ATAD Implementation Act Changes in CFC-Regulations

This blog post is the third part of the series on the ATAD Implementation Act. You can access the previous contributions regarding Hybrid mismatches and the changes in Exit Taxation via the corresponding links.

Changes to the Controlled Foreign Companies-Regulations through the ATAD Implementation Act

After the legislator failed to implement the ATAD Directive (Anti-Tax Avoidance Directive) into national law in time by the end of 2019, this has now been done with the ATAD Implementa-tion Act of 30 June 2021.

The ATAD Implementation Act will only result in a few changes to the previously applicable legal situation in the area of the taxation of Controlled Foreign Companies ("CFC"). This is due to the fact that far-reaching regulations already exist in Germany through the national laws on CFCs in the Foreign Tax Act (Außensteuergesetz, AStG).

One major change is the switch to a shareholder-based approach. The decisive criterion is the control of an intermediate company. According to Section 7 Para. 2 German Foreign Tax Act, this is now the case if, at the end of the respective financial year of the foreign company, more than half of the shares in the nominal capital are directly or indirectly attributable to the taxpayer alone or together with persons closely associated with him, or if he is directly or indirectly entitled to more than half of the profits or liquidation proceeds. In this context, the associated persons do not have to be domestic residents. The legislator thus abandons the concept of national control. The risk of accidental or even unknown national control will thus be avoided in the future.

The decision of the legislator to define a catalogue of active income instead of passive income in Section 8 AStG contrary to the ATAD, remains unchanged. The catalogue was, however, partially revised. Among other things, interest is now always to be regarded as passive income. The regulation on dividends, which had formerly been clearly laid out, was also revised. Previously, all profit distributions by corporations were considered as active income without exception. Now, only certain intercompany dividends qualify as active income. The tax rate of 25%, which is the threshold for a "low taxation", has, however, remained unchanged.

The new legal situation also entails a change in the exemption limit for mixed income (Section 9 AStG). To begin with, the revenue, instead of the gross income, is now the relevant factor. In addition, the threshold of EUR 80,000 per company has been eliminated.

The relevant point in time for attributing CFC-income to the taxpayer has also changed. Whereas under the old law, pursuant to Section 10 Para. 2 Sen. 1 AStG, the CFC-income was deemed to be attributed immediately after the end of the relevant financial year of the foreign company, under the new law it is deemed to be attributed in the assessment period in which the relevant financial year of the foreign company ends.

The new provisions are generally to be applied for the first time for the assessment periods for which CFC-income is to be attributed resulting from a financial year of the intermediate company or permanent establishment that begins after 31 December 2021.

Relevance in practice

As mentioned above, though the ATAD Implementation Act only results in a few changes to the applicable legal situation, these must be taken into account in tax planning. This applies in particular with regard to the changes to the active income catalogue in Section 8 AStG with respect to profit distributions by corporations. There is an acute need for action here in the case of free float shares, as these are no longer covered by the new active income catalogue. Particularly due to the far-reaching changes made by the ATAD in the other areas, the changes regarding the CFC-rules must not be neglected.

Dr Marion Frotscher

Simon Bauer