Tax haven defense law - Who is on the EU "blacklist"?

Recently, there has been an increase in the number of reports regarding measures to combat tax evasion in Germany. The German tax authorities are using a wide variety of tools for this purpose. Data CDs from third countries continue to be purchased, most recently tax data from Dubai. At the same time, international agreements are being expanded, such as the Automatic Exchange of Information (AEOI). Here, Turkey is regularly part of the reporting. The press is also involved in the investigation of potential tax evasion, with the Panama, Paradise and Pandora Papers being particularly prominent examples.

At the same time, new legal foundations are being created, aimed in particular at tax arrangements in the international arena. A further step has now been taken with the Tax Haven Defense Act, which came into force on July 1, 2021 and is to be applied from 2022.

What is the background to this law?

Tax haven defense law – what’s behind it?

The Chancellor-designate, Mr. Olaf Scholz, described the background of the Tax Haven Defense Act in his office as Federal Minister of Finance as follows:

“We are doing something to dry up tax havens. With the planned regulation, we are tackling tax evasion by warding off business relationships with states and tax jurisdictions that do not adhere to international tax standards. It is good that we are pulling together with our EU partners. In this way, we are working together to ensure greater global tax justice. Everyone must make their fair contribution to tax revenue, not just the bakery next door, but also the major international corporation. If someone wants to steal out of tax liability, we strike with targeted defensive measures.”

(Source: Bundesfinanzministerium )

Which countries are on the blacklist of the Tax Havens Defense Act and are treated as tax havens?

The countries affected are those that are on the EU’s “black list”, Section 3 StAbwG. Pursuant to § 3 StAbwG, the Federal Ministry of Finance will issue a separate legal ordinance in this regard, in which non-cooperative territories (parallel to the EU’s “black list”) will be named (source:. PStR 15.11.2021).

Quite decisive for the question of Turkey’s classification on the “black list” is the participation and implementation of the Automatic Exchange of Information (AEOI) agreement. This can be seen very clearly in the current conclusions of the European Council of 05.10.2021.

In this, the European Council discusses the background on the composition of the black list and also devotes attention to Turkey.

Currently, the Council of the European Union lists the following countries on the “black list”.

American Samoa
Fiji
Guam
Palau
Panama
Samoa
Trinidad and Tobago
American Virgin Islands
Vanuatu

What are the specific provisions of the Tax Haven Defense Act?

In essence, legal transactions with companies based in tax havens will in future be treated more strictly for tax purposes in Germany than legal transactions with companies in non-tax havens. The individual measures are summarized by the Ministry of Finance (source: Federal Ministry of Finance) as follows:

Prohibition of deduction of business expenses and income-related expenses
Expenses from business transactions related to tax havens can no longer be claimed for tax purposes.
More stringent taxation of taxable income from tax havens
There is a stricter addition taxation if a so-called intermediate company is domiciled in a tax haven. This means that companies can no longer avoid tax payments by shifting income to a company in a tax haven, because all active and passive income of the intermediate company is subject to additional taxation.
Tougher withholding tax measures
In addition, more stringent withholding tax measures will apply if, for example, interest expenses are paid to tax haven residents. This will extend the limited tax liability of tax haven residents to certain income (in particular for all financing fees), which will also be subject to tax withholding under Section 50a of the Income Tax Act.
Measures in the case of profit distributions and share disposals
In the case of profit distributions and disposals of shares, tax exemptions and provisions in treaties for the avoidance of double taxation are to be restricted or denied if such payments are made by a corporation resident in a tax haven or shares in a company resident in a tax haven are disposed of