On 10 December 2019, the Federal Ministry of Finance (“Bundesfinanzministerium” – BMF) sent the long-awaited draft bill of a law on the implementation of the Anti-Tax Avoidance Directive (ATAD Implementation Act – ATADUmsG) to the associations for comments. The Federal Cabinet should already deal with the draft bill on 18 December 2019 in its 79th session. This did not come to pass in the end. It can be assumed that this will be made up for promptly at the beginning of 2020. The reason for this is that the regulations of the planned CFC/PFIC rules in accordance with the ATADUmsG are already to apply to financial years of intermediate companies that begin after 31 December 2019.
What makes the draft bill so explosive for the fund industry?
According to the current legal situation, the regulations of the Investment Tax Act (InvStG) take precedence over the regulations of the CFC/PFIC rules (AStG) – section 7 (7) AStG. The aim was to ensure a clear separation between the InvStG and the AStG in the interests of legal certainty, as non-distributed income is accessed via both, investment taxation and CFC/PFIC taxation. However, as there are certain cases according to the current law justification in which (according to the opinion of the legislator) the amount of the pre-determined tax base (“Vorabpauschale”) in the case of investment funds or the retained income (“thesaurierte Erträge”) in the case of special investment funds is not sufficiently taken into account, the legislator wants to abandon the priority rule of the InvStG and thus applies both taxation regimes simultaneously.
Avoidance of double taxation
In order to avoid double taxation, the legislator has included two regulations in the draft law. In the case of the retention of investment income in accordance with the InvStG, i.e. the pre-determined tax base for investment funds in accordance with section 16 (1) no. 2 of the InvStG and the retained income for special investment funds in accordance with section 34 (1) no. 2 of the InvStG, the CFC/PFIC amount in accordance with the AStG is reduced by the amount of the assessment basis in accordance with the InvStG to offset the additional burden (section 10 (6) AStG-E). If investment income is distributed in accordance with the InvStG, the additional burden is regulated by the reduction provision in accordance with section 11 AStG-E. The taxpayer can deduct a reduction amount when determining income upon application. The provision in accordance with section 3 no. 41 of the EStG (German Income Tax Act), which currently applies to traditional profit distributions, is to be eliminated.
Planned new CFC/PFIC regulations
This does not take into account the complexity of the taxation of investment funds, which already prevails in fund practice. Investment funds have only just been allowed to deal with the implementation of the InvStG 2018 – for example, the consideration of the transitional rules for so-called old shares (“Alt-Anteile”) as of 31 December 2017 in accordance with section 56(2) of the InvStG or the determination and provision of the tax bases for domestic investors participating in foreign fund structures in accordance with sections 16 et seq. of the InvStG taking into account the applicable fund classification to allow for a possible partial tax exemption – they must now prepare for the application of the planned new CFC/PFIC taxation.
In this context, the following regulations are particularly noteworthy:
- The previous “domestic” CFC concept will be replaced by a “shareholder”-related control concept in accordance with the Directive (section 7 (1), (2) AStG-E). The associated consideration of indirect shareholdings as well leads to the abolition of the system pursuant to section 14 AStG (downstream intermediate companies). A control according to the new wording exists if, at the end of the financial year of the foreign company, the taxpayer alone or together with related parties (1.) is directly or indirectly entitled to more than 50% of the voting rights or (2.) more than 50% of the shares in the nominal capital or the taxpayer alone or together with related parties (3.) is entitled to more than 50% of the profit or the liquidation proceeds of this company (section 7 (2) AStG-E). A person is related to the taxpayer if the person has a significant interest in the taxpayer or the taxpayer has a significant interest in this person, can exercise a controlling influence or if persons cooperate with the taxpayer through concerted action. In the case of the partners of a partnership, cooperation through concerted behaviour is rebuttably assumed (section 7 (3), (4) AStG-E).
- The regulations on income of an investment nature (PFIC rules) are basically retained. These are now regulated in a separate section 13 AStG-E (participation in corporations).
- The concept of the previous Active Catalogue remains the same, but with various modifications. For example, the profit distributions of corporations according to section 20 (1) no. 1 EStG should be emphasized. These are still considered as active income. However, distributions according to section 8b (4) KStG will have to be qualified as passive income (section 8 (1) no. 7 AStG-E).
- The optional determination of profits according to section 4 (3) EStG is no longer permissible. The determination of profits should now be carried out exclusively in accordance with section 4 (1) EStG (section 10 (3) AStG-E).
- The concept of the phase-shifted entry of the imputed income is to be dropped. The imputed income should now be entered in the same phase, that is, at the end of the assessment period or fiscal year in which the fiscal year of the foreign company ends (section 10 (2) AStG-E). As a result, the deadline for submitting the CFC/ PFIC declaration is no longer linked to the phase-shifted assessment year, but to the business year.
- Contrary to expectations, no new setting of the low tax threshold below 25%. The legislator justifies this with promising votes on the introduction of a global minimum taxation at OECD level. Unilateral measures are not intended to anticipate such a plan.
- The regulation on separate determination is still governed by section 18 AStG-E. The admissibility of an external audit is now to be included in section 18 (5) AStG-E.
The initial pressure caused by the draft bill shortly before the end of the year was slowed down somewhat due to a lack of discussion in the Federal Cabinet. Nevertheless, it is to be assumed that a final version will be available soon. However, it remains to be seen to what extent the draft bill will be adopted as a result.
This article was first published in: Handelsblatt online, Steuerboard, 20 December 2019