The Pillar Two implementation process, which introduces a minimum taxation rate of 15% for multinational groups and large domestic groups, is continuing in EU countries. The most recent developments have been introduced in the Czech Republic, Germany, Luxembourg and Italy. The European Commission has introduced the BEFIT directive, which proposes a new pan-European corporate tax base. The German government has approved a draft of the Growth Opportunity Act to promote economic growth and innovation in Germany. For more news on international taxation, we bring you the following article.
Czech Republic: Draft legislation to implement the EU Pillar Two directive for global minimum taxation was amended and discussed in the first reading in the parliament. The originally proposed extraordinary process to expedite the procedure and approve the legislation within the first reading was denied, so the standard legislative procedure should now take its course. Nonetheless, the draft is expected to be approved by the end of 2023.
Germany: On 16 August 2023, the German government approved draft legislation to implement the EU Pillar Two directive for global minimum taxation. The draft law will now proceed through parliament for approval, expected by the end of 2023.
The legislative process involved two discussion drafts, with the final version containing technical adjustments, increasing the number of sections to 96, and aligning German GAAP rules with IFRS. Notable changes include retaining the royalty barrier rule with a lowered threshold of 15% and maintaining trade tax on controlled foreign company (CFC) income from subsidiaries.
Luxembourg: In August 2023, Luxembourg submitted a draft law to implement the EU Pillar Two directive, which establishes a 15% global minimum tax rate for MNE groups and large domestic groups in the EU. The draft closely aligns with the directive and OECD guidelines but doesn’t reference recent guidance. It introduces three new taxes with different effective dates.
The first phase of Pillar Two analysis involves determining its scope, applying to Luxembourg entities in MNE or domestic groups with a minimum annual turnover of EUR 750 million, excluding certain entities. This determination includes identifying the ultimate parent company, assessing the turnover threshold, identifying excluded entities, and classifying each entity based on ownership interest.
Italy: Italy has introduced a draft legislative decree to implement the EU Pillar Two directive, aiming to establish a global minimum tax rate of 15% for multinational and domestic groups within the EU. The directive must be adopted by EU member states by 31 December 2023, and Italy’s draft aligns with EU and OECD recommendations to enhance tax fairness and competitiveness.
The EU Pillar Two directive follows global tax reforms and introduces rules such as the “income inclusion rule” and “undertaxed payments rule” starting from December 2023. Italy also plans a “qualified domestic minimum top-up tax”. The draft requires Italian parent groups to file specific tax returns, while non-Italian parent groups with Italian operations must comply as well.
The European Commission has introduced the BEFIT (Business in Europe: Framework for Income Taxation) directive that seeks to harmonize corporate income taxation within the EU. It offers a hybrid scope, making it mandatory for certain large groups and optional for others. BEFIT simplifies tax base determination, minimizes adjustments, and introduces transfer pricing rules. However, its adoption depends on achieving unanimous agreement within the European Council, which may be challenging given the sensitivity of tax matters. Nonetheless, BEFIT aligns with global minimum taxation agreements and could bring substantial changes to corporate taxation within the EU if approved.
The European Commission has proposed a “Transfer Pricing Directive” to harmonize transfer pricing rules within the EU. This directive aims to ensure the consistent application of the arm’s length principle, reducing tax uncertainty, litigation risk, and double taxation for multinational enterprises (MNEs) operating within the EU. It also seeks to discourage aggressive tax planning through transfer pricing. The directive would incorporate the arm’s length principle into EU law, apply to EU-resident companies and their permanent establishments, and introduce a common definition of “associated enterprise”. It outlines five predefined transfer pricing methods and includes provisions on comparability analysis and documentation.
However, unanimous agreement within the European Council is needed for this directive, and its adoption could be influenced by various political and economic factors.
The European Commission published a proposal for a directive establishing a head office tax (HOT) system for micro, small, and medium-sized enterprises (SMEs). The proposed directive would allow SMEs that are growing and expanding across the border through permanent establishments (PEs) to opt in for applying the tax rules of the member state of the head office to calculate the taxable result of their PEs in other member states. Consequently, the local sets of tax rules in the member state in which the PE is located would not need to be applied. The proposed effective date is 1 January 2026, but unanimous agreement within the European Council is needed for this directive, and its adoption could be influenced by various political and economic factors.
The German government has approved a business tax reform bill known as the “Growth Opportunity Act”. Its goal is to stimulate economic growth, innovation in new technologies, and Germany’s business competitiveness.
