The objectives of both global minimum taxation and additional taxation are to prevent abuse and restrict cross-border tax competition. However, the question arises to what extent global minimum taxation and additional taxation must be applied in parallel in order to achieve the objectives. This question is addressed in this article.

1. The Global Minimum Taxation Per se

The final Minimum Taxation Directive Implementation Act (MinBestRL-UmsG) transposes the European Union Minimum Taxation Directive into national law on 21 December 2023. The main component in Article 1 MinBestRL-UmsG is the law to ensure a global minimum taxation for groups of companies (Mindeststeuergesetz – MinStG).

The objective of global minimum taxation is to reduce cross-national tax rate competition. In contrast, the additional taxation counteracts the improper interposition of corporations for minimizing the tax load by breaking through their shielding effect. The global minimum taxation also addresses the abusive profit shift in low-tax countries and thus has a similar goal as the additional taxation. However, it goes beyond that objective. All income is subject to minimum taxation, whether or not it is misleading.

2. new regulations on additional taxation by the Minimum Tax Implementation Act

The MinBestRL-UmsG also has an impact on additional taxation. The law lowered the low tax rate limit for additional taxation. The draft reform also provided for the additional amount no longer to be burdened with business tax. However, this was rejected and is therefore no longer to be found in the Minimum Tax Implementation Act.

In the entire legislative procedure, however, no modification of the active catalogue within the meaning of § 8 (1) AStG was made. It was possible to align the definition of passive income with the definitions of Article 7(2)(a) ATAD or Article 24(6) MinBestRL. The legislator did not do this either.

Therefore, the legislature alone adjusted the low tax rate limit for additional taxation. Failure to make further adjustments creates double taxation risks. Furthermore, the question arises as to whether additional taxation is still needed in addition to the global minimum taxation. We clarify all this as follows.

3. double taxation at global minimum taxation and additional taxation

The legislature provides for the application of the additional taxation according to §§ 7 ff. AStG in addition to the regulations of the global minimum taxation. However, there are various double taxation risks as a result of the coexistence of the two constructs.

In the global minimum taxation, the taxes collected by the addition in the addition taxation regime are taken into account to determine the effective tax rate in the state of the intermediary company. According to Section 49(2) of the MinStG, the amount of the taxes thus recorded, which must be taken into account for the purposes of the global minimum taxation at the level of the low-taxed intermediary company, must not exceed 15 % of the passive income. As a result of this upper limit, the tax triggered by the additional taxation often cannot be allocated in full to the low-taxed business unit. This occurs in cases where the national tax rate of the country applying the additional taxation is above the global minimum tax rate of 15 %.

The remaining non-allocable tax is to be taken into account in determining the effective tax rate of the shareholder jurisdiction. However, this regulation is regularly empty. The effective tax rate is regularly already above the minimum tax rate level. Therefore, the exclusion of the remaining tax has the same result. Even if the remaining tax is not taken into account, additional additional taxes are not levied under the global minimum taxation.

The result is double taxation. The higher the national tax rate level of the shareholder, the more extensive these are. In Germany, there is a relatively large income tax rate of about 30% (corporate tax and business tax). Germany is therefore particularly affected by double taxation risks.

4. reduction of the low tax rate limit in the AStG

4.1. Background to the low tax rate limit

Low taxation of the income of the foreign intermediary company is a prerequisite for the application of additional taxation. Until the amendment by the MinBestRL-UmsG in accordance with § 8(5) in conjunction with § 10(3) AStG, this was available if the passive income of the intermediary company under German profit determination principles was subject to an effective tax burden of less than 25 %.

When the AStG was introduced in 1972, the low tax rate was 30%. This amounted to half of the then applicable corporation tax rate on accrued profits of 51 %. However, the business tax burden was not taken into account.

The StSenkG reduced the corporate tax rate to 25 %. One year later, the UntStFG adjusted the low tax rate limit to the amount of the corporate tax rate. However, this synchronization was ended by the UntStRefG 2008. The corporate tax rate was recently reduced to 15%. However, the low tax rate limit remained unchanged until recently. The reason for this divergence should be the additional consideration of the business tax burden in Germany. Passive income abroad should be taxed as if the income had been earned domestically. In Germany, however, trade tax is levied in addition to corporate tax. If this additional trade tax burden on passive income were not taken into account, the transfer of income abroad would be considered in order to avoid trade tax. This should be avoided.

