The German cabinet adopted the draft Defence against Tax Havens Act on 31 March 2021. With the new law, the German government is taking action against tax evasion, tax avoidance and unfair tax competition from tax havens.
The Defence against Tax Havens Act (Steueroasen-Abwehrgesetz) aims to achieve greater tax fairness across international borders. It includes targeted defensive measures that will encourage non-cooperative jurisdictions (tax havens) to implement international standards in the area of taxation and to prevent tax avoidance. To this end, the bill’s provisions aim to deter individuals and companies from continuing or entering into business relations with these tax havens.
“We’re taking action to eliminate tax havens. By adopting this new bill, we’re upping the fight against tax avoidance by deterring business relations with jurisdictions that fail to comply with international tax standards. It’s good that we are acting in concert with our European partners. In this way, we are teaming up to ensure greater tax fairness at the global level. Everyone must pay their fair share of taxes, not just the bakery next door but big multinationals too. If taxpayers try to shirk their responsibility to pay taxes, we’ll fight back with targeted defensive measures.” Commenting on the new legislation, Finance Minister Olaf Scholz
The German government’s Defence against Tax Havens Act goes beyond the minimum standards set by the EU. The bill contains the following defensive measures:
- Prohibition on deducting business expenses and work-related expenses
Business expenses relating to tax havens are no longer tax deductible.
- Tighter CFC rules
Tighter rules on controlled foreign companies (CFCs) apply in cases where intermediate companies are resident in tax havens. Because the entire active and passive income of intermediate companies will be subject to taxation, corporations will no longer be able to avoid taxes by shifting their income to companies in tax havens.
- Tighter withholding tax measures
Tighter withholding tax measures will also apply, for example in cases where interest payments are made to persons who are resident in tax havens. The limited tax liability of persons resident in tax havens will be expanded to include certain types of income (in particular all income from financing fees). This income will be made subject to withholding tax as set out in section 50a of the Income Tax Act (Einkommensteuergesetz).
- Measures relating to profit distributions and sales of shares
In the case of profit distributions and sales of shares, tax exemptions and provisions in double taxation agreements will be restricted or denied if these earnings are paid by a corporation that is resident in a tax haven, or if shares are sold in a company that is resident in a tax haven.
The bill will enact an appropriate combination of measures that are carefully designed to cover the various situations encountered. This will allow the new legislation to have a broad effect. At the same time, the bill is designed in such a way that the most suitable defensive measure applies in each particular case.