New German tax policies: Impact on foreign companies

Germany’s Christian Democrats and Social Democrats have successfully completed their coalition negotiations and will form a new federal government. They published their draft coalition agreement on February 7, 2018, which contains the future government’s policy goals, including goals of its tax policies and the measures to achieve them. Although the draft coalition agreement includes few specifics on these tax measures, it offers some insight into what can be expected.

Impact of tax policies on foreign companies doing business in Germany:

For foreign companies with German business activities, these are the government’s most important goals of future tax policies:

• Implementing the EU Anti-tax Avoidance Directive (ATAD) into German tax law using contemporary CFC rules, extended anti-hybrid rules and an amended interest barrier rule. The wording of the coalition agreement indicates that Germany will only implement the minimum standard under the EU ATAD, i.e. the implementation is expected to be business-friendly. Germanys plan to modernize CFC rules was expected and also demanded by the corporate world. The extension of anti-hybrid rules for financing structures was also anticipated.
• Tightening real estate transfer tax (RETT) to prevent perceived harmful tax planning through share deals. In the recent past, the federal states examined options to lower the current 95% threshold, which triggers RETT in direct and indirect transfers of shares in companies owning German real estate. Furthermore, the German real estate tax will be amended.
• Combatting tax avoidance, unfair tax competition and tax dumping in the EU and at national and international level. The new government aims to ensure a fair tax burden for multinational companies, in particular for those of the digital economy, through international coordination and a widespread implementation of the OECD BEPS recommendations around the globe.
• Introducing measures for the appropriate taxation of the digital economy, but without naming any specifics, nor does the coalition agreement indicate whether such measures would be aligned with the EU and OECD initiatives on taxing the digital economy.
• Supporting the common consolidated corporate tax base (CCCTB) and minimum corporate income tax rates in the EU, both in close cooperation with the French government.
• Eliminating the solidarity surcharge tax (approx. 2% on taxable business profits). Individual lower-income taxpayers will benefit from the first reduction as of 2021.
• Implementing tax incentives for R&D activities, in particular for small and medium-sized businesses.
• Strengthening and enhancing the role of the German Federal Central Tax Office located in Bonn as the competent authority for mutual agreement procedures (MAP) and advance pricing agreements (APA). Most recently, an OECD peer review report showed that Germany has an effective and practical MAP program in place, and longstanding and extensive experience of resolving MAP cases, though the average time necessary for resolving them exceeded the 24-month aim slightly. The German Federal Central Tax Office will also become the central point of contact for tax issues and advance tax rulings of foreign companies.
• Conducting German tax audits in a timely manner and strengthening the role of the German customs authorities by recruiting more staff. The enforcement and refund procedure for import VAT will also be enhanced.