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31 March 2021

Measures to increase tax fairness adopted

In March 2021, the federal cabinet initiated a range of measures to increase tax fairness. The aim is to eliminate tax havens and combat aggressive tax planning more effectively with the help of targeted instruments. In addition, updates to modernise corporation tax legislation will make family businesses more competitive.

The federal cabinet adopted a range of tax measures at its meetings on 24 and 31 March 2021. These measures are designed to eliminate tax havens, combat aggressive tax planning and make family businesses more competitive.

“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.” Olaf Scholz, former German Finance Minister

Eliminating tax havens

With the draft Defence against Tax Havens Act (Steueroasen-Abwehrgesetz) that was adopted by the cabinet on 31 March 2021, the German government is taking action against tax evasion, tax avoidance and unfair tax competition from tax havens. The new law aims to achieve greater tax fairness across international borders.

Tax havens allow wealthy individuals and companies to avoid paying taxes on income and profits. This is why the EU member states agreed in December 2019 to take concrete measures to combat tax havens, a decisive step towards joint action against tax havens in Europe. The Council conclusions adopted at the time call on member states to implement at least one of the four tax law measures against tax havens by 1 July 2021 at the latest. Unlike other member states, Germany has adopted legislation that implements all four anti-tax avoidance measures.

The Defence against Tax Havens Act also gives real bite to the EU’s black list, which identifies tax havens that refuse to engage in international cooperation: the new legislation adopts strict sanctions to deter individuals and companies from continuing or entering into business relations with these tax havens. Taxpayers entertaining business relations with these tax havens must be made to pay, quite literally.

Combating aggressive tax planning

The federal cabinet also already adopted the draft Anti-Tax Avoidance Directive Act (Gesetz zur Anti-Steuervermeidungsrichtlinie) on 24 March 2021. In the bill, the German government proposes stricter rules to fight aggressive tax planning. The new rules aim to effectively counteract tax avoidance strategies used by multinational corporations.

Specifically, the bill is designed to prevent what are known as “hybrid mismatches”. Such arrangements exploit the differences between the tax laws of EU member states and allow, for example, business expenses to be deducted more than once. Furthermore, the rules on controlled foreign companies are to be tightened. These rules are designed to prevent companies from avoiding taxes by shifting their income from Germany to an entity in a low-tax jurisdiction.

Often, companies also avoid taxes by moving their business assets abroad. The EU’s uniform exit taxation rules, set out in the Anti-Tax Avoidance Directive, now aim to prevent this. In future, it will be easier to tax capital gains from significant corporate shareholdings when entities or assets are transferred abroad, while the range of tax planning arrangements previously possible will be cut off.

Boosting the competitiveness of family businesses

In addition to the above, the federal cabinet adopted the draft Act Updating Corporate Tax Law (Gesetz zur Modernisierung des Körperschaftsteuerrechts) on 24 March 2021. The bill improves the tax framework especially for small and medium-sized partnerships and family businesses. In addition, it makes corporate tax law better suited for international business in a globalised economy.

The bill’s main feature is the introduction of an option permitting certain types of partnership to be treated like a corporation for tax purposes. The new option especially for limited and general partnerships (those that have the legal form of a Kommanditgesellschaft (limited partnership) or offene Handelsgesellschaft (general partnership)) to be treated like a corporation for income tax purposes is another important measure to enhance the competitiveness of the many family businesses in Germany that are successful players on international markets. The law will provide an option to eliminate the systematic and procedural differences which, in some cases, can cause significant discrepancies in terms of tax burden and red tape.