Germany’s federal cabinet adopted the draft Act Implementing the Anti-Tax Avoidance Directive (Gesetz zur Umsetzung der Anti-Steuervermeidungsrichtlinie) on 24 March 2021. In the bill, the German government proposes stricter rules to fight aggressive tax planning. The new rules aim to effectively counteract tax avoidance strategies used by multinational corporations.

The bill aims to significantly reduce multinational corporations’ use of planning instruments for purposes of tax avoidance. In addition, it advances the harmonisation of corporate tax law in the EU. The EU’s Anti-Tax Avoidance Directive (ATAD) contains a package of measures to fight tax avoidance. In many areas, Germany already fulfils most of the standards set out in the Directive and is now taking steps to do even more.

“You can have a fair society only if you have a fair tax system. This is the principle guiding today’s cabinet decision on the implementation of the Anti-Tax Avoidance Directive. This is a major step towards greater tax fairness. We are taking a stand against aggressive tax planning and profit shifting. Large corporations must be stopped from shirking their tax responsibilities. Everyone must pay their fair share. The draft legislation we adopted today shows that we will not relent. We are closing tax loopholes. And Germany is not alone in this effort. We are taking action in concert with our European partners.” Finance Minister Olaf Scholz

The bill contains the following provisions:

Hybrid mismatch prevention
The rules to eliminate differential tax treatment in connection with hybrid mismatches will prevent companies from (a) deducting business expenses multiple times and (b) deducting business expenses in cases where the relevant income is not subject to tax. These rules implement Article 9 and 9b of the ATAD.

Reform of controlled foreign company (CFC) rules
The bill adapts Germany’s CFC rules. This means that Germany’s efforts to prevent multinational corporations from shifting their profits to low-tax jurisdictions will gain legal certainty and be brought up to date. In particular, the criteria for determining control will be adapted. In the future, the determination of control will no longer be based on whether or not a CFC is controlled by a domestic taxpayer but will instead take the overall composition of shareholders into account. Furthermore, in the case of multi-tier corporate structures, CFC rules will no longer permit the consolidation of losses at the level of the ultimate foreign entity.

Exit taxation
The bill also amends Germany’s provisions on exit taxation in order to bring these into line with Article 5 of the ATAD, which requires the taxation of unrealised gains in cases where a taxpayer transfers assets abroad or moves its tax residence to another country, and which also gives taxpayers the option to pay these exit taxes in instalments over a period of five years. In the case of exit taxes payable by natural persons in accordance with section 6 of the External Tax Relations Act (Außensteuergesetz), the bill standardises deferral rules and provides for measures to improve the rules on taxpayers returning to Germany and to prevent tax avoidance in connection with substantial profit distributions.