GERMANY Law and Practice Contributed by: Michael Best, Gerald Herrmann and Jannis Lührs, POELLATH
6.6 The Substance of Non-Local Affiliates German CFC rules do not generally relate to the sub - stance of non-local affiliates. However, the carve-out from CFC rules that is provided for EU/EEA corpora - tions requires – alongside other conditions – that the German shareholder proves that the specific income is derived from a substantial economic activity per - formed in the state of residence of the CFC (the so- called motive test). 6.7 The Sale of Shares in Non-Local Affiliates The gains made by local corporations on the sale of shares in non-local affiliates enjoy the same 95% tax exemption as granted for the sale of shares in local subsidiaries. Section 42 of the General Tax Code provides for a general anti-avoidance rule that applies in the case of abusive tax structures. At the level of the EU, the Anti-Tax Avoidance Directive (ATAD) establishes a common minimum level of anti-avoidance rules with which every member state must comply. Germany has implemented a mandatory disclosure regime for cross-border arrangements if one or more specified characteristics (hallmarks) are met and con - cern more than one EU country or an EU country and a non-EU country (DAC 6). These hallmarks are aimed at aggressive tax avoidance structures but are drafted much more broadly, so non-tax-motivated transac - tions may also be caught. If one or more hallmarks are met, the person or company who markets, designs or organises a cross-border tax arrangement or makes these arrangements available for use by third parties (an intermediary) has several reporting obligations. The reporting deadline is 30 days after the day on which: • the structure is made available for implementation; • the structure is ready for implementation; or • the first step of implementation of the structure is started. 7. Anti-Avoidance Provisions 7.1 Overarching Provisions
Failure to comply with these rulings could lead to sig - nificant sanctions under local law. The new German government intends to extend the scope of such reporting obligation to national tax arrangements for companies with a turnover of more than EUR10 million. The Defence Against Tax Haven Act ( Steueroasen- Abwehrgesetz ) contains several mechanisms to make it more difficult to avoid paying taxes in Germany through a business relationship with a state or territory that is on the EU list of non-co-operative tax jurisdic - tions (the so-called blacklist), which is amended from time to time. The measures include: • denial of deducting business expenses; • tighter CFC rules; • tighter withholding tax measures; and • measures relating to profit distributions and sales of shares.
8. Audit Cycles 8.1 Regular Routine Audit Cycle
There is no audit cycle prescribed by law, but audits tend to take place once every three to four years.
9. BEPS 9.1 Adoption of BEPS Recommendations The BEPS 1 Implementation Act passed the German legislation process at the end of 2016, and was the first step towards implementing the recommendations of the BEPS process into domestic law. BEPS Action 13 The BEPS 1 Implementation Act led to an extension of co-operation obligations in cross-border situations, based on BEPS Action 13 (Transfer Pricing Documen - tation and Country-by-Country Reporting). As a result, the transfer pricing documentation now consists of: • a master file; • a country-specific and company-related local file; and
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