The German Ministry of Finance has released guidance on implementing the Tax Haven Defense Act, formerly the Act to Prevent Tax Avoidance and Unfair Tax Competition. This guidance introduces stringent measures to decrease business dealings with non-cooperative jurisdictions, commonly known as tax havens.
The key defensive measures are:
Tighter Controlled Foreign Corporation (CFC) rules
Taxpayers holding shares in companies based in tax havens will face stricter CFC rules. These rules treat such companies as intermediaries, and their passive and active income will be subject to additional taxation.
Non-deductibility of payments
Business transactions involving payments to a tax haven will not be deductible unless the related income is subject to taxation in Germany.
Withholding tax adjustments
Payments to tax havens will no longer benefit from reduced withholding tax rates or exemptions.
Extended non-resident tax liability
Income derived from financing, insurance, reinsurance services, and trading goods or services in tax havens, when claimed as an expense in Germany, will be subject to a 15% withholding tax at source.
Elimination of participation exemptions
Dividends and capital gains from the disposal of shares in subsidiaries located in tax havens will no longer qualify for participation exemptions under domestic or treaty law.