4.2. Criticism of the level of the low tax rate limit

Against the argument of taking into account the trade tax burden in the level of the low tax rate limit, however, speaks that other countries regularly do not know any trade tax. Therefore, only an equivalent to corporate tax is regularly levied abroad. In Germany, however, this is now only 15%. Therefore, it should not be reprehensible if only 15% of the income is taxed abroad. In addition, in Germany, the additional amount is not necessarily subject to trade tax. This applies, for example, if the participation is held in private assets.

Furthermore, in Germany, despite trade tax liability, there may be a lower burden on domestic income than 25%. If in a municipality the minimum trade tax rate of 200 % applies, the German low tax rate limit for additional taxation is above the income tax rate of 22,83 %. If the business tax levy is 400 %, there is only a 29,83 % income tax burden on the corporation. Then the difference to the low taxation limit is just under five percentage points. Low taxation of foreign passive income does not exist if the tax threshold abroad falls only slightly below or even exceeds the domestic tax burden. In these cases, however, the argument of avoiding abuse by artificially shifting passive income abroad does not bear fruit.

The ATAD Directive also provides for low taxation only at a tax rate of 7.5%. Thus, the German border for low taxation was more than three times higher than required under European law. The ATAD Directive provides only a minimum level of protection. Therefore, the national legislator is open to restrictive transposition of the Directive. Yet such a big difference is not sustainable. Accordingly, the reduction of the low tax rate limit is logical with the introduction of the global minimum taxation. Whether the limit was drawn correctly at a tax rate of 15% seems questionable.

5. Business tax liability of the additional amount

5.1 Background on the business tax liability of the additional amount

For survey periods up to 2016, the Bundesfinanzhof (BFH) decided that the additional amount of a domestic business is to be allocated to the non-domestic establishment. Accordingly, it is to be reduced in accordance with § 9 no. 3 sentence 1 GewStG. Thus, the additional amount was not initially subject to trade tax. This judgment was confirmed by a non-application decree by the tax authorities. This non-application decree was later repealed by another decree.

Since the 2017 survey period, § 7 sentence 7 GewStG has now regulated by fiction that the additional amount includes income incurred in a domestic establishment. As a result, § 9 no. 3 sentence 1 GewStG does not apply, so that the additional amount is subject to business tax.

5.2 Reason for the business tax liability of the additional amount

The objective of the additional taxation is to tax foreign passive income by means of additional taxation with the tax resident as if it had been obtained directly in the country. Since domestic income is also subject to business tax, the fictitious allocation of the additional amount to the domestic permanent establishment seems logical.

5.3 Criticism

5.3.1. Lack of creditability of foreign tax on business tax

The additional amount is subject to business tax. On the other hand, foreign taxes already paid on the additional amount can only be counted against domestic income tax or corporate tax. However, foreign taxes are not eligible for business tax. The lack of creditability of foreign taxes on business tax threatens the risk of credit overhangs. As a result, income is taxed higher than if it is earned domestically. This is like a criminal taxation.

5.3.2. Business tax liability of the additional amount

The trade tax liability of the additional amount must first be criticised for the fact that trade tax is actually based on the territoriality principle. Only those incomes should be subject to business tax which are attributable to a domestic company (§ 2 (1) sentence 3 GewStG).

The abolition of the business tax liability of the additional amount also reduces the above-mentioned, possible double burden. The burden on passive income would then only have increased to the national corporate tax rate of 15 %. A trade tax burden would no longer exist. This level corresponds to the global minimum tax rate level. In principle, that would be all taxes. the amount to be allocated to the subordinated intermediary. This would significantly reduce double taxation risks due to the parallel application of additional taxation and global minimum taxation. This would significantly increase the compatibility of additional taxation and global minimum taxation.

Is the additional taxation still necessary?

6.1. Objective of additional taxation and global minimum taxation different

The question arises as to whether additional taxation and global minimum tax should be applied in parallel. This question must be assessed in the light of its objective. Additional taxation serves to prevent the improper interposition of limited liability companies in order to minimize the tax burden by breaking through their shielding effect. The global minimum taxation, on the other hand, is intended to reduce cross-national tax rate competition. Of course, the aim of the global minimum taxation is also to prevent the unfair shift of profits in low-tax countries. However, the global minimum taxation goes beyond this objective. Indeed, all income, irrespective of whether it is misleading, is subject to minimum taxation. The objective of global minimum taxation and additional taxation is therefore only comparable.

