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On December 27, 2023, Germany’s law to implement the Pillar 2 GloBE Rules/EU Minimum Tax Directive was published in the Federal Law Gazette 2023.
There were a number of significant amendments to the original government draft law during the legislative process.
Most notably, the enacted law implements numerous aspects of the Second Set of OECD Administrative Guidance (issued in July 2023). The original draft law already included most aspects of the First Set of OECD Administrative Guidance. No aspects of the Third Set of OECD Administrative Guidance (issued in December 2023) are included in the law.
However, on August 20, 2024, the German Ministry of Finance issued a Discussion Draft of a Draft Law to implement most aspects of the Third Set of OECD Administrative Guidance. A Second Discussion Draft was issued on December 6, 2024 which also implements aspects of the Fourth Set of OECD Administrative Guidance.
On November 22, 2024, the Annual Tax Act was passed by the Upper House of Parliament. This includes two technical changes to the German GMT law.
The structure of the law is very similar to the EU Minimum Tax Directive, with the addition of two new chapters for the QDMTT and procedures and penalties.
The legislation is very comprehensive and, as expected, covers all relevant aspects of the EU Minimum Tax Directive.
In particular, it provides for an Income Inclusion Rule (IIR) for financial years beginning after December 30, 2023 and the Under-Taxed Profits Rule (UTPR) for financial years beginning after December 30, 2024.
The legislation also includes a Qualifying Domestic Minimum Top-Up Tax (for financial years beginning after December 30, 2023) which reflects the OECD Administrative Guidance.
In addition, safe harbours, as reflected in the OECD Safe Harbour Guidance and the Second Set of OECD Administrative Guidance are also reflected in the legislation.
The law includes a mandatory exemption from accounting for deferred taxes that arise from the Minimum Tax Act or corresponding foreign tax laws (based on international accounting standards). This is based on the exemption in international accounting standards (IAS 12.4A).
In addition to the accounting exemption, a new disclosure requirement applies in the notes to the financial accounts. The actual tax expense arising under the Minimum Tax Act or foreign minimum tax laws must be disclosed, alongside the qualitative effects (and quantitative if available) of the GloBE rules on the corporation.
Section 5 of the 2024 Draft Law includes an amendment to the treatment of deferred tax liabilities that have been offset against deferred tax assets under Section 274 of the German Commercial Code. This permits the recasting of the losses to minimum tax rate under Section 50(3) of the Minimum Tax Act.
In the January 2025 Central Record of Legislation with Transitional Qualified Status issued by the OECD, the German IIR and DMTT are both treated as qualified for GloBE purposes.
The law issued in August 2023 included relevant provisions from the OECD Administrative Guidance (eg Blended CFC Regimes, Substitute Loss Carry Forwards etc).
The final enacted law takes this a step further and includes additional aspects of the OECD Administrative Guidance, particularly the July 2023 Administrative Guidance.
Aspects of the First Set of OECD Administrative Guidance included in the law are:
-The deemed consolidation rules (Article 1.2)
-Provisions for consolidated deferred tax amounts (Article 1.3)
-The exclusion of sovereign wealth funds from the definition of Ultimate Parent Entity (Article 1.4)
-The meaning of “ancillary” for Non-Profit Organisations (Article 1.6)
-The foreign exchange hedge election (Article 2.2)
-The rules for the asymmetric treatment of dividends and distributions (Article 2.3)
-The debt release election (Article 2.4)
-Provisions for accrued pension expenses (Article 2.5)
-Excess negative tax carry-forward guidance (Article 2.7)
-Substitute loss carry forwards (Article 2.8)
-The equity gain or loss inclusion election (Article 2.9)
-Rules for blended CFC Tax Regimes (Article 2.10)
-The extension of the taxable distribution method election to insurance investment entities (Article 3.1)
-The exclusion of Insurance Investment Entities from the definition of Intermediate Parent Entity and Partially-Owned Parent Entity (Article 3.2)
-Provisions on restricted tier one capital for insurance companies (Article 3.3)
-Liabilities related to Excluded Dividends and Excluded Equity Gain or Loss from securities held on behalf of policyholders (Article 3.4)
-The portfolio shareholding election (Article 3.5)
-The application of the tax transparency election to mutual insurance companies (Article 3.6)
-Deferred tax assets and tax credits under the transitional rules (Article 4.1)
-The transitional rules and transactions similar to asset transfers (Article 4.2)
-Asset carrying value and deferred taxes under the transitional rules (Article 4.3)
The following provisions of the Second Set of OECD Administrative Guidance (published on July 17, 2023), are included in the law:
-Currency Provisions
-QDMTT Safe Harbour
-Transitional UTPR Safe Harbour
-Marketable Transferable Tax Credits
-Treatment of Investments in Certain Tax Transparent Entities
-Interjurisdictional Assets for the Substance-based Income Exclusion (the provisions for interjurisdictional payroll costs are included in the 2024 Annual Tax Act)
-Substance-based Income Exclusion: Other Assets
-QDMTT Challenges
However, the 2024 Draft Law proposes to implement most aspects of the Third Set of OECD Administrative Guidance, including amendments to the Transitional CbCR Safe Harbour (see below) and Blended CFC Regimes.
