In its letter dated 22 December 2023, the Federal Ministry of Finance published the new version of the AStG decree on 255 pages and set out its view and corresponding interpretation of the statutory provisions. However, the explanations on the taxation of add-backs in accordance with sections 7 et seq. of the AStG (as in the "old" law) are interpreted rather theoretically with regard to the respective definitions of terms and, in our opinion, do not provide sufficient concrete guidance on how to deal with add-back taxation in practice. A practice-orientated interpretation with practical examples etc. would have been desirable in this context. Taxpayers are left in the lurch as they are exposed to massive obligations to co-operate and tax risks for situations that are common in Germany (e.g. profit and tax consolidation through tax groups, cash pooling within a group, etc.). In addition, due to the instruction in para. 217 of the decree, they bear the burden of proof for undefined legal terms (such as the existence of "active income", "substance test", etc.) and must finally fulfil their documentation obligations (e.g. documentation of the taxes actually levied and to be offset). The companies concerned are therefore required to fulfil a large number of tasks that they must take into account as part of their tax compliance and from the point of view of legally compliant tax structuring in the area of corporate taxation.

The regulation

The add-back taxation was adapted to the control concept as part of the EU Directive on ATAD II (previously: domestic control). Its purpose (as before) is to notionally transfer to Germany foreign "harmful" income that has accrued in a foreign low-taxed corporation or permanent establishment. This means that whenever taxpayers operate via foreign corporations, partnerships or permanent establishments, complex legal issues may arise in connection with add-back taxation. This now also applies to fund structures, as the indirect target investments are no longer shielded by the fund as in the past, but must in future be taken into account directly by the taxpayer in the context of add-back taxation. These changes are closely related to the internationally harmonised CFC rules, which also affect international taxes as part of the measures against profit shifting and profit reduction.

Practical application and tax compliance management system in the context of add-back taxation

In order to properly document the taxation of add-backs in ongoing business operations and as part of the declaration preparation process at an early stage, including the corresponding legal opinion vis-à-vis the tax office, it is advisable to set up a customised compliance management system. This will help you to fulfil the numerous determination and documentation obligations and avoid criminal prosecution.

Experience has shown that the following points must always be observed in practice:

  • How is it checked within the group for which companies the add-back taxation is to be applied?
  • How is foreign commercial law translated into German commercial or tax law in the context of a reconciliation?
  • How is active income separated from "harmful" passive income and how can harmful income be attributed to active income within the framework of the functional approach?
  • How is the substance test documented and to what extent must it be submitted to the tax authorities?

 

Your expert for corporate taxation and tax audits Patrick Bubeck and the TAXGATE team advise you on setting up an international tax compliance management system and support you with declarations in the context of add-back taxation as well as with the tax-efficient structuring of your business activities abroad in the context of international taxes, CFC rules and sustainable tax structuring.