Draft law on Royalty taxation of IP registered in Germany

On 3 September 2022, the German government passed the third relief package, primarily aimed at taking steps to lighten the burden on the public resulting from the current high energy costs. Besides these measures, it was also decided – almost in passing – to begin implementation of internationally agreed global minimum taxation, Pillar Two, on the national level.

No details are yet known and publication of the bill on transposing the Pillar Two Model Rules into German law, which is now to be drafted by the finance ministry, is still to come. Nevertheless, this step is quite surprising since announcements so far had been that implementation of minimum tax would be at a minimum on the EU level. But in the last meetings of the EU finance ministers (ECOFIN), no agreement on a draft directive on global minimum tax could be reached since firstly Poland and then Hungary refused to consent so that there was not the unanimity required to adopt the EU directive.
Since the current German government, and Chancellor Olaf Scholz (SPD) in particular, consider Pillar Two a key political objective, there had already been discussions about whether minimum tax could now be introduced unilaterally, as now intended, for political reasons without regard for the many unknown developments in other countries and the unclarified questions about the details of the Model Rules, which bring in great uncertainty and risks.

Further rules, especially those on simplification, have not been published on the OECD or EU level up till now. Since the compliance burden on multinational businesses for drafting the required declarations (GloBE declarations) would be very high, ‘safe harbour’ rules had been demanded. For example, under Englisch and Schanz’s proposal, these could include creating relief for companies that are resident in countries that have an effective tax rate on IFRS income, which is relevant for GloBE purposes, of over 15 percent based on the national tax rate and the comparability of the national basis for tax assessment. These countries could be exempted from the duty to submit a GloBE declaration beforehand. For countries that deviate in certain areas in the way they define their basis of tax assessment for determining the relevant IFRS income – something that could result in advantages in taxation – a simplified calculation of the effective tax rate of these ‘red flags’ would have to be made at the company level. This calculation could be limited to the critical deviations and would be based on national tax law so as to be able to build on the data the company has available. An alternative consideration to simplification being discussed is to use CbC (which might need adapting). There are currently no details whether simplifications, and if so what kind, might be applied in Germany. It would certainly be desirable for the German bill to lay down such rules on simplification as well as to include solutions to the questions of detail that are currently unclear, such as the application of the Model Rules to partnerships and questions concerning how they are to be applied in determining covered taxes for GloBE purposes.

Since the announcement of unilateral implementation, the relevance of preparation to German businesses that come within the scope of Pillar Two has grown again, because the national introduction of minimum tax now appears to be set fast and a GloBE declaration may well already have to be submitted from 2024

We will be pleased to assist you with questions concerning Pillar Two – just contact us.