Dear Sir or Madam, Dear clients,
The word “tax haven” makes not only taxpayers prick up their ears, but of course also the tax authorities. If you have any business relations or ownership structures to one of the countries which seems to be a tax haven, you might be directly concerned by these measures. To avoid any consequences, we recommend an early review of the measures and an evaluation of possible actions
The EU list of non-cooperative jurisdictions for tax purposes has been updated on February 14, 2023. Russia, British Virgin Islands, Costa Rica and Marshall Islands have been added to the EU list. In the following we would like to explain the consequences and what it means to be on the “blacklist”.
In particular, we would like to emphasise that the first measures for business relationships with Russia will already take effect from 1 January 2024. These include stricter add-back taxation, mandatory withholding tax and increased obligations of cooperation, which we present to you below.
What is the EU list of non-cooperative jurisdiction?
It is the general objective to fight tax evasion and avoidance. Countries which are also known as fiscal paradise shall be encouraged by concrete measures to adjust their approach and to comply with tax good governance criteria.
Thereby, jurisdictions which have committed to implementing reforms in a specific timeframe are included in a state of play document (Annex II). For example, Hong-Kong and Qatar are currently mentioned on the state of play document. The remaining jurisdictions which have refused to do so are included on the “blacklist” (Annex I). The above-mentioned countries which have been on 14 February 2023 added to the EU list are all included in Annex I.
However, once a country accomplishes all the requirements, its name is removed from the list.
Which consequences result from the EU list of non-cooperative jurisdictions?
On the one hand there are financial restrictions. Various funds from the EU budget, like investments of the European Fund for Sustainable Development would be restricted. Furthermore, there are additional effects from a tax perspective.
There is an increased duty to collaborate as per the fiscal paradise defense law (Steueroasen-Abwehrgesetz “StAbwG”) as well as increased reporting obligations in case of cross-border tax structures according to §§138d ff. of the revenue code.
In the following we would like to explain the detailed measures of the StAbwG. These are applicable if a taxable individual has business relations or ownership structures in a listed jurisdiction. Furthermore, the country needs to meet at least one of the following conditions:
- Non-transparency in tax affairs,
- Unfair tax competition or
- Non-compliance with the BEPS-minimum standards
Characteristics in this regard are for example low tax rates as well as missing tax data and information exchange with EU member states.
- 8 StAbwG – prohibition of operating and work-related cost deduction
Accordingly, expenditures from transactions with non-cooperative jurisdictions cannot be deducted.
However, there are two exemptions. The first exemption is applicable if the expenditures are connected to business partner’s income which is subject to unlimited or limited taxation as per the Income Tax Act or Corporation Tax Law.
The other exemption is applicable if there is already an amount that needs to be added because of income resulting from these expenditures.
The approach will be illustrated by the following (simplified) example:
A-GmbH has its location and management in Germany. She receives a loan from B-S.R.L. who has its location and management in Costa Rica.
Solution:
According to §8 par. 1 StAbwG* it is not allowed that A-GmbH deducts the interest which is paid for the loan as B-S.R.L. is resident of a non-cooperative country as per the EU list.
*Potential further restrictions related to the deduction of interest payments are not considered in this example for the purpose of simplification.
Exemption 1:
Would be applicable in the above-mentioned example if B-S.R.L. would have a permanent establishment in Germany and if the interest claim would be allocated to the German PE. In this case, B-S.R.L. would be subject to limited taxation in Germany according to §2 of the Corporation Tax Law. A-GmbH is entitled to consider the paid interest as business expense.
Exemption 2:
Would be applicable in the aforementioned example if there would be a C-AG who has its location and management in Germany and would be the only shareholder of B-S.R.L. In this case C-AG would have to consider the interest payments as taxable income as its origin is from passive income from a low-tax country according to §10 German Foreign Transaction Tax Act. If applicable, the deduction of interest payments as operating costs is not denied on A-GmbH’s level.
- 9 StAbwG – intensified add on taxation
In case of an individual who is subject to unlimited taxation in Germany and who is a shareholder of a company which is a resident of a non-cooperative jurisdiction, the foreign company is intermediary with its total income. This is only applicable if the income of the foreign company is subject to a low taxation in the country of origin.
Example:
The domestic A-GmbH has 100% of B-OOO’s shares who is located and has its management in Russia. B-OOO provides services to C-OOO who is also a Russian resident.
