Global Minimum Tax from 2024

Agreement on the Implementation of the Global Minimum Tax at EU Level

The glo­bal mi­ni­mum tax was ad­op­ted by around 140 coun­tries at OECD le­vel in 2021 as part of the BEPS 2.0 pro­ject as a so-cal­led se­cond pil­lar or Pil­lar Two. At the end of 2021, the EU Com­mis­sion pre­sen­ted a first draft ver­sion of a di­rec­tive on the in­tro­duc­tion of a glo­bal mi­ni­mum tax for mul­ti­na­tio­nal groups of com­pa­nies in the EU.

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As a re­sult of op­po­si­tion from in­di­vi­dual EU mem­ber sta­tes, a un­ani­mous vote on this could not be re­ached for se­veral months. Howe­ver, a bre­ak­th­rough was achie­ved on 12.12.2022. All EU mem­ber sta­tes are in fa­vor of the in­tro­duc­tion of a glo­bal mi­ni­mum tax on the ba­sis of the draft di­rec­tive as amen­ded on No­vem­ber 25, 2022.

This was fol­lo­wed on Dec. 16, 2022, by the for­mal ad­op­tion of the mi­ni­mum tax di­rec­tive by the Coun­cil of the EU, which will en­ter into force the day af­ter its pu­bli­ca­tion in the Of­fi­cial Jour­nal of the Eu­ro­pean Union.

The re­qui­re­ments of the di­rec­tive are to be im­ple­men­ted by the EU mem­ber sta­tes in their na­tio­nal law by the end of 2023 and are to be ap­plied for fis­cal years be­gin­ning on or af­ter De­cem­ber 31, 2023.

Main Features of the Minimum Tax

In line with OECD re­qui­re­ments, the new EU di­rec­tive con­ta­ins re­gu­la­ti­ons for im­ple­men­ting the glo­bal mi­ni­mum tax to en­sure cor­po­rate pro­fits will be ta­xed at an ef­fec­tive rate of at least 15%. The di­rec­tive ap­plies to groups of mul­ti­na­tio­nal en­ter­pri­ses (MNEs) and large-scale do­mestic groups that have a com­bi­ned an­nual group tur­no­ver of at least EUR 750 mil­lion ba­sed on con­so­li­da­ted fi­nan­cial state­ments in at least two of the four pre­ce­ding fis­cal years. In prin­ci­ple, the glo­bal mi­ni­mum tax is ai­med at in­ter­na­tio­nal groups, but the scope of the di­rec­tive also co­vers pu­rely na­tio­nal groups.

Tech­ni­cally, the glo­bal mi­ni­mum tax is im­ple­men­ted by me­ans of a top-up tax at the le­vel of the pa­rent com­pany of the group. This af­fects pro­fits of group com­pa­nies re­si­dent in tax ju­ris­dic­tions with an ef­fec­tive tax bur­den be­low the mi­ni­mum tax rate. This is to be achie­ved th­rough an ad­di­tio­nal tax le­vied as the dif­fe­rence bet­ween a mi­ni­mum tax rate of 15% and the lo­wer ef­fec­tive tax rate. In this way, the tax bur­den is to be pus­hed up to the mi­ni­mum tax le­vel.

Note: It should be no­ted that an ex­ami­na­tion of the glo­bal mi­ni­mum tax is also ap­pro­priate if group mem­bers of an af­fec­ted group of com­pa­nies are re­si­dent in coun­tries that have a tax rate that is no­mi­nally cle­arly above the glo­bal mi­ni­mum tax rate. Due to de­via­ti­ons bet­ween the tax base to be de­ter­mi­ned ac­cor­ding to the gui­de­lines and the ef­fec­tive tax rate to be ap­plied, an ap­pli­ca­tion case for the glo­bal mi­ni­mum tax could also arise in such ca­ses. Group com­pa­nies in high-tax coun­tries such as Ger­many are also af­fec­ted by the ex­ten­sive de­cla­ra­tion re­qui­re­ments.

Application Case

A ty­pi­cal ap­pli­ca­tion case of the glo­bal mi­ni­mum tax ru­les could be as fol­lows: A group pa­rent com­pany ba­sed in Ger­many holds 100% of the sha­res in sub­si­dia­ries in France, Ire­land, Aus­tria and Swit­zer­land (Can­ton Zug).

Un­der the glo­bal mi­ni­mum tax a pa­rent com­pany must ex­amine whe­ther the pro­fits of the group com­pa­nies in the re­spec­tive ju­ris­dic­tions were sub­ject to an ef­fec­tive tax rate of at least 15%. The ef­fec­tive tax rate as de­fi­ned un­der the di­rec­tive is de­ter­mi­ned by qua­li­fy­ing tax ex­pen­ses (so-cal­led ad­jus­ted co­vered ta­xes) di­vi­ded by qua­li­fy­ing pro­fits. For this pur­pose, the re­spec­tive pro­fit of the in­di­vi­dual sub­si­di­ary ac­cor­ding to group ac­coun­ting stan­dards be­fore con­so­li­da­tion has to be mo­di­fied by cer­tain add-backs and de­duc­tions as de­ter­mi­ned in the di­rec­tive. Both qua­li­fy­ing tax ex­pen­ses and mo­di­fi­ca­ti­ons to ac­coun­ting pro­fits of the in­di­vi­dual sub­si­di­ary can­not sim­ply be ta­ken from the con­so­li­da­ted fi­nan­cial state­ments. In a first step a com­pany will ana­lyze which ta­xes are to be in­clu­ded and, if ne­cessary, how they are to be ad­jus­ted.

