aggregation of 90 per cent or more of the shares in a corporation, only the person acquiring such shares is liable for the payment of the tax. Share deals involving stakes in real estate holding companies require particular care when it comes to notification obligations for RETT purposes, which should be reflected in the parties' agreements.

iv International tax

The tax-efficient repatriation of German-source profits is subject to tight German anti-treaty shopping rules (see 'Tax-efficient repatriation of German-source profits' below). The German foreign-to-foreign intellectual property (IP) taxation continues to be an issue (details in 'German foreign-to-foreign IP taxation' below). Finally, third country corporations may benefit from new rules on the return of capital contributions (see 'Return of capital contributions by third country corporations' below).

Tax-efficient repatriation of German-source profits

When it comes to inbound tax planning (i.e., investments by a non-German investor into Germany), one of the major tax planning considerations is usually the tax-efficient repatriation of German-source earnings and profits. Often, such repatriation is structured through the disposal of shares in the German top holding company by the non-German investor, as such capital gains are tax exempt under either German domestic rules (and not even subject to the 5 per cent clawback taxation if the seller does not have a PE in Germany, as recently confirmed by the German Federal Fiscal Court) or an applicable double tax treaty. These capital gains are also not subject to WHT in Germany. In addition to the disposal of shares to a third person, this beneficial capital gains treatment can also be achieved by way of share buy-backs, which may often economically substitute a dividend distribution.

Dividend distributions are often not the preferred route for the repatriation of earnings and profits from German inbound investments as these distributions are generally subject to German WHT amounting to 25 per cent, plus solidarity surcharge of 5.5 per cent thereon (i.e., effectively 26.375 per cent). Under domestic provisions, WHT can be reduced to 15 per cent or lower or even to zero under an applicable double tax treaty or the EU Parent–Subsidiary Directive. To tackle abusive tax structuring based on these reductions of WHT (treaty or directive shopping), Section 50d, Paragraph 3 of the German Income Tax Act (GITA) provides for quite harsh anti-abuse and substance requirements. The provision applies a two-step approach with a general presumption of treaty abuse under certain circumstances and the possibility of a rebuttal of the presumption by the taxpayer under specific conditions. This results in a significant tightening of the anti-treaty shopping rules, consequently limiting the circumstances in which non-resident companies may qualify for WHT relief and even applying in cases where a double tax treaty already includes a specific anti-abuse rule. One should additionally take into account that further changes to Section 50d, Paragraph 3 GITA and the German WHT regime might be introduced following the EU's 'unshell proposal'. It remains to be seen whether the Member States will consider the substance requirements as set up by the unshell proposal to be missed in cases of intra-group outsourcing and how entities that, by the very nature of their business, require hardly any 'substance' would be treated under these new unshell rules. It is also uncertain if the unshell proposal will be adapted at all.

In the context of a tax-efficient repatriation of German dividends, the German Federal Fiscal Court held that dividends that are received through a German partnership (which can even be a low substance partnership with deemed trading activity) will be subject to tax assessment, which effectively means that WHTs are refundable at the level of the partnership assessment. This refund by assessment would not be subject to German substance requirements (even if they are still applicable). Although, obviously, this provides for tax planning opportunities, the structures should be carefully planned and monitored as the refund by assessment requires that the shares in the distributing corporation can be attributed to the partnership, which might be challenged in case of a low substance partnership.

German foreign-to-foreign IP taxation

From 2020 onwards, many foreign companies had to learn (sometimes the hard way) that they might have fallen within the scope of German non-resident taxation in respect of past IP licence or sale transactions, even if only non-German parties were involved.

As far as foreign-to-foreign intra-group transactions involving IP registered in Germany are concerned, the German Ministry of Finance (MoF) has issued several circulars, sustaining the view that these are subject to German tax and only providing some relief from overly burdensome tax reporting and payment obligations in clearly treaty-protected cases, most recently by circular of 29 June 2022.

The simplifications described in these circulars, however, do not apply if the licensor's treaty entitlement cannot be confirmed or is doubtful. This applies, among other things, to hybrid or dual-resident companies or in other cases of conflicts of qualification. In such cases, the licensees are obligated to file quarterly WHT returns and make payments in non-treaty-protected cases. Even for treaty-protected parties, a 'zero' WHT return may be required.

