On March 24, 2021, the German Government approved the draft bill to implement the EU Anti-Tax Avoidance Directives (ATAD I and ATAD II). It is expected that the bill will pass through the legislative process without significant amendments.
The bill intends to reform German rules on exit taxation (Art. 5 ATAD), implement anti-hybrid regulations (Art. 9, 9b ATAD) and it reforms the German controlled-foreign-corporation (CFC) rules (Art. 7, 8 ATAD).
The draft also contains provisions for adapting the German exit taxation rules to Art. 5 of the ATAD, which, on the one hand, provides for the taxation of hidden reserves in the event of an exit or the transfer of individual assets abroad and, on the other hand, grants taxpayers the option of spreading the taxation over a period of five years.
With regard to the exit taxation of individuals (Section 6 AStG), the draft law provides for standardization of the deferral rules as well as measures to improve the so-called returnee rule and to prevent tax structuring in the case of substantial profit distributions.
Hybrid mismatch arrangements
Hybrid mismatches are differences between tax systems that can be exploited to achieve a double non-taxation, a double deduction, a deduction without inclusion or a non-taxation without inclusion.
ATAD provides rules to counteract hybrid mismatches arising between EU member states and third countries, including imported mismatches, reverse hybrid mismatches and tax residency mismatches (Art. 9 and 9b ATAD).
The implementation of hybrid mismatch rules by the member states was due by Dec. 31, 2019, to be applied as of Jan. 1, 2020.
Germany is among the European member states that have limited the exemption for dual-inclusion income more than originally provided by ATAD. For more information and potential US tax implications refer to European anti-hybrid laws target common U.S. holding structures.
The bill represents a shift from the concept of national control to a shareholder-based approach. Control of the foreign corporation occurs where a taxpayer, alone or together with related parties, directly or indirectly owns more than half of the foreign corporation’s shares by vote or by value or is directly or indirectly entitled to more than half of the profits or liquidation proceeds of the corporation.
The new regime requires current inclusion of passive income earned by a CFC where such income is taxed at an effective rate lower than 25% to the CFC. Despite wide criticism, the threshold for a ‘low taxation’ remains unchanged.
The bill provides for an application of the amended exit taxation and CFC-rules as of Jan. 1, 2022. The application of anti-hybrid rules is still provided for Jan. 1, 2020, although the retroactive effect will pose legal challenges.