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 information 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. The Taxpayers are being left in the lurchas they are exposed to massive obligations to co-operate and tax risks for common domestic situations (e.g. profit and tax consolidation through tax groups, cash pooling within the group, etc.). In addition, due to the instruction in para. 217 of the decree, they bear the Determination load for undefined legal terms (such as the existence of "active income", "substance test", etc.) and must ultimately be Documentation obligation (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 as part of their tax compliance.

The regulation

As part of the EU Directive on ATAD II, add-back taxation was adapted to the control concept (previously: domestic control). The purpose of add-back taxation is (as before) to notionally shift foreign "harmful" income that has accrued in a foreign low-taxed corporation or permanent establishment to Germany. This means that whenever taxpayers operate via foreign corporations, partnerships or permanent establishments, complex legal issues may arise in relation to 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.

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 presenting the corresponding legal opinion to the tax office, it is advisable to set up a customised compliance management system. This will help to fulfil the large number of determination burdens and documentation obligations and avoid penal consequences.

Experience has shown that in the Practice the following points always to note:

  • How does the group check which companies are subject to add-back taxation?
  • 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 recognised in the context of the functional approach be attributed to active income?
  • How is the Substance test and to what extent is this to be submitted to the tax authorities?

Your TAXGATE Team advises you on setting up an international tax compliance management system and supports you with the declaration in the context of add-back taxation as well as with the tax-efficient structuring of your business activities abroad in order to avoid add-back taxation.

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