Regarding foreign-to-foreign third-party transactions involving IP registered in Germany, the German legislator has passed changes that retroactively carve out the majority of such transactions from German taxation. The new rules take effect for past and future tax years. However, the German taxation right is upheld for transactions from 1 January 2022 onwards involving counterparties that are tax resident in a jurisdiction deemed as a non-cooperative jurisdiction (NCJ) for the purposes of the German Tax Haven Defense Act. NCJs are based on a blacklist of non-cooperative jurisdictions published by the EU and as updated from time to time, and implementations of this blacklist by the German legislator as amended from time to time.2 This requires a careful monitoring of all third-party licensing transactions made since 1 January 2022.

Return of capital contributions by third country corporations

Since 2023, new rules apply to returns of capital contributions by corporations that are tax-resident outside the EU. According to German CIT provisions, returns of capital contributions are generally not subject to German income taxation, provided, however, that the contributions (and returns) have been separately assessed following strict procedural rules. In the past, this exemption was only applicable to German and EU entities. For a non-German/non-EU entity, it was quite difficult to meet the procedural requirements. With the new rules, Germany has extended the exemption to third country corporations and provides for a certain procedural simplification.

v Capitalisation requirements

To limit the deductibility of interest and royalties, Germany applies broad and highly complex interest stripping rules as well as royalty deduction limitations. These interest stripping rules apply to the deductibility of any interest payments made by a German-resident borrower to any related or unrelated recipient resident within or outside Germany. In addition to limiting the deduction of interest from the German interest payer's corporate income tax base, they may also affect the deductibility of debt interest from its trade tax base. Under the interest stripping rules, deductions for interest payments are, in principle, subject to a cap at 30 per cent of earnings before interest, taxes, depreciation and amortisation (EBITDA) (as adjusted for tax purposes) of the borrower.

By way of exception, the interest stripping rules do not apply if the net interest payment amount (interest paid minus interest received) remains below €3 million for the tax year (de minimis exception), if the German interest payer is a stand-alone company (i.e., it is an unrelated person within the meaning of the German Foreign Tax Act and does not have a PE (stand-alone exception)) or if the debt-financed entity can prove that its equity ratio as per the previous balance sheet date was better or no worse than by 2 per cent compared with the equity ratio of the entire group (escape clause). Where none of the above exceptions apply, net interest paid in excess of the cap amount of 30 per cent of the borrower's EBITDA (as adjusted for tax purposes) is disallowed in the current year but can be carried forward indefinitely to subsequent tax years (subject to restrictions that apply in the case of detrimental transfers of shares in which interest carry-forwards – as loss carry-forwards – fully or partially cease to exist). The same limitations apply in the carry-over year.While the German 'traffic light coalition', which has been in office since December 2021, had to row back on a number of its tax-related proposals for more economic growth. The 'Chances for Growth Law' and associated laws has introduced a few of these proposals. The German interest barrier rules have been amended significantly (see above): first, the definition of interest expenses has been extended to mirror the ATAD definition, and secondly, exemptions (the stand alone and the equity escape clause) have been tightened. The new interest barrier rules apply to all fiscal years which started after 14 December 2023 (and did not end prior to 1 January 2024). The government has also expanded loss carry-forwards for individuals, but – after a lengthy discussion – not touched loss carry-backs where businesses hoped for an expansion as well.

Special considerations

Common ownership: group structures and intercompany transactions

i Tax planning considerations for related parties

The ATAD Implementation Act (the AIA) passed by the German legislator in 2021 significantly impacts tax planning considerations for intra-group financing as well as controlled foreign corporations (CFC). Most importantly, the AIA implements Articles 5, 7, 8, 9 and 9b of ATAD II which include, inter alia, anti-hybrid provisions to cover hybrid mismatches.

Article 9, Paragraph 2, ATAD II applies to the deduction or non-inclusion of hybrid instruments such as hybrid bonds or participation rights – where payments on hybrid instruments are deductible in the state of the payer (deduction) but the state of the recipient does not qualify the payments as taxable income (no inclusion) (D/NI scenario). In this context, ATAD II recommends as a primary measure (response) denial of deduction at the level of the payer, and as a secondary measure (defensive rule) taxation of payments at the level of the recipient.

According to the new Section 4k, Paragraph 1, GITA, expenses on the use of capital are not deductible if and to the extent that the corresponding profits are not subject to such a tax that is comparable with German taxation. In these cases, the provision denies the deduction at the level of the payer (primary measure by way of denial of deduction). According to the explanatory notes to the AIA, Section 4k, GITA also applies to mismatches arising from cross-border compensation payments made in securities lending transactions or repo transactions. Furthermore, the new rules apply to 'hybrid transfers' (i.e., transactions in which the profit of capital assets is attributable to more than one person participating in the transaction).