The 2024 Draft Law also includes proposed amendments to implement the Fourth Set of OECD Administrative Guidance. This includes:
-Aggregate DTL Category basis (Article 1.2.1)
-Exclusion of certain types of GL accounts and separate tracking (Article 1.2.1)
-Exclusion of GL accounts that generate standalone DTAs (Article 1.2.1)
-Exclusion of swinging accounts and separate tracking (Article 1.2.1)
-FIFO/LIFO Basis (Article 1.2.2)
-Aggregation of Short-term DTLs (Article 1.2.3)
-Reversal of DTLs that accrued before the Transition Year (Article 1.2.2)
-5 year unclaimed accrual election (Article 1.2.2)
-Recalculated deferred tax where GloBE carrying value differs from accounting carrying value (Article 2.1.2)
-Extension of the Substitute Loss Carry-forward DTA to PEs, hybrids and rev hybrids (Article 4.1)
-Exclusion of deferred tax assets or liabilities arising under a Blended CFC regime from transition rules (Article 4.2.3)
-Determining GloBE status when a Flow-through Entity is held directly by another Flow-through Entity (Article 5.2.2)
-Non-group owners: Partially owned Flow-through Entities (Article 5.3.2)
-Non-group owners: Indirect minority ownership (Article 5.3.5)
-Taxes allocated to a flow-through entity (Article 5.4.2)
-Hybrid entities – Taxes pushed down include indirect owners (Article 5.5.2)
-Hybrid entities – Entities located in jurisdictions without a Corporate Income Tax system (Article 5.5.4)
-Extension of taxes pushed down to include Reverse Hybrids (Article 5.6.2)
Safe harbours, as reflected in the OECD Safe Harbour Guidance are reflected in the legislation.
The legislation includes the simplifications agreed by the OECD. In particular:
-The CbCR Safe Harbour (Sections 84 to 88);
-Simplified Calculation Safe Harbour (Section 79); and the
-Non-Material Constituent Entities (Section 80)
Section 81 of the draft law implements the QDMTT Safe Harbour in Section 5.1 of the July 2023 Administrative Guidance.
Section 89 of the draft law implements the Transitional UTPR Safe Harbour.
The QDMTT Safe Harbour excludes the application of the GloBE Rules in other jurisdictions by deeming the Top-up Tax payable under the GloBE Rules to be nil where top-up tax is levied under a QDMTT. The MNE Group therefore only needs to undertake one calculation.
However, this then opens up a risk that the QDMTT tax may be much less than any GloBE top-up tax that would have been due. This would undermine the international application of the GloBE rules. Therefore, to qualify for the QDMTT Safe Harbour a QDMTT must meet three conditions as provided in the OECD Administrative Guidance (QDMTT Accounting Standard, Consistency Standard and the Administration Standard).
