Germany's Ministry of Finance published the draft of the Annual Tax Act. The draft outlines that, in various areas of German tax law, there is a need for technically necessary legislative action, particularly to align with EU law and European Court of Justice case law, and to respond to rulings of the Federal Fiscal Court. 

More specifically, the Ministry of Finance stated there is a need to regulate procedural and jurisdictional issues, implement consequential amendments, make adjustments resulting from previous legislative changes, and correct errors. As a result, the officials have proposed numerous tax amendments.

Key Proposed Tax Amendments

The draft law includes significant amendments to the Minimum Tax Act to align Germany's Pillar Two rules with the latest administrative guidance issued by the OECD/G20 Inclusive Framework on BEPS. These changes are presented as a "side-by-side package" to ensure consistent application of the Global Minimum Tax while reducing unnecessary compliance burdens in certain cases. 

One of the main changes is to allow multinational groups to reduce both the primary and secondary top-up tax amounts to zero if their Ultimate Parent Entity (UPE) is located in a jurisdiction that operates a recognized side-by-side taxation regime. The key requirement to qualify for this measure is that the jurisdiction must impose a domestic Corporate Income Tax rate of at least 20% and must not pose a significant risk that businesses can reduce their effective tax rate on domestic activities below the 15% Global Minimum Tax required under Pillar Two.

The draft law also includes important VAT reforms aimed at increasing legal certainty and modernizing Germany's VAT framework, particularly for VAT groups and cross-border compliance. Under a new application-based system for VAT grouping, proposed to begin in July 2028, a VAT group will only be recognized if the parent company formally applies for and declares the arrangement to the tax authorities

In addition, the draft proposes the gradual abolition of the existing consignment warehouse rules, with the provisions to be phased out by July 2029. This phase-out aligns with the broader One-Stop Shop (OSS) reporting framework at the EU level. 

The draft further proposes several measures to modernize Germany's tax administration, promote digitalization, and reduce administrative burdens for both taxable persons and Tax Authorities. One notable change is to increase the interest rate applied to full standard tax interest calculations from 0.15% to 0.3%, effective January 1, 2027.

Conclusion

Taxable persons operating in Germany should carefully monitor the adoption of proposed measures. VAT groups might be the most affected entities and should therefore continually review the conditions for VAT grouping. Overall, businesses should act proactively to minimize the risk of non-compliance and use the time to structurally adapt to potential new rules and regulations.