Germany adopts ATAD rules on exit taxation, CFCs, hybrids

By Timo Turek, partner at Ypsilon International GmbH, Köln

After a delay of more than two years, Germany on June 30 implemented the Anti-Tax Avoidance Directive (ATAD) into German law. The original deadline for implementation was 1 January 2019. The current draft law has now been agreed with the Bundesrat and will come into force on 1 January 2022.

The EU’s base erosion and profit shifting (BEPS) directive, drafted from the OECD’s BEPS project, is intended to guide member states in the uniform implementation of the BEPS project.

The new law essentially transposed into German law regulations on exit taxation, controlled foreign corporation (CFC) taxation reform, and intra-EU anti-hybrid rules.

Exit taxation (Article 5 ATAD)

Exit taxation is implemented in Germany through various laws.

Article 5 of the directive obliges member states to tax hidden reserves in the case of cross-border transfers of assets, the relocation of businesses or the departure of corporations. On application, the tax can be paid in installments.

The member states are also obliged, in the case of the transfer of assets and the relocation of corporations to the domestic territory, to accept the values as “acquisition costs” assessed in the foreign countries for taxation if they correspond to the “market value.” Given the differing views regarding market price in the context of international tax law, it remains to be seen whether the regulations will prove to be practicable.

The corresponding implementation takes place in the Income Tax Act and the Corporate Tax Act.

The exit taxation of section 6 Foreign Tax Act (AStG) is adapted to the ATAD Directive with regard to the deferral rules. The previously unlimited deferral option is no longer available and only a payment in installments over seven years is possible.

Reform of CFC taxation (Articles 7 and 8 of the ATAD)

The German regulation on the taxation of CFCs was already very far-reaching and covered most of the regulatory content of the ATAD. Therefore, only minor adjustments were needed.

The main adjustment is with respect to the concept of control. In the future, a shareholder-based approach will be taken. Under this approach, it is crucial that a taxpayer “controls” a foreign company alone or together with related persons. In addition, limited partnership taxpayers may also be subject to CFC taxation if the shares in the foreign company are held through a domestic permanent establishment.

Furthermore, in the case of multi-level company structures, there is no longer any consolidation of losses at the level of the top foreign company within the scope of the CFC taxation, which can lead to a significant increase in the tax base in individual cases.

Intra-EU anti-hybrid rule (Articles 9 and 9b ATAD)

According to the regulation, member states are to deny business expense deductions for certain expenses in connection with hybrid arrangements, provided that the income corresponding to the expenses is not taxed at the receiving party.

The core of the regulations implementing Articles 9 and 9b ATAD is § 4k Income Tax Act (EStG), which restricts the deduction of business expenses for various situations of differing tax treatment due to hybrid elements.

Almost all areas of regulation under § 4k Income Tax Act (EStG) presuppose a “hybrid element,” i.e., that, for example, a legal relationship or a legal entity is qualified differently by the countries involved.

The regulation limits a business expense deduction in Germany in various circumstances, especially if the corresponding income is not taxed due to a conflict of qualification or if expenses are deducted both in Germany and abroad. In cases of double deduction of business expenses, the rule can even be applied if no hybrid element was the reason for the double deduction. Furthermore, a deduction restriction can also apply if a tax treatment difference only occurs abroad but is not corrected there.

Timo Turek is a partner at Ypsilon International GmbH, Köln.

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