Key changes in the approved bill (compared to the original draft bill) include extending the investment period for the climate investment grant to 1 January 2030, offering a 10% R&D tax incentive rate increase for small and medium-sized companies, and relaxing minimum taxation rules from 2024 to 2027. The bill also amends interest deduction limitation rules, partially withdraws proposed partnership taxation changes, retains mandatory disclosure requirements for domestic tax planning arrangements with an adjusted effective date, and provides more detailed rules for tax-neutral demerger transactions. Additionally, it reintroduces declining balance depreciation for specific asset acquisitions and abolishes certain real estate transfer tax exemptions.
The draft bill will now undergo legislative processes, requiring approval from both the upper and lower houses of parliament, with final approval expected by year-end.
The lower tax court in Muenster, Germany, recently decided that the forfeiture of current year trade tax losses in the context of partnership changes within a tax consolidated group. The court ruled that when a partner exits a controlling partnership during a financial year, the controlling partnership may forfeit current year trade tax losses, even if the overall tax group generates a profit for the year. This ruling is based on the principle that income calculations for controlling and controlled entities in a tax group must be done separately before consolidation at year-end. The case involved a German limited partnership and a contribution of partnership interests into a new partnership, resulting in the disallowance of 97% of the current year trade tax losses. The court clarified that income consolidation in tax consolidated groups only occurs at year-end, and ownership changes during the fiscal year are assessed on a standalone basis.
In July 2023, Germany introduced a draft bill called the “Growth Opportunity Act”, proposing mandatory electronic invoicing (e-invoicing) for domestic business-to-business (B2B) transactions starting from January 1, 2025. To implement this, Germany has requested an exemption from the EU VAT directive. The e-invoicing requirement will apply to B2B transactions within Germany only. The bill introduces a new EU-compliant e-invoice format and defines “other invoices” for non-compliant formats like PDFs.
Transition rules will be in place until 1 January 2028, with exceptions for smaller transactions and certain cases. Notably, the bill doesn’t address digital reporting requirements but expresses interest in EU proposals. Amendments may occur during the regulatory process.
Germany’s federal tax court (BFH) ruled that a UK resident’s use of a personal locker while providing aircraft maintenance services at a German airport creates a permanent establishment (PE) under German law and the Germany-UK tax treaty. The decision highlights a trend of broadening the interpretation of PEs in service activities at customer premises in Germany. It emphasizes that even a weak link, such as a personal locker, can lead to PE creation. Nonresident companies providing services in Germany should assess their PE risk carefully, as increased scrutiny from German tax authorities can be expected. The BFH’s approach to PE interpretation may continue evolving.
The Italian Supreme Court ruled that non-Italian companies can benefit from Italy’s participation exemption regime for capital gains on Italian investments, provided they meet certain conditions. This decision is based on EU fundamental freedoms and prevents discrimination against non-Italian investors. Non-Italian companies that meet the exemption requirements and have paid Italian capital gains tax may consider filing a refund request, as they can now enjoy the same tax treatment as Italian companies.
The decision aligns with previous Supreme Court rulings on the taxation of dividends for non-Italian investors and demonstrates the application of EU principles to ensure compatibility with Italian tax rules.
The Cyprus Tax Department issued Circular 7/2023, effective from 2023, providing guidance on determining arm’s length pricing for financing transactions, including back-to-back scenarios. The recommended method is the Comparable Uncontrolled Price (CUP) method using interest rates as comparables. This method applies to taxpayers engaged in back-to-back financing, provided they meet specific criteria regarding risk and financial capacity. Exceptions to this method require approval from the Cyprus Tax Department and must be justified with supporting analyses.
The UK Upper Tribunal has ruled against a taxpayer company’s appeal regarding the substantial shareholdings exemption (SSE) and the sale of shares after a “hive-down” transaction.
In this case, M Group Holdings Limited transferred its trade and assets to a subsidiary, MCS, and sold MCS’s shares to a third party within 12 months of MCS’s creation. Normally, the SSE wouldn’t apply due to the short holding period. However, a 2011 SSE law amendment allowed exceptions for disposals after transferring trading assets, provided certain conditions were met, including group membership. Since the taxpayer didn’t have any subsidiaries before incorporating MCS, it didn’t meet the group membership requirement.
The act implementing the mandatory use of structured e-invoicing and the National e-Invoicing System was published in August 2023.
Starting from 1 July 2024 (with minor exceptions), structured e-invoices will be the primary method for documenting taxable transactions by VAT taxpayers with registered seats or fixed establishments in Poland (i.e., the taxpayers have less than a year to prepare for these new obligations).
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