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Germany publishes draft Pillar Two implementation bill
July 2023
In brief
The German Federal Ministry of Finance on July 11 published a draft bill dated July 7 on implementation of the EU Council Directive to implement the global minimum tax into German national law. The legislation reflects updates from feedback received from various industry associations and the OECD Administrative Guidance published in February 2023. The legislation follows a March 20, 2023 discussion draft (see PwC insight dated March 20, 2023).
The legislation consists of 95 sections (instead of 89 sections in the discussion draft).
Significant adjustments are also proposed in the Income Tax Act and the Foreign Tax Act, including abolition of the so-called royalty barrier rule, lowering of the low tax threshold for Controlled Foreign Corporations (CFCs) from 25% to 15%, and abolition of CFC income being subject to German trade tax.
Observation: Businesses should continue to monitor the ongoing legislative process. The next legislative steps—publication of a government draft and referral to the parliament—are expected toward the end of August or beginning of September.
The July 7 draft bill focuses on the integration of specific parts of the OECD’s February 2023 Administrative Guidance:
- Excluded Equity Gains or Loss and hedges of investments in foreign operations (Chapter 2.2)
- Treatment of debt releases (Chapter 2.4)
- Excess Negative Tax Carry-forward guidance (Chapter 2.7)
- Equity Gain or loss inclusion election (Chapter 2.9)
- Allocation of taxes arising under a Blended CFC Tax Regime (Chapter 2.10)
- Transition (Chapter 4)
The March 2023 discussion draft introduced the concept of a “Minimum Tax Group” consisting of all German resident constituent entities. Within this group, only the group leader is subject to the minimum tax (IIR, UTPR, QDMTT); other group entities do not need to pay the minimum tax. The July 7 draft bill foresees a compensation mechanism, such that the group leader obtains a reimbursement of the taxes paid from the other group entities.
Other parts of the OECD’s February 2023 Administrative Guidance, including Chapter 1, Scope, Chapter 2.3, Excluded Dividends – Asymmetric treatment of dividends and distributions, and Chapter 2.8, Loss-making Parent Entities of CFCs, were not included in the draft. Furthermore, the Guidance released by the OECD on July 17 is not yet included.
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