Overall, the draft law is in line with the Pillar Two Model Rules as published by the OECD/Inclusive Framework and the EU Council Directive (2022/2523). As such, many aspects of the draft law will already be familiar to interested parties. The draft law contains the relevant provisions for calculating the GloBE Income (or Loss) and the Adjusted Covered Taxes to determine whether a jurisdiction's Effective Tax Rate is below the Minimum Rate of 15%. If that is the case - and depending on the individual group structure - the draft law also provides for the charging mechanisms to levy the corresponding Top-up Tax under the Income Inclusion Rule (IIR) (in German so-called 'Primärergänzungssteuer') or Undertaxed Profits Rule (UTPR) (in German so-called 'Sekundärergänzungssteuer'). In addition, Germany also intends to introduce a Domestic Minimum Top-up Tax (DMTT) (in German so-called 'nationale Ergänzungssteuer') to collect any Top-up Tax resulting from potentially low-taxed Constituent Entities in Germany.

The IIR and DMTT will apply to fiscal years beginning after 30 December 2023. The UTPR will follow one year later and will start applying to fiscal years beginning after 30 December 2024.

In more detail

The following points of the draft law are particularly worth highlighting:

• The draft law already contains the Transitional Country by Country Reporting (CbCR) Safe Harbour rules as published by the OECD/Inclusive Framework in December 2022. However, the German draft law goes beyond this and provides for two additional set of rules that had not been agreed yet at the level of the Inclusive Framework.
• Firstly, a Qualified Domestic Minimum Top-up Tax (QDMTT) safe harbor rule is already included in the draft legislation according to which the Jurisdictional Top-up Tax is deemed to be zero if the jurisdiction applies a QDMTT. Such safe harbor rule had been promoted by many stakeholders in the past and the OECD/Inclusive Framework had recently stated that it is undertaking further work in this regard. It can be expected that Germany will nonetheless monitor and consider any further developments concerning a QDMTT safe harbor that comes out of the work from the OECD/Inclusive Framework. What should be reconsidered as part of the German legislative process is that the current draft provision seems to not recognize cases where the QDMTT is determined based on an Authorized Financial Accounting Standard instead of an Acceptable Financial Accounting Standard.
• Secondly, an optional simplification rule is included in the draft legislation according to which the GloBE Income (or Loss) and the Adjusted Covered Taxes of an immaterial Constituent Entity may be calculated by reference to CbCR data. The background of this rule is that an MNE Group for Pillar Two purposes is defined based on the consolidation group for financial accounting purposes but does also include entities which have not been consolidated solely on immateriality grounds. The envisaged simplification rule is a welcome reaction to input provided by stakeholders, e.g., by several industry representatives at a symposium held by the Federal Ministry of Finance in Berlin in November 2022.
• The draft law already takes into account the Agreed Administrative Guidance that the OECD/Inclusive Framework had recently published. For example, it is stated that the allocation of CFC taxes for purposes of the calculation of Adjusted Covered Taxes does not apply for purposes of the German DMTT. Another example is the rule dealing with the adjustment for Accrued Pension Expense when it comes to the calculation of the GloBE Income (or Loss). In line with the Administrative Guidance it is specifically stated that this adjustment only applies in cases where a pension fund is used to meet pension liabilities. In all other cases, such as direct payments from the company to its pensioners, the full amount of the pension expenses is taken into account as it is recorded in the financial statements without any specific adjustment.
• The draft law also deals with various procedural and compliance aspects of Pillar Two. For example, it is envisaged that any top-up tax due is supposed to be self-assessed by the relevant taxpayer and paid based thereupon. This self-assessment obligation is separate from the obligation to submit a GloBE Information Return. At least the filing deadlines for both returns are somewhat aligned and follow the Model Rules/EU Directive which stipulates a filing deadline of 15 months after the last day of the relevant fiscal year (18 months for the first year of application).

Interested parties are invited to submit comments to the German Federal Ministry of Finance via email by 21 April 2023.

Please do get in touch with us if you would like to discuss the draft law in further detail and assess how Pillar Two may impact your organization.

We would also like to highlight our monthly Baker McKenzie "Planning for Pillar Two" webinar series where we regularly take a deep dive into specific Pillar Two topics. The registration link to these webinars can be found here.