The 2024 Draft Law proposes to implement most of the amendments to the Transitional CbCR Safe Harbour included in the Third Set of OECD Administrative Guidance (December 2023), including:
-Purchase Accounting Adjustments (consistent reporting condition and the goodwill impairment adjustment)
-JVs
-Same Financial Statements/Local Financial Statements for Statutory Reporting
-Using different accounting standards
-Adjustments to Qualified Financial Statements/Dividend Misatches
-MNEs not required to file CbC Reports
-Qualified Financial Statements for PEs
-Treatment of hybrid arbitrage arrangements
The application of the global minimum tax follows the EU Minimum Tax Directive (eg it also applies to wholly domestic groups and requires a constituent entity applying the IIR to apply it not only to foreign subsidiaries but also to all constituent entities resident in that Member State (which isn’t mandatory in the Model Rules)).
Taxable Period
Section 94 of the law provides that the taxable period is the calendar year. As such, even if the fiscal year differs from the calendar year, the minimum tax only arises at the end of December 31 of the year in which the financial year ends.
This simplifies the calculation and monitoring of deadlines.
Allocation of Global Minimum Tax Liabilities
Section 3 of the law includes a provision that applies to German Minimum Tax Groups. In particular, the registration and payment of the top-up tax for entities within the group is made by the group parent.
The group parent is the UPE if it is located in Germany. If not, a parent company located in Germany is the group parent if it the parent company of all subsidiaries in Germany. If this doesn’t apply then a foreign UPE must nominate which entity is the group parent. The aim is to simplify the administration.
Section 3(6) of the law includes a provision that requires the group entities to compensate the group parent for the tax incurred on their behalf. Similarly tax refunds must be passed on by the group parent to the other German business units.
All of the elections included in the OECD Model Rules and the EU Minimum Tax Directive are provided in the draft law, including:
-Excluded Entity Election (Section 5(3) of the law)
-Stock-Based Compensation Election (Section 34 of the law)
-Election to use the Realization Method (Section 35 of the law)
-Election to Spread Capital Gains (Section 36 of the law)
-Consolidation Election (Section 37 of the law)
-Unclaimed Accrual Election (Section 50(7) of the law)
-GloBE Loss Election (Section 51 of the law)
-Prior Year Adjustment Election (Section 52(4) of the law)
-De minimis Election (Section 56 of the law)
-Substance-Based Income Exclusion Election (Section 58 of the law)
-Deemed Disposal of Assets Election (Section 66(4) of the law)
-Taxable distribution Election (Section 74(1) of the law)
-Tax transparency Election (Section 73(1) of the law)
-Distribution Tax Regime Election (Section 71(1) of the law)
-Safe Harbour Elections (Section 87 of the law)
The other elections included in the OECD Administrative Guidance are included in the updated draft law. This includes the:
–Debt Release Election (Section 41 of the law);
–Foreign Exchange Hedge Election (Section 40 of the law);
–Portfolio Shareholding Election (Section 38 of the law) ;
–Excess Negative Tax Carry-Forward Election (Section 46 of the law); and the
–Equity Investment Inclusion Election (Section 39 of the law).
Sections 90-93 of the legislation provide for a QDMTT (or at least a domestic minimum tax that is likely to be classed as a QDMTT).
Section 90(1) of the legislation provides that the method of calculation is to take the general top-up tax calculation in Section 55(3) or additional top-up tax from a prior year (in Section 57). However, this is then effectively recalculated taking account of some adjustments that were provides in the OECD Administrative Guidance:
Section 90(2) of the legislation provides that the Top-up Tax that is subject to the QDMTT is based on the whole amount of the Jurisdictional Top-up Tax irrespective of the Ownership Interests held in the Constituent Entities located in the QDMTT jurisdiction by any Parent Entity of the MNE Group (unlike the general GloBE Rules).
Stateless entities, joint ventures and joint venture subsidiaries are to be allocated to the tax jurisdiction in which they were incorporated (ie a stateless entity is no longer stateless) under Section 91. This means that these entities that are incorporated in Germany will be subject to the QDMTT.
As provided in the OECD Administrative Guidance, CFC taxes are not pushed down when considering the QDMTT ETR under Section 92of the draft legislation (See Treatment of CFC Taxes: QDMTTs vs GloBE Rules) Section 92 prohibits the pushdown of taxes for PEs, CFC’s, Hybrid entities, and also for taxes on distributions. This ties in with the Second Set of OECD Administrative Guidance. Note that domestic withholding tax on dividends distributed from a German entity to a foreign entity should still be allocated to the German entity under the OECD Guidance for the drafting of QDMTTs. Section 92 of the law provides for this by stating that only recorded foreign taxes are not pushed down.
