GERMANY Law and Practice Contributed by: Michael Best, Gerald Herrmann and Jannis Lührs, POELLATH
9.7 Interest Deductibility and Territorial Tax Regime The German tax regime is residence-based rather than territorial. Germany generally taxes worldwide income, subject to DTTs that usually exempt interest income of foreign shareholders from taxation. 9.8 Controlled Foreign Corporation Reform With respect to EU law, conflicts may be looming with the general drift of the CFC proposals, particularly with regard to the freedom of establishment. The ECJ has decided in the case of Cadbury Schweppes that CFC rules unjustifiably restrict the freedom of estab - lishment, unless the specific objective of a CFC rule is to prevent conduct involving the creation of wholly artificial arrangements that do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out in national territory. Thus, the case law of the ECJ has limited the application of CFC rules. It is questionable whether the BEPS proposals consider this fact. Apart from that, German tax law already provides for strict CFC rules for offshore subsidiaries whose pas - sive income is taxed at a “low rate” of less than 15% (respectively 25% for passive income of fiscal years ending before 1 January 2024). These CFC rules have recently been renewed and hence no further amend - ments are expected in the near future; see 6.5 Control of Foreign Corporation-Type Rules . 9.9 Anti-Avoidance Rules To address the inappropriate granting of treaty benefits and other potential treaty abuse scenarios, Germany implemented domestic “anti-treaty shopping rules” several years ago (see 4.1 Application of Withhold- ing Taxes ). According to these regulations, benefits will not be granted if a company’s main purpose is to gain access to advantageous conditions derived from a double tax convention (DTC) and/or EU directives (eg, the EU Parent-Subsidiary Directive). Furthermore, domestic subject-to-tax clauses to pre - vent under-taxation and non-taxation due to DTC or EU directive benefits and CFC rules are in place. Thus, German tax law already provides adequate regula - tions to address the abuse of benefits and tax avoid - ance in general.
9.10 Transfer Pricing and IP Taxation Transfer pricing matters for intellectual property are a crucial issue for companies and advisers in Germany, as the evaluation, benchmarking and documentation of intellectual property are always challenged in Ger - man tax audits. As a result of the transfer pricing documentation con - cept with the implemented country-by-country report - ing, as well as the master file and the local file, intellec - tual property must be documented more extensively. Therefore, comments must be made regarding the creation, beneficial ownership, chances and risks, etc, of intellectual property. The concept does not radi - cally change things; however, intellectual property will be more transparent for tax authorities in Germany and other countries. Consequently, there are certain concerns that this could lead to more challenging tax field audit procedures, including income corrections in Germany and other countries. 9.11 Country-by-Country Reporting and Transparency Provisions Due to German transfer pricing reporting and docu - mentation requirements, a certain transparency with regard to intercompany cross-border transactions already existed prior to the BEPS project. Further - more, there are disclosure obligations if a German tax resident (an individual or a legal entity) establish - es permanent enterprises or partnerships abroad or acquires shares in foreign corporations. Concerns are being raised in connection with the country-by-country reporting that has been imple - mented by the BEPS 1 Implementation Act, as com - panies will face further significant administrative bar - riers in the future. Finally, increased bureaucracy is to be expected due to the new disclosure obligations for cross-border tax arrangements based on BEPS Action 12 (see 9.1 Adoption of BEPS Recommenda- tions ). 9.12 Digital Economy Businesses Prompted by BEPS Action 1, the EU Commission adopted two legislative proposals in March 2018 relating to the taxation of digital activities in the EU. One of the two draft directives seeks to reform corpo - rate tax rules so that profits are registered and taxed
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