Section 4k GITA also applies to some other hybrid mismatch scenarios, in particular to another D/NI scenario where 'reverse hybrid entities' are treated as transparent in their state of residency but are treated as opaque (and taxable entities) in the residency state of their shareholders (Paragraphs 2 and 3), to double deduction scenarios where expenses of the same taxpayer are deductible in two different states (Paragraph 4) and to imported hybrid mismatch scenarios (Paragraph 5). Such imported mismatch scenarios might arise if deductible expenses and corresponding income cause a mismatch in another state that is not eliminated by that state but 'imported' to Germany via one or more transactions. However, payments without a hybrid mismatch that benefit from low taxation or no taxation at the level of the recipient under the general tax regime of the state of the recipient should not be affected. Section 4k GITA is criticised by commentators for not providing sufficient legal certainty and for being incomplete in terms of burden of proof. It remains to be seen whether administrative guidelines and jurisdiction on the various covered scenarios will bring more clarity to Section 4k GITA as it stands.

Lastly, the AIA also contains a new – and, unfortunately very aggressive – version of the long-outdated German CFC rule. The new rule has a wider scope. Not only the holders of shares but also the holders of certain equity capital instruments qualify as related parties for CFC purposes. Non-tax-resident shareholders can also be subject to the new CFC rule if they hold shares in a foreign corporation in a German PE. Most notably, dividend income constitutes passive income if the payments are tax deductible at the level of the payer or if the taxpayer does not own at least 10 per cent of the shares in the payer. Due to Section 4k, Paragraph 6, GITA, the extended definition of 'related parties' applies also to the new anti-hybrid provisions of Section 4k GITA as described above.

The legislation based on the AIA has basically come into force with effect as of 26 June 2021, with Section 4k, Paragraph 6, GITA in connection with the modified CFC rule, however, applying with retroactive effect as of 1 January 2020. With effect from 1 January 2024, the threshold below which a low taxation is assumed has been reduced to 15 per cent (i.e., foreign passive income is subject to the CFC rule if it is taxed at an effective tax rate below 15 per cent in the source state).

ii Domestic intercompany transactions

Dividends received from German and non-German corporations are generally exempt from corporate income tax in the hands of a German corporation or a non-German corporation that holds the relevant shares as part of the assets of a PE maintained in Germany. This requires, among other things, that at the beginning of the calendar year the shareholding amounted to at least 10 per cent in the share capital of the distributing corporation (special rules apply to participations of at least 10 per cent that are acquired during a calendar year). However, 5 per cent of any dividends received is deemed to constitute a non-deductible expense so that, as a consequence, only 95 per cent of any dividends received is exempt from corporate income tax, resulting in an aggregate tax rate of approximately 1.5 per cent.

Similar to a dividend received, capital gains from the disposition of shares in a German or non-German corporation are exempt from German tax in the hands of a German corporation, or in the hands of a non-German corporation holding the relevant shares as part of the business property of a PE maintained in Germany. In this case, too, 5 per cent of any such capital gains is deemed to constitute a non-deductible expense so that only 95 per cent of capital gains from the disposal of shares is exempt from corporate income tax. However, unlike the tax exemption applying to dividends received, the exemption from corporate income tax applying to capital gains from the disposal of shares does not hinge on the selling corporate shareholder holding a minimum participation in the equity of the corporation whose shares are sold. Capital losses from the disposition of shares are not deductible. Similarly, no deduction is allowed for a write-down on account of a depreciation in value of shares in corporations. A non-German corporation holding the relevant shares without having a PE or permanent representative in Germany would not be subject to German tax regarding the capital gains from the disposal.

iii International intercompany transactions

Dividends distributed are subject to a dividend withholding tax (WHT) at a rate of 25 per cent (plus solidarity surcharge at 5.5 per cent thereon, resulting in a total withholding of 26.375 per cent). German-resident shareholders and non-residents which hold the relevant shares as part of the business property of a German trade or business are entitled to a refundable credit of this tax against their final tax liability determined by assessment. A non-resident corporation can request a refund of two-fifths of the taxes withheld under German domestic rules. In addition, non-residents may further be entitled to a full or partial refund under an applicable double tax treaty or the EU Parent–Subsidiary Directive. All refunds are subject to rather strict substance requirements, which recently came under scrutiny in light of their compliance with the fundamental freedoms under the Treaty on the Functioning of the European Union.

