AbzStEntModG brings changes to Withholding Tax, Transfer Pricing & Tax Rulings
After the draft was already published at the end of 2020, the Act on the Modernization of Relief from Withholding Taxes and the Certification of Capital Gains Tax (Abzugsteuerentlastungsmodernisierungsgesetz; AbzStEntModG) has now been promulgated in the Federal Law Gazette (BGBl) on June 8, 2021.
Which areas have been changed?
The Act envisages changes in the following areas:
- Relief from withholding tax in Germany
- Transfer pricing
- Introduction of binding tax rulings
A brief overview of each is provided below.
Significant changes regarding the relief from withholding tax in Germany
The new Section 50c EStG (= German income tax act) regulates the procedure for relief from capital gains tax and from withholding tax pursuant to Section 50a EStG. Specifically, the party obliged to report has to issue tax notification , even if the receiving party has an exemption certificate (in future, such certificates are issued for a maximum of three years from the date of issue). On the positive side, exemption certificates can be issued under certain circumstances even if the existence of a tax withholding obligation is doubtful (possibility of a subjective case-by-case assessment). In addition, a legal basis has been implemented to handle the entire procedure electronically (expected to be in place as of 2024).
The provision on anti-treaty shopping (Sec. 50d (3) EStG) was comprehensively revised. According to the new provision, a foreign corporation is not entitled to withholding tax relief irrespective of an applicable DTT provisions if
- the persons involved in the (intermediary) company would not have been entitled to such relief if they had received the income themselves (personal relief entitlement), and
- the source of income has no substantial connection with the economic activity of this foreign corporation (factual relief entitlement).
This represents a significant tightening of the previous provisions. Under the personal relief entitlement, the tax relief claim of the intermediary company must be based on the same norm as the claim of the persons holding shares in the intermediary company. This is not the case, among others, if the relief is granted to the intermediary company on the basis of the EU Parent-Subsidiary Directive and to the persons holding shares in the intermediary on the basis of a provision of an applicable DTT, even if the amount of the relief would be the same (!).
The factual entitlement to relief requires a substantial connection of the income from the participation with the economic activity of the foreign corporation. Accordingly, it must be economically comprehensible why the foreign corporation holds this source of income; otherwise, the entitlement to relief lapses despite the fact that the foreign corporation has its own, fully-fledged economic activity.
However, escape clauses have also been implemented: Provided that the foreign corporation can prove that the structure has not been chosen to receive a tax advantage (as one of its main purposes), the new Sec. 50d (3) EStG is not applicable (principal purpose test). This also applies if the foreign corporation is listed on the stock exchange; however, the listing of a person involved in the foreign corporation is not sufficient. There is no exception for investment funds.
In the context of capital gains tax, further obligations for the withholding agent have also been implemented, whereas these will be applicable for the first time to capital gains that accrue to the creditor after December 31, 2024. Among others, these extended obligations relate to
- Supplementary information on tax certificates (Section 45b EStG)
- Transmission of the tax certificate to the BZSt in the case of limited taxpayers (Sec. 45a (2a) EStG)
- Extension of liability in the event of incorrect tax certificates (Sec. 45a (7) EStG)
Major changes in the area of transfer pricing in Germany
The Act also introduced – perhaps somewhat surprisingly considering its title – a number of innovations in transfer pricing:
The German Foreign Tax Act was amended or expanded in the following respects:
- Pursuant to Sec. 1 (3) AStG (= German foreign tax act), the arm’s length price is generally to be determined on the basis of the “most appropriate transfer pricing method”. This results from the comparative values available at the time of the agreement for similar business transactions as well as from the comparability analysis carried out beforehand;
- In Sec. 1 (3a) AStG, the interquartile range was legally defined, whereby the median is decisive in the context of a correction if the taxpayer lies outside the (narrowed) range in the course of the tax income calculation and cannot credibly demonstrate that a different value is in line with the arm’s length principle.
- Within the framework of Sec. 1 (3c) AStG, a DEMPE concept was introduced, which provides for a remuneration for related parties who perform functions in connection with DEMPE. It should be noted that the financing of development, enhancement, maintenance and protection functions is to be remunerated appropriately, but does not entitle the related party to income from the financed intangible asset.
- In case the business relationships involves significant intangible assets, there could be significant deviations between the profit expectations on which the price determination is based and the subsequent actual profit development. Therefore, it is presumed that third parties would have agreed on an appropriate price adjustment clause. If such an agreement was not made and if deviations of more than 20% occur within the first seven years after the conclusion of the transaction, an adjustment to the actual values is made in the eighth year in accordance with Section 1a AStG.
- The final wording of the law does not include the tightening of the rules on intra-group financing that had been planned in the meantime.
The new transfer pricing rules will apply for the first time to the 2022 tax assessment period.
Further changes in the area of international tax law
In the area of international tax law, the following changes were made, among others:
- Within the framework of the new Section 89a AO (= German fiscal code), the possibility of a preliminary tax ruling procedure was introduced. If a DTT is applicable and there is a risk of double taxation, which could be avoided by such a procedure, such a preliminary tax ruling procedure can be initiated at the request of all parties concerned. The decisive factor is that the facts of the case have not yet materialized at the time of the application. The accompanying tax assessment of the facts provide legal certainty for the taxpayers for a certain period of time (generally for a maximum five years).
If you have questions regarding the AbzStEntModG changes to Withholding Tax, Transfer Pricing & Tax Rulings in Germany, contact our tax experts!