6.2. different designs

But then it is questionable whether it is necessary to apply both concepts side by side for the purpose. First of all, this is contradicted by the fact that the low tax rate limit has been reduced to the global minimum tax level. In addition, the global minimum taxation includes both active and passive income. If there were no additional taxation, all passive income with an effective tax burden of less than 15% would still be subject to the global minimum taxation.

However, the legal consequences of additional taxation are stricter than those of the global minimum taxation. Sometimes the tax burden of passive income under the additional taxation was raised to at least the German tax rate level including trade tax. By contrast, if the global minimum taxation is applied, the additional tax will be increased only up to the global minimum tax rate of 15 %. The additional charge is therefore more heavily charged. There is also trade tax liability.

It seems plausible to apply stricter treatment in the case of additional taxation, given that the focus of additional taxation is only on harmful passive income. The global minimum taxation, on the other hand, does not differentiate between abusive and otherwise shifted income.

6.3 Significant administrative burden due to cumulative application

The tax legislature assumes that the administrative burden on tax administration and companies in the case of additional taxation will be reduced by the latest changes. The reason for this is the newly decided reduction of the low tax rate limit. However, this is a fallacy. Regardless of how high the low tax rate limit is, it is necessary to determine the effective tax burden according to German profit calculation round rates. Recourse to the effective tax rate of the global minimum taxation is not possible. This is linked to the minimum tax income, a new tax base. As a result, the taxpayer has to carry out a trade-balance-sheet and tax-based profit determination, a profit determination for the purposes of additional taxation and additionally the determination of the minimum tax income. It is therefore difficult to consider relieving the taxpayer or the tax authorities.

7. Possible reform proposals

7.1. Adaptation of additional taxation to the global minimum taxation

The adjustment of the additional taxation to the global minimum tax, however, seems more poblematic than perhaps suspected. If the tax consequences of over-taxation were adjusted to those of the global minimum taxation, over-taxation would develop into a “light minimum taxation” on passive income. A corresponding adjustment would be made, for example, by abolishing the business tax liability of the additional amount. Then only the corporate tax level is decisive, which corresponds to the global minimum taxation of 15%. Then, however, the question arises as to why the administrative burden should remain in order to continue to apply the two regulations side by side. The income is already burdened with the global minimum taxation.

7.2 Limitation of additional taxation to income not subject to global minimum taxation

As a further reform possibility, it would be conceivable to exclude from the scope of additional taxation groups of companies subject to the regulations of the global minimum taxation. Thus, additional taxation and global minimum taxation would have an exclusivity ratio.

The problem with this proposal, however, is that the additional taxation is higher than the global minimum taxation. This is due to the business tax liability of the additional amount. In that case, however, groups of undertakings which are obliged to apply the global minimum taxation are favoured over those which are subject to the additional taxation regime. Justification would be conceivable insofar as the purpose of the additional taxation is to prevent unfair profit shifting. However, misused income can also be subject to global minimum taxation. If this is the case, this proposal excludes additional taxation. The higher burden of applying the additional taxation would have been avoided by abolishing the business tax liability of the additional tax.

7.3. Exclusive application of the minimum global taxation

Another possibility would be the acquisition of additional taxation and the sole application of the global minimum taxation. However, the design of the additional taxation has further peculiarities compared to the global minimum taxation. This includes, for example, the inclusion of related persons in the review of the control criterion. Furthermore, for income with an investment character within the meaning of § 13 AStG, the fulfilment of the control criterion is not necessary. Thus, there are cases in which additional taxation has a wider scope than the global minimum taxation. This scope will be closed if there is only a global minimum taxation.

8th Conclusion: Global Minimum Taxation vs. Additional Taxation

The compatibility of additional taxation and global minimum taxation could be improved by abolishing the business tax liability of the additional tax. However, the abolition of the trade tax liability is not mandatory. The purpose of the additional taxation is to make the misusedly shifted income subject to domestic taxation as if it had been received by the taxable person within the country. However, the exclusive burdening of the addition amount with corporate tax reduces double taxation risks resulting from the interaction between the addition taxation and global minimum taxation. Against this background, however, it is necessary to abolish the business tax liability of the additional amount.