The German QDMTT applies the general GloBE rules to determine the accounting standard used. As such, the domestic minimum tax is calculated using the financial accounting standard of the UPE, and, if that is not practicable, on the basis of an accepted accounting standard or an approved accounting standard, if:
-the constituent entity’s financial statements are prepared in accordance with that standard,
-the information contained in the financial statements is reliable; and
-permanent differences of more than EUR 1 million are conformed with the UPEs accounting standard.
Section 3(1) of the German GMT Law provides that German resident constituent entities of corporate groups form a Minimum Tax Group. The Group Parent is liable to file and account for top-up tax under the IIR, UTPR and DMTT on behalf of the Minimum Tax Group.
Section 3(3) of the GMT Law provides that the UPE is the Group Parent if it is located in Germany. If this does not apply the German parent entity of the German resident constituent entities is the Group Parent. In all other cases, a designated German Constituent Entity is treated as the Group Parent. If not, the economically most relevant German resident constituent entity is deemed to be the Group Parent.
These tests apply based on the circumstances at the end of the tax period.
Section 3(4) stated that the Group Parent is required to electronically notify the Federal Central Tax Office of its status as a Group Parent within two months after the end of the tax period (ie February 28, 2025 for the 2024 fiscal year).
Changes to the status of the Group Parent, must be notified immediately by the previous Group Parent.
As the Group Parent pays top-up tax on behalf of the minimum tax group, members of the members of the minimum tax group whose top-up tax is attributed to the Group Parent obliged to compensate the Group Parent for their share of the top-up tax.
On October 17, 2024, Germany released the template for its Group Parent Notification Form:
The 2024 Annual Tax Act (passed by the Upper House of Parliament on November 22, 2024) provides that a single constituent entity in Germany will be classed as group parent for the purposes of the German minimum tax group provisions.
Section 75(3) of the law provides that a GloBE Information Return is required to be filed 15 months after the end of the fiscal year, with the tax return due at the same time (18-months for the first fiscal year). For the filing of the tax return, the provisions of the general tax code apply.
Section 76 of the law provides that the GloBE Information Return must include:
-A list of all group entities, broken down by tax jurisdiction, their tax numbers and their status for GloBE purposes;
-An overview of the corporate structure of the group, in particular the controlling interests group entities that are held by other entities;
-The ETR and top-up tax for each relevant jurisdiction including both under the IIR and UTPR
-A list of all GloBE elections claimed.
GloBE top-up tax is required to be self-assessed and is payable within, one month after the tax return is filed under Section 90 of the draft legislation.
Section 75(1) of the law provides that a Constituent Entity located in Germany is required to file a GloBE Information Return. The return may be filed by either the Constituent Entity or by a Designated Entity on its behalf.
Under Section 75(2) of the law, a Constituent Entity is not required to file a GloBE Information Return with the German tax administration if a GloBE Information Return has been filed by either the Ultimate Parent Entity or the Designated Filing Entity located in a jurisdiction that has a Qualifying Competent Authority Agreement in effect with Germany for the Reporting Fiscal Year.
Section 96(1) of the law also requires a German constituent entity to submit a tax return electronically by the standard filing deadline. When there are a number of Constituent Entities within an MNE group, only the parent company is required to file.
Section 96 of the law ensures that the deadline for submitting the tax return does not end before the deadline for submitting the GloBE Information Return. The 2024 Draft Law provides that the earliest date for the submission of the GIR is June 30, 2026.
Section 98 of the law provides that it is an administrative offence to intentionally or recklessly, fail to submit the GloBE Information Return (in whole or part), by the filing deadline.
Section 98(2) of the law provides that a taxpayer that is intentionally or recklessly late in submitting a GloBE information return can be subject to a penalty of up to EUR 30,000.
For detailed information on the application of the GloBE Rules in Germany based on the latest Law, see our:
OECD Administrative Guidance: Domestic Implementation Matrix
Transitional CbCR Safe Harbour: Domestic Implementation Matrix
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