On 28 May 2020, the German Federal Ministry of Finance [Bundesministerium der Finanzen – “BMF”] presented a bill by the somewhat unwieldy title “Bill on the Multilateral Convention of 24 November 2016 to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting”, the purpose of which is to ratify what is known as the Multilateral Instrument (“MLI”).
The MLI is an international tax treaty signed by the Federal Republic of Germany as one of the 68 initial signatories on 7 June 2017. Since other countries and territories can accede to the MLI by signing it subsequently, the current number of signatories now stands at 94 (as at 24 June 2020). The MLI is one of the results of the G20/OECD project on base erosion and profit shifting (BEPS) that aims to better regulate international tax planning strategies. The particular aim of the BEPS initiative is to amend national and international tax rules allowing taxpayers to artificially shift profits to low- or no-tax jurisdictions. This is to ensure that profits are taxed more in jurisdictions where the economic activities and creation of added value actually occur. In this context, the BEPS initiative also recommended changes to existing double taxation treaties (“DTTs”). In order to implement such changes to existing DTTs within a reasonable time, the international community agreed to enter into a multilateral convention for this purpose because otherwise it would have been necessary to re-negotiate all DTTs on a bilateral basis.
The Draft Bill presented by the BMF now proposes to ratify the MLI. The Draft Bill includes the Approval Act to the MLI as defined in Art. 59 Para. 2 Sentence 1 of the German Constitution [Grundgesetz – GG], an Explanatory Memorandum to the Bill, the text of the MLI in German, English and French as well as a two-part memorandum, one part explaining the MLI from the perspective of the Federal Republic of Germany and the other specifying the options to be chosen by the Federal Republic of Germany in relation to the MLI provisions to be applied.
According to the options included in the Draft Bill, only 14 of the almost one hundred DTTs the Federal Republic of Germany has in place with other countries are to be amended under the MLI at this time. Specifically, this concerns the DTTs with Austria, Croatia, the Czech Republic, France, Greece, Hungary, Italy, Japan, Luxembourg, Malta, Romania, Slovakia, Spain and Turkey.
However, the options provided for under the MLI and chosen by the Federal Republic of Germany are not put into effect directly by the proposed Approval Act because the procedure for making amendments to the DTTs concerned comprises two steps:
As a first step, the ratifying Bill orders legal effect to be given to the MLI at the national level (Rechtsanwendungsbefehl) with respect to the DTTs, Options and Reservations covered under the MLI. However, the amendments do not come into effect immediately after that since, on the one hand, this is only possible once the respective other country has also declared the DTT and the amendments made to it to be applicable; and on the other, the Federal Republic of Germany has made a reservation pursuant to Art. 35(7) MLI according to which the amendments made by the MLI come into effect under international law only 30 days after the OECD has been notified that the Federal Republic of Germany has completed its internal procedures for the entry into effect of the provisions of the MLI. This is because the Federal Republic of Germany, for reasons of legal certainty (and probably mainly for reasons of legal clarity), has chosen to put the specific amendments of the individual DTTs concerned into effect under domestic law once again by way of an Approval Act. The notification to the OECD will be sent only after that.
The Draft Bill will now be forwarded to the German Federal Council (Bundesrat) for an opinion and then discussed by the Federal Parliament (Bundestag).
The MLI in particular includes amendments to provisions to prevent improper use of tax treaties (to tackle treaty shopping with the principal purpose test), provisions for more effective dispute resolution mechanisms, as well as on issues concerning permanent establishment status and reallocation of taxing rights for alienation of shares held in certain types of entities. Groups having an international holding structure should therefore have their structure reviewed for a potential need and options for adaptation.
In its Draft Bill, the Federal Republic of Germany also declared the so-called “immovable property clause” of Art. 9(4) MLI to be applicable, which stipulates that the alienation of shares of entities deriving their value principally from immovable property is to be taxed in the country where the immovable property is situated. This may result both in the shares of entities deriving their value principally from immovable property (i.e. in the shares no longer being or becoming subject to German tax liability, respectively) being bound up for tax purposes. In particular German entities holding shares in foreign real estate companies and foreign holding companies holding shares in German real estate companies should therefore have their structures reviewed for tax purposes and options for adaptation to prevent the risk of potentially material adverse tax effects that may arise without further action on their part.
Dr Michael Engel
Frankfurt am Main