Tax Haven Defence Act has been in force for two years
The provisions of the Tax Haven Defence Act (StAbwG) have been applicable in Germany for around two years. From the legislator's perspective, this law is intended to encourage countries that have not cooperated to date to implement internationally recognised standards with regard to tax transparency and the binding BEPS minimum standards and to combat unfair tax competition. To this end, companies and private individuals are to be prevented from continuing or entering into business relationships with these countries through targeted measures.
Many islands - and now a major power
The Tax Haven Defence Ordinance (StAbwV) determines which countries are to be classified as tax havens. So far, the list includes twelve rather exotic countries from American Samoa to Vanuatu, meaning that only a few German taxpayers are currently affected by the regulations. This is likely to change from next year, as a further four countries are planned for inclusion on the list. In addition to Antigua and Barbuda, Belize and the Seychelles, the inclusion of Russia on the list is likely to significantly expand the scope of the law. Russia's inclusion had been expected after the country was recently also listed by the EU twice in succession. The Federal Council still has to approve the expansion of the list.
Extensive tax sanctions
In the case of business relationships with taxpayers domiciled in a tax haven, the law provides for far-reaching tightening compared to other national regulations:
- In relation to countries listed in the StAbwV, any existing double taxation agreements are suspended insofar as they restrict German taxation rights (section 1 (3) sentence 2 StAbwG).
- Expenses from business relationships with the countries listed in the StAbwV may not be deducted as operating expenses or income-related expenses (Section 8 StAbwG).
- In the case of an investment in a company that is domiciled in a country listed in the StAbwV, stricter add-back taxation applies (Section 9 StAbwG).
- Residents of a country listed in the StAbwV are subject to extended withholding tax obligations if they generate income from business relationships with German taxpayers (Section 10 StAbwG). This applies, for example, to the provision of services or trade in goods. The German business partners are obliged to withhold and pay the withholding tax (15% plus solidarity surcharge).
- In the case of shareholdings in companies domiciled in one of the countries listed in the StAbwV, profit distributions and gains from the sale of shares are not tax-privileged (Section 11 StAbwV).
- Stricter record-keeping and documentation obligations apply to German taxpayers who maintain business relationships in countries listed in the StAbwV (Section 12 StAbwG).
On 30 November 2023, the tax authorities published a draft BMF letter on the details of the application of the law and asked for comments by 9 January 2024.
Sanctions take effect from 1 January 2024
Even though many German companies and private individuals have greatly reduced or, in some cases, completely terminated their business relationships with Russia as a result of the war of aggression against Ukraine and various non-tax sanction regulations, such business relationships are likely to continue to exist to a considerable extent. The planned inclusion of Russia in the list of the StAbwV will place a considerable economic and tax burden on these relationships. German taxpayers affected are under considerable time pressure, as the measures - with the exception of the ban on the deduction of business expenses or income-related expenses and the stricter rules on profit distributions and the sale of shares - will take effect from 1 January 2024.
Update: The Federal Council approved the inclusion of the Russian Federation and three other countries on the list of non-cooperative countries and territories on 15 December 2023. The expansion of the list came into force with the publication in the Federal Law Gazette on 20 December 2023 (Federal Law Gazette I 2023, No. 375).