Germany has adopted hybrid mismatch rules in line with the EU Anti-Tax Avoidance Directive (ATAD 2), effective from tax years commencing on or after 1 January 2020. The objective of the rules is to prevent double non-taxation as a result of mismatches in the tax treatment of legal entities or financial instruments unless a specific exemption is applicable. The rules target all transactions between related parties, including dealings between headquarters and the permanent establishment and structured arrangements with third parties, whereby a mismatch in either qualification, attribution, or recognition of tax status leads to either a deduction without inclusion or a double deduction. Under such situations, Germany will completely deny the deduction of the payment if it is the source country or will include it in the taxable income of the resident recipient if it is the country of residence.
The rules cover different situations where a mismatch can occur, as follows:
- Payment on account of a financial instrument;
- Qualification of the paying entity;
- Payments between a permanent establishment and head office or between two or more permanent establishments;
- Double deduction in general;
- Qualification of the recipient entity i.e., reverse hybrid; and
- Imported hybrids i.e., if a hybrid mismatch between two foreign jurisdictions is shifted (imported) into another jurisdiction by the use of a non-hybrid instrument (like a normal loan).
The reverse hybrid mismatch rules apply from 1 January 2022.
Tax Information Exchange Agreements (TIEAs) provide for the exchange of information on tax matters, and Germany has concluded TIEAs with around 22 countries, including Andorra, Anguilla, Antigua and Barbuda, Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Liechtenstein, Monaco, Montserrat, Saint Lucia, Saint Vincent, and the Grenadines, San Marino and Turks and Caicos Islands.
In line with BEPS Action 5 and the EU directive on mutual administrative assistance, Germany has adopted various measures in its domestic laws to enable the exchange of information on cross-border tax rulings and advance pricing agreements (APAs) in December 2016.
Germany has adopted measures to implement the automatic exchange of financial account information with the EU Member States pursuant to Council Directive 2014/107/EU of 9 December 2014, which synchronized EU rules with the global standard for exchange of information developed by the OECD under the Common Reporting Standard (CRS). Effective from 1 January 2016, Germany implemented the CRS, and the initial exchange of information on financial accounts based on the CRS from Germany was done in September 2017. Germany is also a party to the OECD Mutual Assistance Convention and the related Multilateral Competent Authority Agreement and as such exchanges financial account information under CRS with qualifying non-EU countries. Further, Germany concluded an Intergovernmental Agreement (IGA) with the United States on 31 May 2013 for the implementation of the U.S. Foreign Account Tax Compliance Act (FATCA).
Germany has published the law implementing the EU Council Directive (DAC6), which requires the reporting of cross-border tax planning arrangements and mandatory exchange of information with the other EU Member States. The reporting requirement primarily applies to intermediaries that design, market, organize, or manage the implementation of a reportable arrangement. However, the reporting requirements may also be shifted to the taxpayers in certain cases, including where an intermediary has a legal obligation to confidentiality and the taxpayer has not relieved the intermediary of that obligation for reporting purposes.
The requirements apply from 1 July 2020, with the disclosure of the reportable arrangements to be made within 30 days from the date when the arrangement is made available for implementation or is ready for implementation or where the first step to implementation has been carried out. With respect to reportable arrangements for which the first step for implementation was taken after 24 June 2018 and before 1 July 2020, the reporting deadline was 31 August 2020.
Further, taxpayers are required to disclose arrangements in their tax return, the tax benefit of which had an impact in the respective year. Failure to comply with the requirements results in fines of up to EUR 25,000, including where information is incorrect, incomplete, or is not submitted in a timely manner.
Germany has published guidance on the application of the DAC6 reporting rules for cross-border arrangements, including the filing and transmission specifications to the Federal Tax Office via an electronic interface using a DAC6 XML schema. Information is required to be submitted in German along with certain information in English.
Germany adopted the exit tax rules in line with the EU Anti-Tax Avoidance Directives (ATAD1) effective from tax years commencing on or after 1 January 2020, including an amendment to the existing exit tax rules. The rules are amended to bring them in line with ATAD Art. 5 whereby taxpayers will be allowed to defer the payment of any tax relating to a deemed gain from an exit event (i.e., the transfer of assets from a German permanent establishment to a foreign (EU) headquarters or the transfer of an asset from a German headquarters to an EU permanent establishment). The exit tax can be paid in installments over a period of 5 years.
Previously, under the tax laws of Germany, the unrealized capital gain was taxed when Germany’s right to tax the gains on the sale or use of assets was lost as a result of an exit transaction. The exit tax was imposed on the deemed profits to be transferred out of Germany by performing a hypothetical arm’s length analysis.
Effective from 1 July 2021, Germany has several specific anti-avoidance rules for transactions with entities located in non-cooperative jurisdictions (tax havens) as listed by the EU. This includes:
- Disallowance of payments made to a non-cooperative jurisdiction for business transactions (see Sec. 6.4.);
- Enhanced CFC implications with respect to entities established in non-cooperative jurisdictions (see Sec. 13.3.1.);
- Non-applicability of reduced withholding tax or exemptions for payments made to a non-cooperative jurisdiction (see Sec. 8.2.1.);
- Extension of non-resident tax liability to income from financing relationships, insurance, and reinsurance services, the provision of other services, and trading goods and services for income received by persons in a non-cooperative jurisdiction and claimed as an expense in Germany, with the payment of such income subject to applicable withholding tax at source;
- Non-applicability of the participation exemption under domestic law or a tax treaty to dividends received from a subsidiary or for gains from the sale of shares in a subsidiary resident in such jurisdictions (see Sec. 8.1.1.); and
- Increased duty to cooperate with respect to documentation and disclosure requirements for transactions with a non-cooperative jurisdiction.
