The BMF has authorised theDraft law on defence against tax avoidance and unfair tax competition and amending other laws published. The aim of this law is to make business relationships with countries that do not fulfil internationally agreed transparency and information exchange standards or do not implement the BEPS minimum standards even less attractive, thereby encouraging the countries in question to comply with international standards.
The draft law is based, among other things, on the Conclusions of the EU Council to the EU list of non-cooperative countries and territories (so-called "blacklist"), which was updated in 2020 and includes jurisdictions such as American Samoa, Cayman Islands, Oman and Panama.
The provisions of this law are to take precedence over the provisions of the German Fiscal Code and tax laws (e.g. Sections 90 et seq. of the German Fiscal Code, Sections 4f-j, 50d of the German Income Tax Act, German Corporate Income Tax Act, etc.). Integrating the planned tightening into existing tax regulations is a systematic approach, especially as the jungle of tax regulations in international tax law is already large.
The law pursues a massive objective and direction, as taxpayers who maintain business relationships or shareholdings with partners in blacklisted countries can expect considerable tightening beyond the current regulations.
More stringent income calculation
For example, the deduction of business expenses from business transactions with partners based in a blacklisted country is to be prohibited in future. This only does not apply if these expenses are not offset by corresponding taxable income in Germany (e.g. if the recipient of the payment has a permanent establishment in Germany or the payments are subject to German withholding tax - priority of withholding tax, see below).
In addition, the 951TP4 tax exemptions for profit distributions (dividends) and gains from the sale of shares in accordance with Section 8b of the German Corporation Tax Act (KStG) are also to be denied if the corporation in which the tax resident holds an interest is based in a tax haven in accordance with the blacklist. The investment income is therefore fully taxable. The partial income method for corresponding income in the business assets of natural persons and the 25% flat tax rate for shares held as private assets will also no longer apply.
Stricter add-back taxation
If persons with unlimited tax liability hold shares in a foreign company within the meaning of sec. § 7 AStG that is domiciled in a non-cooperative jurisdiction, the company is deemed to be an intermediate company with all of its income, with the result that the tax shield effect of the foreign corporation is breached and all income is deemed to be distributed (so-called add-back taxation). Whether there is active income or low taxation should no longer play a role in these cases. Active income should only not be subject to add-back taxation if the prohibition on deducting business expenses already applies to the expenses attributable to the income. This mitigation of the "double measure" should not apply to passive interim income.
Stricter withholding tax rules and expansion of the catalogue of restricted income
If a foreign company is entitled to relief from withholding tax in accordance with Section 50d (1f) or Section 44a (9) EStG and natural persons have a direct or indirect shareholding in this company totalling more than 10%, the German capital tax charge is definitive (irrespective of Section 50d (3) EStG - an existing treaty override) if these persons are resident in a tax jurisdiction on the blacklist.
In addition to the catalogue in Section 49 EStG, income from financing relationships, insurance and reinsurance services, the provision of other services and trade are to be subject to limited tax liability.
Conclusion
Taxpayers should check before 1 January 2022 whether they have business relationships with listed tax havens and prepare appropriate measures. Regular business relationships may also be affected. The additional burdens resulting from additional German taxes and increased obligations to cooperate must be taken into account as costs for such engagements.
Yours TAXGATE Team is always available to answer your questions about structuring cross-border investments.