Third-party transactions

Based on provisions of the German Reorganisation Tax Act (RTA), and subject to certain requirements which in turn depend on the involved parties and what they've agreed on, transactions can generally be implemented in a tax-deferred or tax-free manner. For example, a share for share exchange may be carried out on a tax book value basis (i.e., without a realisation of built-in gains) if the acquiring and the acquired company are either corporations or co-operatives, if the acquiring company subsequently holds the majority of the voting rights in the acquired company (exchanged shares included), and if the face value of additional considerations (e.g., a loan claim) does not exceed 25 per cent of the tax book value of contributed shares or the lower amount of tax book value of contributed shares and €500,000.

Recently, the German legislator has amended the RTA to further globalise German reorganisation tax law provided that the contemplated reorganisation has the structural characteristics of a domestic reorganisation and that German taxation rights are not restricted or excluded. Because the administrative guideline to the RTA has not been officially updated since 2011, and only a draft version has been shared in 2023, it remains to be seen how these legislative changes will be reflected in (administrative) practice.

Indirect taxes

As part of corporate tax planning, key questions on indirect taxes in Germany continue to focus on VAT when transferring a going concern (generally VAT-exempt, but requirement of transferring a business that is fully functional on a stand-alone basis may be difficult to prove in the individual case), on VAT when selling shares or intercompany loan claims (generally VAT-exempt, but depending on the exact subject matter of the contract), and on the continuation or lapse of fiscal unities for VAT during transactions.

International developments and local responses

At the back of the OECD's and EU's proposals, Germany continues to implement rules targeting hybrid mismatches as set forth in the EU Anti Tax Avoidance Directive (ATAD II), as well as changes to its controlled foreign companies (CFC) regime (see above). To implement Pillar Two into domestic law, Germany has introduced a minimum tax act. In mid-2020, mandatory reporting rules entered into force, which is why any intermediary (i.e., any adviser) who helps taxpayers to set up tax-related cross-border arrangements must be aware of the reporting requirements. Finally, German tax authorities have increased their efforts on tax audits performed jointly with the tax authorities of other countries, and the German legislator continues to tighten rules relating to 'tax havens'.

i OECD-G20 BEPS initiative: implementing the EU Minimum Tax Directive

Following the OECD's Pillar Two proposals and the EU Directive 2022/2523 on minimum taxation, Germany has introduced rules to ensure a taxation rate of at least 15 per cent for corporations with a total turnover of €750 million or more per annum (Minimum Tax Act). The new terminology included in the German Minimum Tax Act, as well as the calculation of turnover and tax burden for multiple jurisdictions that is provided therein is set to be complicated. However, during fiscal years 2024–2026, simplifications based on using the data available from country-by-country reporting ('safe harbour') are supposed to allow taxpayers to transition into the new rules.

ii Tax treaties: Focus areas for German DTAs

It is almost an 'evergreen' facet of German international tax rules that key provisions of its DTAs (namely, on dividend and interest payments) are partially or completely overruled by German domestic treaty overrides. The most cited of these is certainly Section 50d, Paragraph 3 GITA (for details, see above) with its strict substance requirements and domestic principal purpose test. Other focus areas for German DTAs include discussions about the German model DTA agreement regarding taxation rights in case of cross-border mobility. Changes to these rules could impact executive employees who are increasingly often working remotely from (multiple) foreign countries.

iii EU DAC Directives: mandatory reporting of tax planning

Following amendments to the Directive on Mutual Administrative Assistance 2011/16/EU regarding tax arrangements in 2018 (DAC6), the German legislator introduced rules requiring intermediaries as well as, under certain requirements, users to report these arrangements to their domestic tax authorities within a strict time frame (DAC6 Reporting Obligations). An intermediary is any person who designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement (i.e., specifically, advisers giving tax advice with regard to cross-border arrangements in general qualify as an intermediary). The reportable cross-border arrangements have to be disclosed within the 30 days after the arrangement is made available for implementation or is ready for implementation or after the first step of the implementation has been made, whichever occurs first.

According to the DAC6 Reporting Obligations, any arrangement with a cross-border dimension and fulfilling one of the 'hallmarks' of a cross-border arrangement either on a stand-alone basis (for certain hallmarks) or in connection with a main benefit test (certain other hallmarks) must be reported. The German provisions also consider as a cross-border tax arrangement an arrangement that consists of a series of steps if at least one step or partial step has a cross-border dimension. In this case, the DAC6 Reporting Obligations apply with regard to the whole series. The law implementing the DAC6 Reporting Obligations contains numerous hallmarks, which describe all sorts of cross-border tax structures and their essential characteristics. Some of these hallmarks are particularly important for advisers. First, a tax arrangement having a substantially standardised documentation or structure and available to more than one taxpayer without a need for customisation is reportable if the requirements of the main benefit test are fulfilled. The main benefit test requires that obtaining a tax benefit is the main goal or one of the main goals of the respective arrangement. Second, tax structures involving deductible cross-border payments between related parties are reportable in many cases. These structures must, inter alia, be reported if the payment is not subject to corporate taxation (e.g., because the payment is tax exempt, if it benefits from a preferential tax regime or if, for other reasons, the recipient jurisdiction does not impose taxes). Third, the cross-border transfer of assets is reportable if the valuation of the assets for tax purposes differs significantly in the jurisdictions involved. Although practical experience shows that some hallmarks have a greater practical relevance than others, one should, in general, evaluate on a case-by-case basis all the hallmarks, particularly the transfer pricing hallmarks and the conversion, as well as circular transaction hallmarks.