Re­gar­ding the sub­si­dia­ries in Ire­land and Swit­zer­land in par­ti­cu­lar, a top-up tax could ap­ply due to the low cor­po­rate tax ra­tes there. Howe­ver, the ex­ami­na­tion of the ef­fec­tive tax rate is by no me­ans li­mited to these two coun­tries in our ex­am­ple. Ra­ther, the ex­ami­na­tion can­not be wai­ved even if the no­mi­nal tax rate of the re­spec­tive state is si­gni­fi­cantly hig­her than the mi­ni­mum tax rate of 15%, as in France and Aus­tria in the ex­am­ple gi­ven. Whe­ther an ex­emp­tion for "no­mi­nal" high-tax coun­tries will still be in­tro­du­ced and how this could be struc­tu­red in the mem­ber sta­tes will de­pend on any OECD re­qui­re­ments. Pro­po­sals for pos­si­ble "safe har­bor" re­gu­la­ti­ons with at least sim­pli­fied cal­cu­la­tion re­qui­re­ments are cur­rently un­der dis­cus­sion.

It should also be no­ted that, in par­ti­cu­lar due to the va­rious mo­di­fi­ca­ti­ons of the qua­li­fy­ing pro­fits com­pa­red to the re­spec­tive tax base, the ef­fec­tive tax rate of 15% or less may re­sult in cer­tain con­stel­la­ti­ons even in tra­di­tio­nal high tax coun­tries.

In ad­di­tion, the group pa­rent com­pany (and, if ap­plica­ble, the sub­si­dia­ries) would be re­qui­red to file a spe­cial tax re­turn for glo­bal mi­ni­mum tax pur­po­ses by 30 June 2026. In prin­ci­ple, the filing dead­line is 15 months af­ter the end of the fis­cal year, but this is to be ex­ten­ded to 18 months for the first year of ap­pli­ca­tion.

Application also in inbound cases

Ger­man com­pa­nies that be­long to an in­ter­na­tio­nal group with a for­eign group pa­rent com­pany may also be af­fec­ted by the plan­ned new re­gu­la­ti­ons. If, for ex­am­ple, the sha­res in the Ger­man sub­si­di­ary are held ent­irely by a pa­rent com­pany do­mi­ci­led in a third coun­try with no ap­plica­ble glo­bal mi­ni­mum tax or equi­va­lent re­gu­la­ti­ons, the Ger­man group com­pany may be ob­li­ged to levy the top-up tax with re­gard to its down­stream group com­pa­nies. This would be the case, for ex­am­ple, if the group pa­rent com­pany is re­si­dent in the USA, as it can cur­rently be as­su­med that the exis­ting GILTI sys­tem in the USA may not be re­gar­ded as equi­va­lent to the glo­bal mi­ni­mum tax re­gu­la­ti­ons.

The Ger­man group com­pany would have to check whe­ther the pro­fits of its down­stream group com­pa­nies in Ger­many and ab­road are sub­ject to an ef­fec­tive tax rate of at least 15% and would have to com­ply with cor­re­spon­ding de­cla­ra­tion ob­li­ga­ti­ons.

Practical Challenges

Ir­re­spec­tive of a po­ten­ti­ally hig­her tax bur­den wi­thin the group a si­gni­fi­cantly hig­her com­pli­ance ef­fort is to be ex­pec­ted. First of all, it will be ne­cessary to re­quest a large amount of data from the sub­si­dia­ries in or­der to cal­cu­late the ef­fec­tive tax rate un­der the glo­bal mi­ni­mum tax ru­les. Not all of this data is rea­dily avail­able from the an­nual fi­nan­cial state­ment data sub­mit­ted by the sub­si­dia­ries for the pur­po­ses of the con­so­li­da­ted fi­nan­cial state­ments. Fur­ther­more, any ad­di­tio­nal tax bur­den due to the glo­bal mi­ni­mum tax may also have ef­fects on the fi­nan­cial state­ments. Par­ti­cu­larly in the first year of ap­pli­ca­tion, af­fec­ted groups will face the chal­lenge of ad­apting their work pro­ces­ses at an early stage so that data de­ter­mi­na­tion and data pro­ces­sing can be car­ried out in good time be­fore the end of the de­cla­ra­tion pe­riod. This will mean that exis­ting IT sys­tems for cor­po­rate re­por­ting should at least be supp­le­men­ted with the new re­qui­red in­for­ma­tion and that pro­ces­ses should be ad­ap­ted and lin­ked in a mea­ning­ful way.

Due to the ex­pec­ted man­datory first-time ap­pli­ca­tion of the mi­ni­mum tax from 2024, af­fec­ted groups of com­pa­nies are ad­vi­sed to deal with the fu­ture chal­len­ges in a ti­mely man­ner. Sound know­ledge of the sub­stan­tive le­gal re­qui­re­ments of the glo­bal mi­ni­mum tax and IT-sup­por­ted know-how for pro­cess-re­la­ted im­ple­men­ta­tion should be clo­sely in­ter­lin­ked. We at Eb­ner Stolz sup­port you with our ex­perts in in­ter­na­tio­nal tax law and group ac­coun­ting as well as in the area of tax tech­no­logy.