A jurisdiction is considered non-cooperative if it is included in the EU list of non-cooperative jurisdictions and the jurisdiction:
- Does not provide sufficient transparency in tax matters, meaning the jurisdiction:
- does not automatically exchange financial account information;
- does not largely comply with OECD standards for the exchange of information on request; or
- has not ratified the Mutual Assistance Convention or, if the jurisdiction does not have full state sovereignty, it does not comply with the Convention.
- Engages in unfair tax competition, which includes beneficial measures that provide significantly lower taxation compared to the usual level of taxation in the jurisdiction, including among others:
- measures granting benefits only to non-residents or for transactions with non-residents;
- measures granting benefits regardless of actual economic activity or presence; and
- measures for determining group profits that deviate from international standards, especially OECD standards.
- Does not implement the minimum BEPS standards.
Further, it also specifically provided that jurisdiction is considered non-cooperative if it does not provide for the exchange of CbC reports with Germany and other EU Member States or has implemented CbC reporting rules that significantly deviate from the OECD minimum standards on confidentiality, data protection, appropriate use, and timely/sufficient exchange.
Effective 24 December 2021, the following jurisdictions are listed as non-cooperative jurisdictions based on the EU list of non-cooperative jurisdictions as of 12 October 2021:
|Panama||Samoa||Trinidad and Tobago||The US Virgin Islands|
Effective 1 October 2017, all legal entities and certain other types of associations having their seat in Germany are required to provide information on their beneficial owner(s) to the Transparency Register. Certain entities are exempt from the disclosure requirement, such as companies listed on a regulated market according to the German Securities Trading Act or companies that are subject to disclosure requirements consistent with EU law or subject to equivalent international standards that ensure transparency of ownership information.
Effective 1 August 2021, the requirements to submit ultimate beneficial ownership information to the Transparency Register are amended, removing the prior exemptions for entities whose information was already available in other registries and entities listed on the stock exchange. Therefore, all legal entities are now required to comply with ultimate beneficial ownership requirements.
Entities previously exempt from the disclosure requirement are provided transitional periods for the submission of information by the following deadlines depending on entity type:
- 31 March 2022 for stock corporations, European stock corporations, and partnerships limited by shares;
- 30 June 2022 for limited liability companies, cooperatives, European cooperatives, and registered partnerships; and
- 31 December 2022 for all other legal forms.
Further, under the extended requirements, entities must also provide updates on changes in ultimate beneficial ownership information.
The ultimate beneficial owner of a German entity is any natural person who, directly or indirectly:
- Holds more than 25% of the capital of such entity;
- Controls more than 25% of the voting rights of such entity; or
- Can exercise control in a comparable way over such entity.
Failure to comply with the requirements attracts a fine of up to EUR 100,000 or, in the case of a serious or repetitive violation, up to EUR 1,000,000 or twice the economic benefit derived from the violation. Failure to comply with the extended requirements may result in fines of up to EUR 150,000 with the possibility of increased fines in the case of serious and repeated offenses. For entities subject to the transitional deadlines, the prosecution of offenses will not begin until 1 year after the respective deadlines.
Effective 9 June 2021, a foreign company, partnership, or other taxable entity is not entitled to claim the withholding tax relief under a tax treaty if:
- Shareholders or persons that are beneficiaries of the said entities, under the 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 the economic activity of the foreign company, partnership or other taxable entity.
Activities which are limited to the receipt of the income and its transfer to shareholders or beneficiaries as well as activities without adequate substance cannot be regarded as an economic activity.
However, the restriction on withholding tax relief does not apply where:
- It is substantiated that none of the main purposes of the interposition of a foreign company, partnership, or other taxable entity is to derive a tax advantage; or
- The company’s shares are materially and regularly traded on a recognized stock exchange.
The German Ministry of Finance has published a letter providing guidance on the obligation for domestic taxpayers to notify the tax authority of:
- The establishment and acquisition of companies and permanent establishments abroad;
- The acquisition, abandonment, or change of interest in foreign partnerships;
- The acquisition or sale of shares in a corporation, association of persons, or group of assets (estate) with its registered office and management abroad (including direct and indirect participations), if:
- the participation is at least 10% in the capital or assets of the corporation, association, or estate; or
- the sum of the acquisition costs of all investments is more than EUR 150,000, although this condition does not apply if the acquisition or sale is less than 1% in the capital or assets of the corporation, association of persons, or estate if there is significant and regular trading on a qualifying stock exchange; and
- Events where the taxpayer, itself or together with related persons, can for the first time directly or indirectly exercise a dominant or decisive influence on the corporate, financial, or business affairs of a third-country (non-EU/EFTA) company.
In addition to notifying the above, the type of economic activity of the business, permanent establishment, partnership, corporation, etc. must also be indicated.
The guide also provides the form and deadline for notification, which is generally with the annual corporate tax return for the tax period in which the notifiable event occurred. In any case, the notification must be submitted within 14 months after the end of the tax period.
The notification obligation also applies to "third parties" where such a third party is aware that the domestic taxpayer can, for the first time, directly or indirectly exercise a dominant or decisive influence on the corporate, financial, or business affairs of a third-country company, or the domestic taxpayer acquired a direct holding of at least 30% in the capital or assets of the third-country company.
Third parties include credit institutions, financial services institutions, payment institutions, and certain other financial undertakings that have established or mediated relationships of domestic taxpayers with third-country (non-EU/EFTA) companies.