The introduction of the DAC6 Reporting Obligations and their short-term implementation, despite the covid-19 pandemic, have been criticised by commentators in Germany. On 29 March 2021, the MoF published a first circular with guidance regarding the DAC6 Reporting Obligations. However, several questions regarding the interpretation of the law and its practical impact remain. Furthermore, the new German government might still extend the DAC6 Reporting Obligations to merely national arrangements, even if this has not been passed as part of the 'Chances for Growth Law'.

iv Joint tax audits and beyond

The German tax authorities are increasing efforts to realise more and more joint tax audits (i.e., tax audits involving two jurisdictions carried out on the premises of multinational companies). Such coordinated cross-border tax assessments can offer advantages to the taxpayers, especially avoiding double taxation and providing certainty for future tax planning. Changes to the Directive on Mutual Administrative Assistance 2011/16/EU on 22 March 2021 (DAC7) have brought long-awaited clarity. DAC7 rules that, in principle, the applicable law for all officials involved in a joint tax audit shall be the law of the country in which the respective activity takes place. Furthermore, DAC7 includes a legal basis for conducting joint tax audits within the European Union. However, DAC7 does not foresee a formal right of the taxpayer to request a joint tax audit and the final audit report described in DAC7 does not have a legally binding effect. Nevertheless, the growing number of (unsolved) mutual agreement procedures, especially pending in Germany, underlines the necessity for alternative dispute resolution approaches. Joint tax audits may offer such alternative ways to deal with international double taxation. Finally, Germany has joined the circle of countries taking part in the OECD's International Compliance Assurance Programme (ICAP) and the EU's European Trust and Cooperation Approach (ETACA). Both are risk assessment programmes for multinational enterprises trying to increase cross-border tax certainty by granting an 'assurance letter' to the taxpayers.

v German Tax Haven Defence Act

The Tax Haven Defence Act of 25 June 2021 contains several measures applicable from 1 January 2022 rendering it more difficult for individuals and companies with business relationships with NCJs (see Section II.iv) to avoid paying taxes in Germany. The measures include, for example, the denial of tax benefits and deductions. Open questions regarding the Tax Haven Defence Act may be answered by an administrative guideline which is, however, so far, only available in a draft version. According to this draft, the Tax Haven Defence Act shall apply to partnerships as well, which, as a result of a partnership's tax transparency, may raise further rather than solve questions.

Year in review

The most significant issues for tax planning of the past 12 months have centred around the Chances for Growth Draft Bill. The original draft included a large number of changes to German tax laws that would have influenced many tax planning decisions for corporations and partnerships with a German nexus. Along the path through Germany's two parliamentary bodies, and accompanied by a lively discussion of advisers, scholars and representatives of the tax administration, the draft bill was split up into several laws and the number of proposals was significantly reduced. Some of the proposals, however, have been implemented and will influence tax planning in Germany – in particular, the revised interest barrier rules (see Section II.v) and a lowered threshold to assume 'low taxation' (now at 15 per cent instead of 25 per cent, see Section III.i). Furthermore, the new minimum tax (see Section IV.i) is expected to be a controversial issue for the upcoming years, and key RETT rules (see Section II.iii) will remain a hot topic.

Outlook and conclusions

It will be interesting to see whether the corporate law reform of particularly German partnerships will lead to further tax-related amendments.

Furthermore, it should be expected that the requirements for a tax-efficient repatriation of profits from Germany into the investor's jurisdiction will remain in focus. Another critical issue in 2024 will very likely remain the practical consequences of the ATAD and minimum tax implementation. The tax planning community in Germany is excited to see how the German tax authorities execute the anti-hybrid rules, the changes to the CFC rules and the complex calculations for a minimum taxation.

Finally, some practical questions remain, and further amendments seem possible (especially of further documentation obligations) as regards German RETT.