Solution:
Solution:
Basically, the conditions for add on taxes according to §10 German Foreign Transaction Tax Act are not met as the services represent active income (§8 par. 1 no. 5 German Foreign Transaction Tax Act).
However, §9 StAbwG causes that B-OOO is considered as intermediary with its total income. This causes that B-OOO’s income needs to be added for tax purposes within A-GmbH’s profit assessment.
If §9 StAbwG is applicable the paragraph even overrides any potential exemptions or tax allowances according to the German Foreign Transaction Tax Act.
- 10 StAbwG – Withholding tax
The total income of certain sources is subject to a withholding tax in the amount of 15%. Subject to withholding source is for example income from financing relations, insurance premiums and income from providing services.
Example:
Example:
The domestic A-GmbH receives a service from B-OOO (Russian tax resident).
Solution:
Solution:
Usually, these services are not subject to German taxation as B-OOO is neither subject to limited nor to unlimited taxation. These services are not part of the income catalogue as per §49 German Income Tax Act.
- Nevertheless, §10 StAbwG causes that a tax withholding in the amount of 15% is mandatory. A-GmbH is responsible for the withholding and payment of the source tax.
- 11 StAbwG – measures in case of profit distribution and share sale
- Principally, specific capital income like dividends is tax-exempt according to §8b Corporation Tax Law. §11 StAbwG causes that this regulation as well as comparable regulations of a Double Tax Treaty are not applicable.
There is only an exemption if §8 StAbwG or §10 StAbwG have been applied already to avoid double consequences.
Example:
The domestic A-GmbH receives a dividend from B-Ltd., whose location and management is on British Virgin Islands. A-GmbH has 25% of B-Ltd.’s shares.
Solution:
Basically, the dividend would be completely tax-exempt, except 5% which have to be considered as non-deductible expenditures. However, §11 StAbwG denies the application of §8b Corporation Tax Law which causes that the dividend is completely subject to taxation.
- 12 StAbwG – increased obligations to cooperate
According to Section 12 StAbwG, the taxpayer is obliged to keep records of business transactions relating to a non-cooperative tax jurisdiction. This also includes business transactions with third parties. Among other things, records must be kept of the type and scope of business relationships, such as the purchase of goods and services. The records must be prepared no later than one year after the end of the respective financial year and submitted to the responsible tax authority.
Effective date
The measures as per the StAbwG are applicable since January 1, 2022 in general. For countries that were not yet on the EU list on January 1, 2021, i.e. countries that, as described above, were only added to the list in 2023, the measures will only apply from January 1, 2023.
Furthermore, the respective paragraphs need to be considered incrementally. §9 and §10 StAbwG are applicable since the next year after the country was classified as non-cooperative for tax purposes and since this evaluation was published by decree. For example, Russia and the British Virgin Islands were added to the EU list in February 2023 which will be probably published by decree during 2023 accordingly. Hence, the regulation according to the StAbwG will be applicable as of January 1, 2024.
- 11 StAbwG will be applicable as of the 3. following year and §8 StAbwG as of the 4. following year after publishing of the decree. As per the example for Russia and the British Virgin Islands §11 StAbwG will be applicable as of 2026 and §8 StAbwG as of 2027.
What does this mean for you?
Have you noticed that you have any business relations or ownership structures which might be directly concerned by these measures? We recommend to review the potential consequences and take action if applicable on time.
If you have any comments, questions or implementation difficulties, please contact us!
Best regards
Annex I
- American Samoa
- Anguilla
- Bahamas
- British Virgin Islands
- Costa Rica
- Fiji
- Guam
- Marshall Isalnds
- Palau
- Panama
- Russia
- Samoa
- Trinidad and Tobago
- Turks and Caicos Isalnds
- American Virgin Islands
- Vanuatu
Annex II
- Turkey
- Aruba
- Belize
- Curaçao
- Israel
- Botswana
- Dominica
- Seychelles
- Qatar
- Hongkong
- Malaysia
- Jordan (Aqaba Special Economic Zone)
- Albania (industrial incentives)
- Armenia (free economic zones and information technology projects)
- Eswatini (Special Economic Zone)
- Montserrat
- Thailand
- Vietnam
Attachment: Tax deficiencies identified by the EU
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