Tax havens: EU blacklist

List is updated regularly, far-reaching compliance measures make sense.

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With effect from 1 January 2022, the Act on the Prevention of Tax Avoidance and Unfair Tax Competition will apply in Germany. The so-called Tax Haven Defence Act (StAbwG) is based on an agreement between the EU member states to encourage other countries to implement internationally agreed standards for transparency, fair tax competition and measures against base erosion and profit shifting (BEPS).

EU blacklist is updated twice a year

This means that jurisdictions that fail to meet these standards and do not commit to making the necessary improvements will be placed on an EU blacklist. This is a list of non-cooperative countries and territories for tax purposes, known as tax havens.

The EU blacklist was first published in December 2017 and is updated every six months in February and October. Due to regular changes, German companies are faced with the challenge of constantly reviewing business transactions, payment flows and business relationships and fulfilling the corresponding tax obligations.

This is because companies, regardless of their size or sector, are subject to a catalogue of sanctions for business transactions in or relating to EU blacklist countries. The catalogue of sanctions generally provides for the denial of a business expense deduction, stricter add-back taxation, withholding tax and the elimination of tax exemptions for profit distributions and the sale of shares. While Germany has included all sanctions in the Tax Haven Defence Act, many other EU member states refrain from implementing withholding tax measures.

If a tax jurisdiction is newly listed as a tax haven, the measures for this country generally apply from the start of the following year (or financial year). A phased application model is provided for certain defence measures so that they only apply later. For example, the ban on deducting business expenses only applies from the start of the fourth year after inclusion on the list.

Monique Giese

Partner, Corporate Tax Services

KPMG AG Wirtschaftsprüfungsgesellschaft

+49 40 32015-5282

David Mecklenfeld

Senior Manager, Corporate Tax Services

KPMG AG Wirtschaftsprüfungsgesellschaft

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Payments in tax heavens

German companies must deduct withholding tax from certain payments to contractual partners based in a listed country. The withholding tax amounts to 15 per cent plus solidarity surcharge and must be paid to the Federal Central Tax Office (BZSt). In practice, the withholding tax remains a cost factor for German companies. As a result, the transfer of the tax is treated as a net agreement and increases the effective tax rate to 17.82 per cent plus solidarity surcharge.

Payments out of tax heavens

Stricter add-back taxation applies to shareholdings in a company in a listed country. Accordingly, a foreign company with all of its income that is subject to low taxation overall counts as an intermediate company, regardless of the activity of the income, fulfilment of the motive test or the exemption limit for mixed income. With regard to the add-back provisions of the Foreign Tax Act (AStG), the following applies: the standard that leads to the higher tax is applied, either that of the AStG or the stricter add-back taxation under the StAbwG. In addition to the extended add-back taxation, national intercompany privileges (Section 8b KStG) for dividends and capital gains received from tax havens and comparable exemptions under double taxation agreements no longer apply.

Compliance requirements and tax recording obligations

The StAbwG also provides for increased obligations to co-operate, including various record-keeping obligations. In addition, at the request of the tax authorities, the taxable company must affirm the accuracy and completeness of the information provided in lieu of an oath and authorise the tax authorities to assert any claims for information against foreign contractual partners on its behalf.

If the taxable company has breached its duty to cooperate, it is rebuttably presumed that taxable income in Germany in relation to the listed countries has either not yet been declared but exists, or has already been declared but is actually higher than declared. A breach of the duty to cooperate can therefore lead to the assumption of a higher tax assessment basis. In addition, there is a surcharge of 5,000 euros, but at least 5 % and at most 10 % of the additional amount of income.

Further effects of business relationships with tax havens

If a country is listed as a tax haven by the EU, it is not only the defence measures of the StAbwG that apply. Inclusion on the blacklist also has an impact in other contexts. For example, it can lead directly to notification obligations under DAC6 if the payee is located in a listed country as part of a cross-border tax arrangement. In addition, there are effects on public country-by-country reporting (Public CbCR) and coronavirus bridging aid.

What companies should do now

In practice, it is clear that many companies are not yet aware of the provisions of the Tax Haven Defence Act. It is advisable to carry out an impact analysis based on company data and to identify business relationships and payment flows that may be affected by defence measures.

Due to the complexity of the law, the identified business transactions should be analysed in detail from a tax perspective in order to derive appropriate measures. This includes the adjustment of tax returns, the submission of withholding tax declarations, the fulfilment of special record-keeping obligations and restructuring.

Furthermore, compliance violations can also result in legal consequences and sanctions. It is therefore advisable to integrate the consequences of the Tax Haven Defence Act into a tax compliance management system. This applies in particular against the background of the regular adjustment of the EU blacklist.

In addition, companies should also monitor the developments on the so-called EU Green List - which lists the jurisdictions that do not yet fulfil all international standards but have promised to implement reforms - as an early indicator and incorporate them into existing compliance systems. This is because anyone who comes within the scope of the StAbwG is not only confronted with extensive defence measures as well as recording and cooperation obligations, but also with contentious legal issues.

Practical experience shows that the withholding tax deduction obligation in particular has a considerable impact on companies. Withholding tax is a cost factor that can impair competitiveness. In addition, every single transaction has to be reported by means of a withholding tax declaration - and is therefore very time-consuming.

In practice, however, simplifications are already being made by summarising business transactions that are part of a business relationship in a quarterly report. In the meantime, withholding tax returns can also be submitted electronically to the Federal Central Tax Office.

Nevertheless, many legal questions regarding the Tax Haven Defence Act remain unanswered. The published draft of the BMF letter dated 30 November 2023 does little to change this so far.

Practical experience

Practical experience shows that the withholding tax deduction obligation in particular has a significant impact on companies and often remains undetected. Withholding tax is a cost factor that can impair competitiveness. It should be noted that, in principle, each individual transaction must be submitted by means of a withholding tax declaration (and is therefore very time-consuming).

In practice, the use of simplifications has already been observed, e.g. by summarising several transactions belonging to a business relationship in a quarterly report. Although withholding tax returns can now be submitted electronically to the Federal Central Tax Office, the handling of the forms provided is described as not very intuitive and the process is prone to errors.

Many legal questions regarding the Tax Haven Defence Act are still open. The BMF letter dated 14 June 2024 does little to change this.

Compared to the draft version of the letter, the BMF is now of the opinion that public-law service relationships and mandatory usage and service relationships that are closely related to these do not fall within the scope of the StAbwG. The BMF is mainly focussing on fees for transit through the Panama Canal and related services (e.g. tugboats).

With regard to the withholding tax obligation, the BMF is of the opinion that it is not objectionable if no withholding tax is withheld and paid for business relationships with tax jurisdictions prior to the regular adjustment of the StAbwV to the EU blacklist at the end of the year if the relevant tax jurisdiction has been removed from the EU blacklist (and is then, as expected, no longer listed in the StAbwV to be adopted).

With regard to the increased obligations to cooperate, the BMF states that these only apply in conjunction with a (different) defence measure (Sections 8-11 StAbwG). In addition, the BMF does not object if the obligations to cooperate for 2022 are not fulfilled until 31 December 2024 (regular deadline: 31 December 2023).

How we support you

Our team of experts will be happy to support you - from an initial analysis of who is affected, the detailed identification of payment flows and business relationships to the actual data collection and reporting to the authorities. Contact us, we will be happy to answer your questions.