Tax relief in the case of CFC taxation and the licence barrier through the implementation of the global minimum taxation?

The accompanying measures in the newly published draft bill on the implementation of the minimum taxation directive (Pillar 2) could result in a significant reduction of the tax burden on foreign activities and a reduction of bureaucracy - in detail:

• Abolition of the licence barrier
• Lowering the low tax threshold from 25% to 15% (CFC taxation).
• Abolition of the trade tax on CFC income.

After the publication of the discussion draft on the implementation of the directive on the implementation of a global minimum taxation (Pillar 2) into national law on 20 March 2023, the Federal Ministry of Finance now followed up and issued the corresponding draft bill on 10 July 2023. The draft, dated 7 July 2023, includes not only the implementation of the principles mentioned in Pillar 2 but also other related accompanying measures, which are reflected in amendments to the Income Tax Act (EStG), the CFC Rules (AStG) and the Trade Tax Act (GewStG). The main accompanying measures are presented below.

Abolition of the licence barrier

The licence barrier, regulated in § 4j EStG, is to be abolished for assessment periods from 2024. The regulations were introduced against the background of BEPS action point 5 and were intended to counteract tax-damaging profit shifting in low-tax countries. It limits the deduction of expenses for the transfer of rights to related parties that are subject to a preferential regime in the recipient's country and are thus regularly not taxed or taxed at a low rate. The examination of the applicability of the licensing barrier has so far often led to a high level of effort, as this required an examination of the way in which the (foreign) licensor taxes the licensing income.

Lowering the low tax threshold for CFC taxation

The draft bill lowers the low tax threshold for the taxation of CFC income, which is regulated in section 8 (5) AStG, from the current 25 per cent to 15 per cent. This is intended to bring the tax rate in line with the global effective minimum taxation with regard to the taxation of foreign activities. This reduction was already announced during the legislative process for the ATAD Implementation Act 2021 and has been demanded by business representatives and experts for a long time, since with a previously applicable tax rate of 25%, many countries, including many industrialised countries, were considered to be low-taxed.  The previous low tax threshold of 25% thus represented a locational disadvantage for German companies.

Abolition of the trade tax obligation on CFC income

With the introduction of the global effective minimum taxation, the trade tax liability of CFC income is abolished. By repealing § 7 sentences 7 to 9 GewStG, the trade tax liability for CFC income is to apply for the last time in the assessment period 2023 and will be abolished as of 2024. The trade tax liability of CFC income has been criticised in many cases, since, among other things, there is no possibility of offsetting foreign taxes against the trade tax. In addition, a trade tax liability on additional amounts is also obsolete in view of a politically envisaged minimum taxation level of 15%, because this is already achieved through corporate income tax (tax rate 15%).

Creation of a prerequisite for electronic data transmission of notifications and declarations on the application of the CFC Rules

The notifications pursuant to section 6, paragraph 5 AStG in the case of deferrals or annual instalment payments in connection with exit taxation as well as declarations on the separate - and uniform - determination pursuant to section 18, paragraphs 1 to 3 AStG for the implementation of the CFC Rules (sections 7 to 13 AStG) as well as pursuant to section 18, paragraph 4 AStG of the income of a foreign family foundation within the meaning of section 15 AStG can in future be transmitted electronically.

Outlook

The aforementioned tax relief does not only affect those affected by Pillar 2 (groups with a turnover > 750 million), but all companies. It should be noted, however, that the draft bill is currently only a draft law and requires the approval of the government and, in the further leg-islative process, the approval of the Bundestag and the Bundesrat. However, there is now concrete hope that the beneficial effects of the global minimum taxation will also be imple-mented. We will keep you informed about the progress of the legislative process.