German ATAD II regulations apply only in the event of a hybrid mismatch between related parties. Two parties are considered related if one party has a material interest in the other, defined as at least 25% participation in capital, rights or assets, or if a party is entitled to 25% or more of profits or liquidation proceeds. A controlling influence by one party over the other also establishes a related party status. Additionally, two parties are related if a third party has a material interest, profit entitlement or controlling influence over both.

If neither related party threshold is met, the ATAD II rules may still apply in situations where different (minority) shareholders act in concert. This is particularly relevant for investment fund structures in which individual investors typically do not hold more than a 25% of the shares in the fund vehicles.

Whereas the term ‘acting together’ remains undefined in the wording of the law, the ATAD II Decree now clarifies that an ‘acting together’ is only given if the respective taxpayers collaborate concerning a specific anti-hybrid mismatch. The Decree further clarifies that the principles and guidelines relevant to the German Controlled Foreign Corporation (CFC) taxation rules are also applicable to the ATAD II rules. According to these guidelines, investors who invest in a specific structure without knowing each other should not perse be considered as ‘acting together’. While the German CFC regime explicitly presumes that all investors in a partnership fund ‘act together’ unless proven otherwise, this deemed ‘acting together’ due to a joint investment in a partnership fund does not apply for the purposes of the anti-hybrid rules, as per the Decree. Therefore, fund structures and the underlying arrangements need to be checked on a case-by-case basis based on the above-mentioned guidelines from the tax authorities if no investor holds 25% or more in the partnership fund vehicle.

The consequences of certain D/NI mismatches as well as double deduction (DD) can be mitigated in the case a dual inclusion exemption applies. Based on the wording of the law, it is needed in this regard that the income of the same taxpayer, ie, the taxpayer where the mismatch arises, is also taxed at the level of the foreign entity. Both, the requirement that income pertains to the same taxpayer and that the same income is taxed at the level of the foreign entity, restricts the scope of the dual inclusion exemption.

The ATAD II Decree now allows for a rare exception to the second restriction in certain cases with regard to income which is based on an intercompany service and is actually taxed in Germany, even if the income is not included in the tax base of the foreign entity due to different tax treatment of the taxpayer, for example due to the ‘check-the-box’ election.

It should be noted that such treatment is contrary to the wording of the law, but the German tax authorities apply an economic view and grant such relief to avoid unfair outcomes. Remarkably, this specific case is the only time that the tax authorities have applied an economic view deviating from the mere wording of the law with regard to the ATAD II rules to achieve a just outcome in the Decree.

The ATAD II rules denies the deductibility of expenses in case of a so-called DD, ie, if expenses are deducted at the level of the German taxpayer and at the level of the respective related party. In this context, it is required that the expenses affect the taxable result of the foreign related legal entity.

The initial draft ATAD II Decree outlined that the expenses are also considered and therefore relevant for the DD mismatch in case they are part of a foreign CFC taxation. However, the final Decree in contrast outlines that a CFC taxation cannot lead to a double taxation, the same applies with regard to a global intangible low-taxed income (GILTI) taxation.

Hybrid mismatches can only be imported into German (limited) taxpayers if and to the extent that the German taxpayer recognises an expense that results in income at the level of the foreign entity where the mismatch arises, namely a channel of import.

According to the ATAD II Decree, mismatches are to be imported to Germany if hybrid expenses can be offset against income of the German taxpayer at the level of the foreign entity where the mismatch arises. Offsetting is possible if the expenses and income are incurred by the same legal entity and netted when determining the income of the foreign legal entity.

Whether or not the income has any economic link to the hybrid expenses is irrelevant for the assessment of offsetting within the meaning of the German ATAD II rules based on the ATAD II Decree. According to the tax authorities, the abstract possibility of offsetting the German sourced income against any hybrid expenses is sufficient to justify an import of such a mismatch into Germany.

Regarding the quantum of import, it is stated in the ATAD II Decree that hybrid expenses are generally offset indirectly in full against domestic expenses, meaning a full import of all foreign expenses and not only the expenses related to Germany are imported into Germany if the channel of import is high enough.

Even if an import of the same hybrid expenses to a different jurisdiction is possible, such splitting of hybrid expenses is not to be taken into account in accordance with the Decree.

Only in cases where other jurisdictions import the same hybrid expenses via a different chain of transactions, the Decree offers an option to split the imported hybrid expenses. Respective burden of proof is with the German taxpayer.

However, such import into Germany is always limited at a maximum by the respective expense that serves as channel of import to Germany.