Minimum Tax for Large Corporate Groups

On November 10, 2023, the German Federal Parliament adopted the draft bill submitted by the Federal Government to implement Council Directive (EU) 2022/2523 to ensure global minimum taxation and other accompanying measures. The vote was based on the Finance Committee’s recommendation of November 8, 2023. In addition to the newly created Minimum Tax Act (MinStG), the law also contains a number of accompanying measures.

Overview of Key Elements of the MinStG

Tax Liability

In the future, business units of large corporate groups located in Germany that report annual group sales of 750 million euros or more in at least two of four fiscal years immediately preceding the fiscal year are to be subject to the minimum tax. Both internationally and only nationally active corporate groups are to be covered, irrespective of the provisions of a treaty for the avoidance of double taxation with regard to the minimum tax.

The minimum tax for a fiscal year arises at the end of the calendar year in which the fiscal year ends; the taxable period is the calendar year. The tax liability of business units located in Germany is independent of the respective legal form and is in addition to income tax or corporate income tax.

Scope of Taxation

The corporate groups are subject to minimum taxation equally on both their domestic and foreign profits. In this context, the primary supplementary tax regulation ensures that, starting from the parent company, which is either itself low-taxed or holds an equity interest in a low-taxed business unit, subsequent taxation for all subordinate business units in the corporate group takes place centrally at the level of the parent company (so-called “top-down approach”).

The second mechanism, the so-called secondary supplementary tax regulation, is to be applied subsidiary to the primary supplementary tax regulation and serves as a catch-all for factual constellations in which the low taxation is not already compensated by the application of the primary supplementary tax (“backstop”).

In addition, the act provides for the introduction of a national supplementary tax, which arises without prejudice to the primary and secondary supplementary tax amounts.

Bases of Calculation

For the calculation of the minimum tax, the act adopts the internationally agreed country-specific calculation of the tax increase amount based on a minimum tax rate of 15 %.

The starting point is the annual profit before consolidation measures derived from the business unit’s accounting data and adjusted to conform to uniform group recognition and measurement rules. This amount is adjusted for customary differences between the result reported in the annual financial statements and the taxable profit in order to take account of tax policy objectives (for example, reduction for generally tax-exempt dividend income or addition of unlawful payments). In addition, profits and losses from international maritime transport, for example, are to be excluded from the determination of the minimum taxable profit or minimum taxable loss of a business unit, subject to certain conditions. Furthermore, special rules also apply, among other things, to certain income of banks and insurance companies, to qualified gains or losses from certain equity investments, and to qualified reorganization income.

The act also contains the simplification rules agreed internationally in December 2022. Of particular note here are the safe harbor rule in the case of recognized national supplementary tax, which is not limited to EU member states but also applies to third countries, and the simplifications for immaterial business units. In addition, transitional rules are provided for corporate groups with subordinate international activities or when using country-by-country reports of multinational corporate groups (CbCR safe harbor).

Filing and Declaration Obligations

For the minimum tax, a tax return in accordance with the officially prescribed data set must be submitted electronically to the tax office responsible for taxation according to income, in which the taxpayer must calculate the tax himself. The tax is due one month after the tax return is submitted and must be paid by then. If the minimum tax is set higher than the tax return, the difference is due one month after the tax assessment notice is issued and must be paid by then.

In addition, each business unit subject to tax in the Federal Republic of Germany must electronically submit the so-called minimum tax report for the respective fiscal year to the Federal Central Tax Office in accordance with the officially prescribed data set no later than 15 months after the end of the fiscal year. If a minimum tax report is to be prepared for the first time for the corporate group, the transmission must take place no later than 18 months after the end of the fiscal year. The Federal Central Tax Office then transmits all minimum tax reports it receives to the relevant tax office.

Temporal Application

The EU member states are required to implement the EU directive on ensuring global minimum taxation in national law by December 31, 2023. The act will then largely apply for the first time to fiscal years beginning after December 30/31, 2023. The effective date will therefore start in 2025 against the background of the applicable filing and declaration deadlines.

Overview of Key Accompanying Measures

Amendment to the Financial Administration Act

The scope of responsibility of the Federal Central Tax Office is extended to include the receipt of the minimum tax reports, the group leader reports and the evaluation of the corresponding information.

Amendment to the Foreign Tax Act

The existing low tax threshold for the additional taxation pursuant to Section 8 (5) of the German Foreign Tax Act is to be reduced from the current level of 25 % to 15 % in the future. In addition to a considerable simplification and reduction of bureaucracy, the aim is to achieve a synchronization between the additional taxation and the global effective minimum taxation (15 %) with regard to the taxation of foreign activities.

In terms of procedure, the prerequisites for electronic data transmission of notifications and declarations for the purposes of applying the German Foreign Tax Act are to be fulfilled. This concerns the notifications pursuant to Section 6 (5) of the German Foreign Tax Act in the case of deferrals or annual installment payments in connection with exit taxation, the declarations pursuant to Section 18 (1) to (3) of the German Foreign Tax Act for the implementation of addition taxation and those pursuant to Section 18 (4) of the German Foreign Tax Act for the income of a foreign family foundation.

Amendment to the Income Tax Act

The license barrier regulated in Section 4j of the German Income Tax Act will not be completely abolished, as still envisaged in the draft bill. However, it will be reduced from 25 % to 15 % for expenses incurred after December 31, 2023. This measure is thus also aligned with the introduction of minimum taxation and the reduction of the low tax threshold for add-back taxation.

Amendment to the German Commercial Code

In line with international accounting standards, Section 274 of the German Commercial Code provides for a mandatory exemption from the recognition of deferred taxes resulting from the application of the MinStG or corresponding foreign tax laws. This is intended to reduce the complexity of implementing the MinStG and counteract any disadvantages for German GAAP accountants. In addition, companies reporting under German GAAP will also be required to disclose the actual tax expense or tax income under the MinStG and foreign minimum tax laws for the financial year in the notes.