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Germany’s Tax Haven Defence Act25 June 2024

This article reviews Germany’s Tax Haven Defence Act (StAbwG) and the related guidance from the tax authorities with a focus on the maritime and financial sectors.

"The defence measures affect taxpayers who maintain business relationships in or with countries on the EU"

Germany’s Tax Haven Defence Act (“StAbwG”) was introduced on 25 June 2021 and includes various measures intended to encourage non-cooperative jurisdictions to implement internationally agreed standards for transparency, fair taxation and measures against base erosion and profit shifting at an EU-wide level. Non-cooperative jurisdictions for tax purposes will be placed on an official list published by the EU (the so-called “EU blacklist”). The StAbwG’s measures affect taxpayers who maintain business relationships in or with countries on the EU blacklist (so-called “harmful business relationships”). The aim is to avoid such business relationships, even if this is difficult or impossible in practice in some cases.

Approximately six months after the draft guidelines for the StAbwG were published, Germany’s Federal Ministry of Finance (“BMF”) finalised the tax authorities’ views and published their related guidance on 14 June 2024 (the “Guidance”).

Selected aspects of the StAbwG and Guidance relevant to companies in the maritime and financial sectors are presented below, with a focus on international business relations with third parties.

Defence measures under the StAbwG (Sections 9 to 11)

The following defence measures exist under the StAbwG:

  • ban on the deduction of operating expenses (applicable from 1 January 2025 at the earliest);
  • stricter Controlled Foreign Companies tax rules (“CFC-rules”), focussing in particular on controlling interests in intermediate companies based in countries on the EU blacklist;
  • extended withholding taxation (“WHT”), leading to an obligation to withhold WHT for taxpayers in Germany; and
  • measures regarding profit distribution and the sale of shares.

The ban on deducting business expenses and extended WHT will be especially relevant. This applies, for example, to companies in the maritime and financial industry, whereby the ban on the deduction of business expenses becomes less important when the German tonnage tax regime applies.

The above measures will apply irrespective of any double taxation agreement. They do not apply to value added tax (VAT), including import VAT and excise duties.

Current EU blacklist (as of 20 February 2024)

Until the next update, which is expected in October 2024, the following jurisdictions are currently classified as non-cooperative for tax purposes by the EU (“non-cooperative states”):

  • American Samoa;
  • Anguilla;
  • Antigua and Barbuda;
  • Fiji;
  • Guam;
  • Palau;
  • Panama;
  • Russia;
  • Samoa;
  • Trinidad and Tobago;
  • American Virgin Islands; and
  • Vanuatu.

The following jurisdictions were removed from the EU blacklist in the last update: the Bahamas, Belize, the Seychelles and the Turks and Caicos Islands. The Marshall Islands were removed on 17 October 2023.

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"The ban on deducting business expenses and extended WHT will be especially relevant."

There may be differences in the timing of the application of the measures in relation to the respective jurisdictions on the EU blacklist. For example, the extended WHT has applied to Panama since 1 January 2022, but the ban on the deduction of business expenses will (probably) only apply from 1 January 2025.

Practically relevant statements of the Guidance

1.    (No) harmful business relationships

In view of the tax authorities, harmful business relationships are those that involve a non-cooperative state and a German taxpayer (e.g. GmbH, GmbH & Co. KG or permanent establishment in Germany) as one of the transaction parties. This is to be welcomed, especially as the wording of the law could be interpreted very broadly. The following examples are noteworthy:

  • for insurance relationships, the residence of the contracting parties (insurer and policyholder) shall be considered and not the location of the risk. This can be particularly relevant for a policyholder’s deduction of business expenses or extended WHT obligation; and
  • The same applies to loans or other financing relationships. The focus shall only be on the relationship between lender and borrower and not on the financed asset. This should also apply to services provided by a financial institution. On the other hand, the execution of a transfer to a non-cooperative state or the acquisition of a security from a non-cooperative state by a financial institution as a service provider/payment processor, should not be considered a harmful business relationship. This may be particularly relevant for the deduction of business expenses or a WHT obligation on the part of the borrower or extended WHT taxation on the part of the lender.

