22.08.2023Government approves draft legislation to implement EU Pillar Two directive
Approved draft bill includes amendments to CFC rules and the royalty barrier rule
On 16 August 2023, the German government approved draft legislation on the domestic implementation of Council directive (EU) 2022/2523 on ensuring a global minimum level of taxation for multinational enterprise (MNE) groups and large-scale domestic groups (the “Pillar Two directive”). The approved version was published on the Ministry of Finance (MOF) website on 17 August 2023.
The first discussion draft on the domestic implementation of the Pillar Two directive was published on 20 March 2023 (see GTLN dated 03/22/2023). After comments were provided by several business groups and the OECD administrative guidance was published in February, a second discussion draft on the domestic implementation of the Pillar Two directive was published by the MOF on 10 July 2023 (see GTLN dated 07/11/2023). The approved version of the Pillar Two draft implementation law takes into account the additional comments from business groups but did not incorporate the OECD administrative guidance published in July.
The approved version of the Pillar Two draft implementation law includes the following noteworthy changes as compared to the discussion draft published on 10 July 2023:
- The changes and clarifications are technical and include, e.g., certain push-down accounting rules, transfer pricing adjustments, and corresponding treatment of financial instruments. The Pillar Two draft implementation law consists of 96 sections (rather than 95 sections as in the July discussion draft).
- The Pillar Two draft implementation law also includes changes to the German GAAP rules, specifically on the calculation of deferred taxes (section 274 of the commercial code) and tax reporting obligations (sections 285 and 314 of the commercial code). This should provide for a synchronized treatment between German GAAP and IFRS rules.
- The royalty barrier rule of section 4j of the income tax code would not be abolished as described in the 10 July 2023 discussion draft; however, the applicable low tax threshold for the application of the royalty barrier rule would be reduced from 25% to 15%. The royalty barrier rule provides for the (partial) non-deductibility of royalty expenses paid to a related party benefitting from a low tax, non-nexus compliant preferential tax regime. The royalty barrier rule can be of particular interest for US MNE group’s that benefit from the US foreign derived intangible income regime (the application of the royalty barrier rule on such payments is unclear at the moment).
- Contrary to what was included in the 10 July 2023 discussion draft, the application of trade tax on controlled foreign company (CFC) income from subsidiaries would not be abolished, even though the low tax threshold for the application of the CFC rules would be reduced to 15%.
The draft law will be introduced into the legislative process, where the upper and lower houses of parliament must approve the draft law. It seems likely that the draft law will be approved before the end of 2023, but the progress of the legislative process should be closely monitored.
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Andreas Maywald
Client Service Executive | ICE - German Tax Desk
