Minimum tax - A challenge not only for large corporate groups
Germany introduced the so-called minimum tax as of 2024. This requires large companies to ensure that their worldwide profits are taxed at a minimum effective rate of 15%. In the following section, we first present the concept for the international regime and, subsequently, the German Minimum Tax Act.
Elements of the minimum tax system
The minimum tax is based on a coordinated approach at the OECD level (‘Pillar 2’); the aim here is to ensure that the worldwide profits of large companies or groups of companies with consolidated revenues of, at least, €750m (hereinafter: large corporate groups) are taxed at a minimum effective rate of 15%, thereby countering international tax competition, which a number of countries consider to be harmful.
The minimum tax system comprises the following four essential elements or mechanisms:
1. Subject to Tax Rule
By way of derogation from the previous typical rules, under the OECD’s concept, the source (or payor) states will be allowed to impose additional tax on specific interest, royalties and other payments within a group of companies if in the residence (or payee) state such payments are subject to a tax rate of below 9%. The planned large-scale implementation will notably be carried out in the form of a multilateral convention between the states. This is still likely to take some time. The applicability of the Subject to Tax Rule will however not be restricted to large companies/groups.
2. National top-up tax
Germany and other states impose national top-up taxes when the effective tax charges for the group companies that are resident in the territories of these states are below 15%. In principle, only large corporate groups are covered by this mechanism. Although, even smaller companies that are not at all consolidated could be affected, for example, in the case of joint venture structures.
3. Primary top-up tax
Primary top-up tax - If, after applying the above-mentioned steps, a large corporate group is deemed to be low-taxed then, at the level of the ultimate parent entity, an additional tax will generally be imposed that will raise the tax charge on the profits to 15%.
4. Secondary top-up tax
If the state of the ultimate parent entity does not apply a primary top-up tax then, in the case of residual undertaxation, secondary top-up tax will be imposed by the (other) states where the enterprise units are located. In doing so, the amount of the tax increase for the entire group will be allocated equally on the basis of the number of employees and the amount of assets to those states that impose a secondary top-up tax. Like the primary top-up tax, the secondary top-up tax will also mainly affect large companies/groups and, in Germany, will be imposed for the first time in 2025 on companies with financial years aligned with the calendar year.
Necessary measures
Most large corporate groups have been getting ready for minimum taxation for quite a while now, for example, by preparing the data collection that is required for calculations and tax returns and by establishing the related processes. However, in terms of tax planning and with respect to compliance, the minimum tax system calls for continuous monitoring of the policies in all the states where there are enterprise units. Furthermore, accurately mapping the consequences that result from these policies or their modifications usually poses considerable challenges for companies. That is why professional support in these areas would be appear to be appropriate. Minimum tax could possibly also and notably affect enterprise units at the subsidiary level that might not be able to draw on the support, to the extent needed, of a tax department based at the head office or the parent entity.
Large corporate groups will frequently face a complex task when they fall within the scope of applicability of primary and/or secondary top-up taxes for the first time. Determining the data to be collected and setting up the appropriate processes usually requires long lead times and professional support. The German Minimum Tax Act admittedly provides some relief in that the above-mentioned revenue thresholds have to be reached in at least two of the four financial years immediately preceding the relevant financial year. In cases of organic growth this will effectively result in a certain lead time. The situation would however be different in the event of mergers or acquisitions because, even shortly after a restructuring, a minimum tax liability could be incurred here; it would therefore be necessary to think about setting up functioning reporting processes and data collection already when preparing the transaction.
