Dear Sir or Madam, Dear clients,
just a few weeks after the turn of the year, we have already noticed that the Tax Haven Defense Act is having a significant impact on our daily practice. Given the explosive nature of the issue and the constant stream of new developments, we would like to take this opportunity to provide you with a brief update and explain in detail two consequences that we believe have a significant impact in practice.
In a nutshell:
- Classification as a non-cooperative country or territory for tax purposes is made by the European Council and published via the so-called “blacklist”/ Annex I
- The consequences are implemented by the respective national law. In Germany, this is done, among other things, through the provisions of the Tax Haven Defense Act (StAbwG)
- The Tax Haven Defense Act only applies to the countries named in §2 of the Tax Haven Defense Ordinance (StAbwV)
- Section 2 StAbwV only lists countries that are on the blacklist
What has happened since our last newsletter?
The following countries were added to the Tax Haven Defense Ordinance (§2 StAbwV) with effect from 21.12.2023:
- Antigua and Barbuda
- Belize
- Russian Federation
- Seychelles
This means that the statutory provisions of the Tax Avoidance Act will gradually apply to these countries.
On 20 February 2024, the European Council published a revised blacklist of non-cooperative jurisdictions:
- American Samoa
- Anguilla
- Antigua and Barbuda
- Fiji
- Guam
- Palau
- Panama
- Russia
- Samoa
- Trinidad and Tobago
- American Virgin Islands
- Vanuatu
This means that the Bahamas, Belize, the Seychelles and the Turks and Caico Islands will no longer be categorized as non-cooperative countries! If there is no change in the positive development of the tax policy of these countries, it is to be expected that they will also be removed from Section 2 StAbwV.
As a result, this means that the Tax Haven Defense Act will probably no longer apply to these countries as soon as Section 2 StAbwV has been revised accordingly.
Consequences of the Tax Haven Defense Act – case 1:
Russia is still categorized as a non-cooperative country. Accordingly, the first measures for business relationships with Russia will take effect from 1 January 2024. As outlined in our last newsletter, the tax consequences will be applied in stages. As a result, §9, §10 and §12 StAbwG will initially apply to Russia in 2024.
For example, anyone who now receives a service from a company based in Russia is obliged to deduct 15% withholding tax in accordance with Section 10 para. 1 sentence 1 no. 3 StAbwG in conjunction with Section 50a para. 5 EStG (Income Tax Act).
In terms of figures, this means:
Company A, based in Germany, receives advice from company B, based in Russia. B invoices 100€ for this service. When paying the invoice, A must deduct 15% tax. If the tax deduction was not factored in by company B, the result is that A must pay a total of 117.65€. 100€ for payment of the invoice and €17.65 for payment of the tax liability. *
*Simplified illustration, without taking potential VAT issues into account
The date of payment is always decisive. This means that even if services were already provided before 2024 and were initially considered as a liability by the German company, payment in 2024 will result in the obligation to withhold source tax.
Consequences of the Tax Haven Defense Act – case 2:
The increased obligations to co-operate under §12 StAbwG also have considerable consequences in practice. According to this, extensive records must be kept and transmitted to the tax authorities for business transactions with non-cooperative countries. There is a threat of severe surcharges if the recording obligations are not fulfilled.
Required content of the reporting:
- kind and scope of the business relationships (e.g. provided/received services, granted loans, purchase of goods)
- contracts in context with these transactions
- details regarding existing intangibles
- a presentation of assumed functions and risks
- chosen business strategies
- relevant conditions of the market and competition
- information about the individuals who are the shareholders of the business partner in the tax haven country
The reporting according to §12 StAbwG must be prepared within one year after termination of the fiscal year and need to be submitted to the responsible tax authorities.
Temporal application:
- 12 StAbwG has generally applied since 1 January 2022. For countries that were not on the “blacklist” on 1 January 2021, the regulations will apply from 1 January 2023.
For countries that are recently classified as non-cooperative tax jurisdictions in accordance with § 2 StAbwV, the regulations will apply from the following year.
In addition, a non-objection rule applies for financial years that began before 31 December 2022. The records for the business transactions concerned can be submitted until 31 May 2024.
Please find attached an overview of the countries including the period of validity.
Consequences if the increased obligations to co-operate are not fulfilled:
- Estimation of additional income which has either not been declared or has been under-declared (§162 para. 2 s. 3 Fiscal Code)
- Assessment of surcharge in the amount of 5,000 €
- The surcharge is at minimum 5% but maximum 10% of the additional income, if this leads to a surcharge of more than 5,000€
- A delayed submission may lead to a surcharge of max. 1,000,000 € but at least of 100 € for each day of delay
Contrary to a transfer pricing documentation, the extended reporting obligations according to §12 StAbwG do not require a detailed transfer pricing analysis. i.e. there is basically no need to report and justify the (transfer) pricing methodology used. However, the tax authorities are entitled to demand a complete transfer pricing documentation.
What does this mean for you?
Have you established or are you unsure whether your business relationships and share-holdings are affected by the measures? Then we recommend that you check this in good time and inform yourself about the possible consequences and necessary measures.
If you see a need for action or advice, please contact us – we will be happy to support you!
Kind regards
Attachment: Non cooperative country or territory for tax purposes