In each case, the persons or companies behind the transaction must be considered if the contracting parties are partnerships or similar tax-transparent vehicles.

Specifically for maritime relationships, the tax authorities state that a fee to transit a canal (such as the Panama Canal) paid to the canal authority, or a fee for the issuance of a transit permit as well as a fee to a tugboat company for the necessary assistance in maneuvering, are not harmful business relationships. This means that the fees can be deducted as business expenses and there is no extended WHT obligation.

In general, the tax authorities do not consider public-law performance obligations and closely related, mandatory or non-mandatory utilisation and service relationships to be harmful business relationships, which is also to be welcomed.

2.    Extended withholding tax (§ 10 StAbwG)

a.  Introductory overview

If there is not already a limited tax liability (in accordance with Section 49 Income Tax Act) and therefore a WHT obligation in accordance with other applicable regulations, there are extended WHT taxation/obligations for income from

  1. financing relationships;
  2. insurance or reinsurance premiums;
  3. the provision of services (other than those in points 1 and 2), with the exception of the right to use;
  4. trade in goods or services (within the meaning of point 3); and
  5. the letting and leasing or sale of rights that are entered in a domestic public book or register.

The tax authorities clarify in the Guidance that the extended WHT taxation is not to be applied in cases where a limited tax liability applies in accordance with the Section 49 Income Tax Act. If the tax authorities have not previously made use of a withholding tax deduction obligation (pursuant to Section 50a para. 7 Income Tax Act), this may change if the requirements for the extended WHT are met.

In cases concerning debt-financed vessels, the lender may already have a limited tax liability for the financing relationship if the vessel is registered in a domestic shipping registry.

"Payments on financing relationships and time-charter agreements are examples for withholding tax duties."

b.  Finance leasing

Whether and to what extent a finance lease is a financing relationship subject to the extended WHT or a non-relevant right to use should be determined by the allocation of economic ownership of the leased asset.

c.  Dry vs. wet lease and bareboat vs. time charter

While the provision of services generally leads to an extended WHT, the right to use is, however, exempt. In the Guidance, the tax authorities differentiate between leases for vehicles such as vessels involving dry and wet leases and, in particular, freight contracts. Dry leases or bareboat charters do not lead to the extended WHT as a mere right to use.

In contrast, wet leases and time charters include service elements (provision of crew or captain and ship’s officers etc.) in addition to the right to use. The consideration must be apportioned and the portion attributable to the service elements is subject to the extended WHT.

d.  Trade in goods or services

The tax authorities have little to say about trade in goods or services. Bunkers or diesel fuel, for example, could be affected.

3.    Ban on the deduction of business expenses (§ 8 StAbwG)

"According to the tax authorities, the increased obligations to cooperate are only to be fulfilled if at least one defence measure applies."

If no extended WHT applies, the ban on the deduction of business expenses comes into consideration.

For example, it is pointed out that depreciation and amortisation (e.g., loan receivables) amounts must also be considered within the ban on the deduction of business expenses.

4.    Increased obligations to cooperate and keep records (Section 12 StAbwG)

All business transactions in or relating to non-cooperative states are subject to increased obligations to cooperate and extended record-keeping duties, which must be submitted to the competent tax authorities. The deadline for this is one year after the end of the relevant calendar or financial year.

According to the tax authorities, the increased obligations to cooperate are only to be fulfilled if at least one defence measure applies. This restrictive interpretation of the rather open wording of the law is generally pleasing, as it is limiting its application to the “relevant” cases. However, it remains unclear whether the increased obligations to cooperate also apply to shipping companies applying the German tonnage tax regime if the only defence measure of the ban on the deduction of business expenses is generally applicable, but which has no impact due to the German tonnage tax regime.

Record-keeping duties include, for example, records of the business relationship (type and scope), the underlying contracts including the agreed contractual conditions (including changes), the business strategies and the market and competitive conditions that are relevant for taxation.

KYC processes can be used to prove the non-existence of business relationships with non-cooperative states and, thus, the increased cooperation and record-keeping duties should not apply. The tax authorities generally require financial institutions to fully fulfil the KYC processes for all relevant regulations outside of the StAbwG (e.g., Anti-Money Laundering Act).

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