Expansion of EU list of non-cooperative tax jurisdictions: Consequences for Russian business

published on 22. February 2023 | reading time approx. 3 minutes

By decision of the EU member states, four new territories were added to the list of non-cooperative jurisdictions on 14 February 2023. In addition to Russia, the British Virgin Islands, Costa Rica and the Marshall Islands are affected. Inclusion on the list means that business relations with these countries are subject to stricter taxation on the transfer of income, extended withholding tax obligations, a ban on dividend exemption and deduction of operating expenses, and increased cooperation and DAC 6 reporting obligations.

EU list and tax measures packages »
Core measures of the StAbwG »
Accompanying measures and DAC 6 notification requirements »
Conclusion »

EU list and tax measures packages

Together with the four newly enumerated territories, the Council of the European Union's list of non-cooperative countries and territories (the EU list or "blacklist") now includes 16 tax 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
American Virgin Islands
Vanuatu

The blacklist is updated regularly and includes those jurisdictions that do not allow for sufficient exchange of information in tax matters, engage in unfair tax competition or do not meet the minimum standards of the OECD/G20 BEPS project. With the inclusion in the list, the EU states are encouraged to take tax countermeasures and thus influence the tax policy of the territories.

In Germany, these countermeasures are governed by the Tax Havens Defense Act ("StAbwG") and the Tax Avoidance Ordinance ("StAbwV"). While these provisions have not been a focus of taxpayers so far, as the list mostly contains "exotic countries", they are likely to become relevant in particular due to the inclusion of Russia.

Core measures of the StAbwG

The inclusion of countries on the blacklist does not automatically mean that the StAbwG can be applied to them. First, the StAbwV must be amended, to which the StAbwG refers. If the StAbwV is adapted by the end of 2023, the first defensive measures will in principle take effect from 1 January 2024. Individually, the StAbwG provides for the following defensive measures (including possible initial application time points for newly included areas):

Prohibition of deductions for expenses resulting from business transactions to the affected areas (Section 8 of the StAbwG; applicable at the earliest as of 1 January 2027)

Stricter taxation of income from the transfer of profits, irrespective of the existence of passive income within the meaning of Section 8 (1) of the German Income Tax Act (AStG), which is generated by a company resident in the affected area and is subject to low taxation there (Section 9 of the StAbwG, applicable at the earliest as of 1 January 2024)
15 per cent withholding tax also on income from services and trade (Section 10 of the StAbwG, applicable at the earliest as of 1 January 2024)
Profit distributions and share disposals are not subject to Section 8b of the KStG and are therefore fully taxable (Section 11 of the StAbwG, applicable at the earliest as of 1 January 2026)

The scope of application of the StAbwG is thus broad and concerns all business relationships or shareholdings with reference to a non-cooperative territory (Section 7 of the StAbwG). So-called "dealings" within the meaning of Section 1 (4) of the AO between the parent company and the permanent establishment are also affected. The aim of the law is not only to "uplift" profits earned abroad to the domestic tax level. Rather, economic relations with these territories are made unattractive overall, with the risk of double taxation of income being accepted by the legislator.

Accompanying measures and DAC 6 notification requirements

Anyone affected by the StAbwG is also subject to extensive obligations to cooperate in tax proceedings (Section 12 of the StAbwG). For the relevant business transactions, the taxpayer must fulfill numerous record-keeping obligations and maintain contracts and agreements.

Further, it should be noted that transactions where the payee is located in a blacklisted area fall under the C2 indicator of the DAC 6 reporting requirements. Regardless of the economic content of the transaction, it must in future always be reported to the Federal Central Tax Office as cross-border tax structuring.

Conclusion

In particular, taxpayers who (still) maintain business relations with Russia or have invested there should urgently review the implications of Russia's inclusion on the blacklist. It may be possible to take measures in good time on the basis of the application rules before the hard regime of the StAbwG takes effect.