German Pillar Two Tax Amendment Act published

What happened?

The German Federal Ministry of Finance published, on December 5, 2024, a second draft of the German Pillar Two Tax Amendment Act ('the draft act’). The Ministry requested feedback by January 31, 2025, as part of the consultation process. In addition to the aspects previously included in the first draft, this second draft includes further amendments by implementing the OECD Administrative Guidance from June 2024.

Why is it relevant?

The draft act also proposes repealing several international tax provisions. These include the license barrier rule under Sec. 4j of the German Income Tax Act, a rule foreseeing the non-deduction of so-called special business expenses according to Sec. 4i German Income Tax Act, and the CFC taxation rules for participation in investment companies under Sec. 13 of the Foreign Tax Act.

Actions to consider

Multinational companies with German subsidiaries should analyze the draft act's impact on the CbCR Safe-Harbour calculation and calculation of deferred taxes. Businesses also should consider further adjustments, particularly, the unilateral extension of the OECD Model Rules regarding restructurings.

CbCR Safe-Harbour calculation

The draft act adjusted the wording in the definition of ‘reporting packages’ as one of the central elements when applying the CbCR Safe-Harbour (Sec. 87 para. 2 No. 1 of the draft act). In addition, a reference to the German implementation of the CbCR rules in Sec. 138a of the German Tax Code was added to clarify that the CbCR requirements also need to be considered to benefit from the CbCR Safe-Harbour. Under the new rules, only aggregated and not consolidated data are required, according to the OECD CbCR Guidance.

Sec. 87 para. 1 sent. 2 of the draft act foresees that use of the CbCR Safe-Harbour for a tested jurisdiction cannot be claimed if adjustments to the data for the CbCR Safe-Harbour, which are required under the German Pillar Two act, have not been made. This rigid rule is supposed to apply even if the omitted adjustment would have had no effect when applying the CbCR Safe-Harbour. Therefore, all adjustments (e.g., elimination of tax expense from uncertain tax positions) need to be made when determining the reporting packages (even if the CbCR Safe-Harbour would have passed without such an adjustment).

Calculation of deferred taxes

Sec. 50 para. 1a of the draft act transposes Chapter 2 of the June 2024 OECD Administrative Guidance into German domestic law. Based on this provision, the deferred taxes as part of the amount of adjusted covered taxes will be calculated based on the difference between the ’GloBE book values’ (instead of the accounting book values) and the tax book value to the extent adjustments for Pillar Two purposes have been made. The draft act follows the OECD Guidance.

Recapture of deferred tax liabilities (DTLs)

Sec. 50a of the draft act transposes Chapter 1 of the June 2024 OECD Administrative Guidance into German domestic law. In order to track the reversal of deferred tax liabilities (DTLs), taxpayers can choose to aggregate DTLs on a general ledger account level or under certain requirements on a DTL category level. The reversal of DTLs is then either tracked on LiFo or FiFo basis. The draft act follows closely the OECD guidance.

Definition of a transparent entity

The definitions of transparent entities, tax-transparent entities, and tax-transparent structures are expanded in Sec. 7 para. 32 of the draft act to implement chapters 5.2 and 5.5. of the June 2024 OECD Administrative guidance. In particular, the definitions are envisaged to be determined not only by the immediate shareholder, but also by an indirect shareholder.

Restructurings

Sec. 66 para. 2 No. 2 of the draft act introduces a unilateral extension of Art. 6.3.2 (b) of the OECD Model Rules (MR). Under Art. 6.3.1 (a) OECD MR, the disposing constituent entity is supposed to exclude any gains/losses stemming from the disposition of shares from the computation of the GloBE Income/Loss. The draft act foresees that the difference in value of the shares in the disposing entity and the book value of the transferred assets is excluded from the computation of the GloBE Income/Loss of the acquiring constituent entity.

This rule does not apply to the extent the acquiring entity holds a participation in the disposing entity (e.g., in case of an upstream merger) and the sale of the participation would not be an excluded equity gain (not a loss) under Sec. 21 of the Minimum Tax Act (cf. 3.2.1 (c) OECD-MR).

Miscellaneous

The Anti-Hybrid-Arbitrage Arrangement legislation transforming Chapter 2.6 of the December 2023 OECD Administrative Guidance is applicable for fiscal years beginning after December 31, 2024, for the first time.

In addition, the draft act abolishes key provisions of the German tax law, such as:

• The licenses barrier rule under Sec. 4j of the German Income Tax Act (effective from fiscal year 2025 onwards);
• A domestic anti-hybrid rule foreseeing the non-deduction of expenses triggered in conjunction with partnerships (i.e., so-called special business expenses according to Sec. 4i German Income Tax Act), which are deductible in another jurisdiction as well;
• A CFC taxation rule for participations in investment companies under Sec. 13 of the foreign tax code should be abolished with retroactive effect from fiscal year 2022 on.