Germany beginning implementation of Pillar Two

On September 4, 2022, the German coalition parties presented the third relief package. 

Item 17 of the third relief package states that ‘…the federal government will start implementing the internationally agreed global minimum tax at the national level…’ 

There is no draft legislation yet, however, the preamble to the relief package states that it is planned that the relief measures will be implemented quickly. 

On October 17, 2022, the German Government issued a Parliamentary Document answering a number of questions relating to Pillar Two that had been raised in Parliament.

EU/German Implementation of Pillar Two

Whilst very few details have been provided this is nonetheless an interesting development. 

The EU Draft Directive is currently stalled due to the failure to reach a unanimous agreement, however, the intention was to have the EU directive in place first with domestic jurisdictions then giving effect to the provisions of the directive in their domestic legislation. 

Although there is a draft directive in place, this was subject to change in the final agreed version. Therefore, it will be interesting to see to what extent Germany will follow the provisions of the draft EU directive including the planned commencement dates (2024 for the Income Inclusion Rule and 2025 for the Under-Taxed Payments Rule).

Whilst the OECD Model GloBE rules leave relatively little room for variation in domestic implementation, the EU draft directive did extend its scope to large-scale purely domestic groups. In addition, the Directive makes use of an option offered in the Commentary to the Model Rules where the Member State of a constituent entity applying the Income Inclusion Rule (generally the UPE), is required to ensure effective taxation at the 15% rate not only of foreign subsidiaries but also of all constituent entities resident in that Member State and permanent establishments (PEs) of the MNE group established in that Member State. This is in contrast to the OECD Model Rules which provide that the jurisdiction which applies the IIR takes into account the effective tax rate (ETR) of only foreign constituent entities. For more information, see Review of the Draft EU Pillar Two Directive.

In addition, it’s worthwhile noting that the EU draft directive stated that when implementing domestic legislation for Pillar Two, there should be a reference to EU Pillar Two Directive either in the enacting law or in their Official Gazette. 

Whilst Germany could enact the Pillar Two GloBE Rules entirely unilaterally with no EU  Directive in place, this is less likely given the EU’s desire to establish a level playing field across the EU.