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Germany Publishes Withholding Tax Relief Modernization Law — Orbitax Tax News & Alerts

Germany published the Withholding Tax Relief Modernization Law in the Official Gazette on 8 June 2021, which includes measures to simplify and streamline relief procedures, the digitization and centralization of procedures, and the improvement of anti-treaty abuse (treaty shopping) rules. With respect to treaty abuse in particular, a revised rule is introduced to comply with EU law and adopt certain aspects of the ATAD GAAR. The revised rule provides that a foreign company, partnership, or other taxable entity will not be entitled to claim any withholding tax relief under a treaty if:

  • Its shareholders or persons that are beneficiaries under its applicable statute would not be entitled to the relief if they had been the direct recipients of the income; and
  • The source of income is not materially linked to economic activity of the foreign company, partnership, or other taxable entity, with the specific provision that receiving income and transferring it onward to shareholders or beneficiaries, as well as activities without adequate substance do not qualify as economic activity.

However, it is provided that the restriction on withholding tax relief will not apply if it can be proven that none of the main purposes of the interposition of a foreign company, partnership, or other taxable entity is to obtain a tax advantage, or its shares are materially and regularly traded on a recognized stock exchange.

Aside from the measures related to withholding tax, the law also includes updated transfer pricing rules considering the outcomes of BEPS Actions 8-10 and other changes, including:

  • The replacement of the transfer pricing method hierarchy, providing that the most appropriate (suitable) method be applied;
  • The introduction of the concept of DEMPE functions and a definition of intangibles;
  • A reduction in the time period for the adjustment clause in relation to intangibles with uncertain value at the time of a transaction from 10 years to 7 years;
  • The introduction of the provision that a significant difference between the financial projections and actual outcomes for intangibles is assumed if the transfer price and the actual outcome deviate by more than 20%;
  • The introduction of the determination of interquartile range, including a rebuttable assumption allowing taxpayers to demonstrate that any other value within the overall price range is better reflecting the arm's-length principle; and
  • The introduction of a new legal basis for the conclusion of advance pricing agreements (APAs), including outside the context of transfer pricing.

Note that the German authorities already generally apply the BEPS outcomes in practice, which are now formally incorporated into law.

The law is generally effective on the day following publication, i.e., on 9 June 2021. However, certain other changes regarding family relief and beer tax are effective from 1 January 2021, certain changes regarding relief for international organizations are effective from 1 January 2022, and certain changes regarding insurance for employees are effective from 1 January 2024.