Germany’s Minimum Taxation Act – Good News Included
1. Background
The EU Guideline 2022/2523 to ensure global minimum taxation for multinational enterprise groups and large domestic groups was to be implemented into (German) national tax law before the end of 2023. This guideline is the result of an agreement reached at OECD level on common taxation principles. One of the concerns of this group of states („Member of the OECD/G20 Inclusive Framework on BEPS”) is the creation of a “level playing field” for income taxation, hence a global minimum taxation for companies.
The focus is on multinational enterprises (MNEs) with an annual turnover of at least 750 EUR million. However, large-scale domestic groups are also covered. The “Minimum Tax Act” (MinStG) implements this into German tax law.
Interestingly, the new law amends other German tax laws as well, lowering the German minimum taxation definition from 25 to 15% under Section 7 et seq. German Transaction Tax Act (AStG) and Section 4j EStG (license barrier rule, see 8. below).
2. Concept of minimum tax
The minimum tax is intended to be an independent income tax that covers the corporate profits of large (international) corporate groups , irrespective of their legal form. It applies in addition to income tax and corporation tax (as well as trade tax) and aims to tax the income of all business units in a corporate group at an effective rate of at least 15%. If this effective minimum tax rate is not achieved through regular income taxation, the minimum tax provides additional taxation – generally assessed at the level of the ultimate parent company.
Due to the relatively high tax burden of companies in Germany (not less than roughly 23%: 15%corporate income tax + 0.825%solidarity surcharge + 7% trade tax, depending on local multiplyer), a minimum tax rate of 15% may be triggered specifically if companies have subsidiaries in low-tax jurisdictions.
3. Scope of Application
The MinStG is to apply for the first time for financial years starting on 31 December 2023 or later, for groups of companies exceeding annual turnovers of 750 million EUR in at least two of the four previous financial years.
It is estimated that up to 800 German corporate groups are covered (including faily-owned businesses, which is a problem of its own).
It is irrelevant whether the respective corporate group operates internationally or not. However, a 5-year tax exemption is provided for corporate groups with subordinate international activities.
The law does not apply to public bodies, tax-exempt entities (NPOs) and certain investment vehicles.
4. Three different tax rules
The minimum tax for business units located in Germany is made up of the
• primary additional tax,
• secondary additional tax and a
• potential national additional tax amount.
These regulations complement each other.
The business units of a corporate group form a minimum tax group. The primary additional tax rates, secondary additional tax rates and national additional tax rates of these business units are allocated to the group’s parent entity, liable to the minimum tax.
If there is no ultimate parent entity in Germany, intermediate and partially ownedentities may be held liable.
The secondary additional tax regulation is a catch-all provision if any low taxation cannot be offset by the application of the primary supplementary tax regulation.
The national additional tax corresponds to the tax increase amount allocated to a business unit for Germany.
5. Tax Base
The starting point for calculating the tax base are the consolidated German GAAP financial statements. After adjustments the minimum tax profit or loss of the specific business unit is derived therefrom.
The difference between the effective tax rate and the minimum tax rate of 15% is the basis for determining the amount of the tax increase in the respective country.
6. Procedure
The group leader is the (ultimate) parent entity of the corporate group located in Germany. That entity is obliged to submit (i) a minumum tax report to the Federal Central Tax Office and also (ii) a minimum tax return to the local tax offic, for the first time by 31 December 2024 if necessary.
Section 98 MinStG contains a provision on fines for the improper submission of the minimum tax report.
7. Transitional rules and simplifications
A complete tax exemption for the first five years is provided for groups of companies with subordinate international activities.
Further regulations relate to a reduction of the minimum tax to zero, if necessary, if a recognized (comparable) supplementary tax rules abroad apply.
8. Modification of other tax laws
As an important side-measure, the low tax definition for the German license barrier rule (Section 4j German Income Tax Act) is lowered from 25% to 15% for license expenses incurred from 2024 onwards. At the same time, also the low tax limit for add-back taxation under the German Foreign Transaction Tax Act is reduced to 15%.
Both measure have high practical relevance:
Example: A German taxpayer pays a license fee to (non-resident) licensor effectively taxed at 16% on this license income.
In 2023, this was a low taxation (below 25%) and German anti-abuse rules were potentially triggered at the level of the German licensee (add-back taxation pursuant to Section 8 German AStG and, if low-taxation was due to detrimental preferential tax regime, license barriere rule pursuant to Section 4j German EStG).
In 2024, this is not the case anymore. Both anti-abuse provision would only apply, if the effective tax burden at licensor’s level is below 15%.
9. Final remark
The unusual complexity of the German Minimum Tax Law law is partly due to the underlying EU rules to be implemented.
The fact that both (i) a minimum tax report and (ii) a minimum tax filing have to be made, regardless of whether a minimum tax is ultimately applied, appears to an unneccessary double reporting obligation.
For most taxpayers and businessesin Germany, the side-measure of changing the low-tax definition in German anti-abuse tax rules from 25% to 15% appears to be the most practically relevant part of the new legislation – this is good news.
