February 16, 2023
Germany's updated EU list of non-cooperative jurisdictions may trigger significant German tax consequences for business relationships with Russia
On 14 February 2023, the Council of the EU (Council) updated the EU list of non-cooperative jurisdictions for tax purposes and added British Virgin Islands, Costa Rica, Marshall Islands and Russia to the Annex I (the so-called blacklist) of the EU List. With these additions, the list now consists of 16 jurisdictions: American Samoa, Anguilla, Bahamas, British Virgin Islands, Costa Rica, Fiji, Guam, Marshall Islands, Palau, Panama, Russia, Samoa, Trinidad and Tobago, Turks and Caicos Islands, US Virgin Islands and Vanuatu.
Assuming that the German Federal Government will incorporate these amendments into the domestic Tax Haven Defense Act Regulations by the end of 2023, this would trigger German tax consequences for business relationships with these jurisdictions as of 2024. Among others, these would include aggravated controlled foreign company (CFC) rules, an extension of nonresident tax liability, denial of treaty benefits as well as increased obligations to cooperate. Moreover, an increased taxation of dividends and capital gains and a denial of the deduction for operating costs would apply.
German Tax Haven Defense Act
The decision to amend the EU list on 14 February 2023 may trigger significant tax consequences for businesses active in Germany since the EU finance ministers chose to put Russia on the list for the first time. Although the EU has implemented several sanctions against Russia since the Russian aggression against Ukraine started in February 2022, there are still relevant business relationships between both countries that would be affected by the defensive measures under the German Tax Haven Defense Act. Unlike many other EU Member States, Germany applies a comprehensive set of defensive measures against business relationships with listed countries that apply automatically in stages after the EU list is transposed into domestic law.
Implementation into domestic law
For purposes of the German Tax Haven Defense Act, non-cooperative jurisdictions are included once a year in a German regulation. This includes the date on which they qualify as non-cooperative jurisdictions under German law and are, consequently, subject to defensive measures (see below). In general, the measures are triggered as from the beginning of the following year after a jurisdiction has been included in the regulation, provided that the jurisdiction is not removed before the expiry of this deadline. Furthermore, a denial of a dividend exemption shall be applied only from the beginning of the third year after the jurisdiction has become part of the regulation and a denial of the deduction of operating costs shall be applied only from the beginning of the fourth year after the jurisdiction has become part of the regulation, provided that the jurisdiction is not removed before the expiry of this deadline.
If the regulation is, as in recent years, updated at the end of 2023 to include the four newly listed jurisdictions (as well as additional jurisdictions that may be added to the list in October 2023), the following defensive measures would apply on business relationships with these jurisdictions as of 2024 (different timing may apply if the fiscal year is different than the calendar year).
Deferred defensive measures
If the jurisdictions are not removed from the EU list and subsequently from the German regulation, further defensive measures would apply.
The EU list of non-cooperative jurisdictions also has importance for the obligation to report cross-border tax arrangements (DAC6) and the upcoming public country-by-country reporting that is currently in the final phase of German legislation and will apply on fiscal years beginning after 21 June 2024.
Annex II and outlook
Furthermore, the Council updated the Annex II of the EU list (so-called gray list) and decided to remove four jurisdictions (Barbados, Jamaica, North Macedonia and Uruguay) and to add three jurisdictions (Aruba, Curaçao and Albania). The rest of Annex II remains unchanged. The Council will continue to review and update the EU List twice per year, with the next update due in October 2023.
For additional information with respect to this Alert, please contact the following:
Ernst & Young GmbH , Germany
Ernst & Young LLP (United States), German Tax Desk, New York