On March 24th, the German Federal Cabinet passed a draft law to implement the EU Tax Avoidance Directive (ATAD). The German law contains stricter rules to combat aggressive tax avoidance strategies by multinational companies. The draft law contains provisions to prevent hybrid mismatches, control foreign company rules and control exit.
“You can only have a fair society if you have a fair tax system,” said Finance Minister Olaf Scholz. “Large companies need to be prevented from evading their tax liability. Everyone must pay their fair share. The bill that we passed today shows that we will not give in. We close tax loopholes. And Germany is not alone in this. We act together with our European partners. “
The Anti-Tax Avoidance Directive Enforcement Act will further advance the harmonization of corporate tax law in the EU, the Federal Ministry of Finance said, noting that Germany already meets most of the EU standards on this matter and is now taking steps to achieve more.
The rules to eliminate differential tax treatment related to hybrid mismatches will prevent companies from deducting business expenses multiple times and deducting business expenses in situations where the relevant income is not taxable, the government said.
The bill also tightens the rules for controlled foreign companies (CFC) in Germany. “This means that Germany’s efforts to prevent multinational companies from shifting their profits to low-tax areas will gain legal certainty and will be brought up to date,” said the Ministry of Finance.
The criteria for determining control will be adjusted and in the future the determination of control will no longer be based on whether a CFC is controlled by a domestic taxpayer, but will take into account the overall composition of shareholders.
With regard to multi-tier corporate structures, the CFC rules no longer allow consolidation of losses at the level of the ultimate foreign company.
The law also changes German exit tax regulations to better align them with EU standards that mandate taxation of unrealized gains in cases where a taxpayer transfers assets abroad or relocates tax residence to another country, and which also give taxpayers the option to pay this exit tax in installments over five years.
In the case of exit taxes to be paid by natural persons, the draft law standardizes the deferral rules and provides for measures to improve the rules for the return of taxpayers to Germany and to prevent tax avoidance in connection with substantial profit distributions.