Pillar Two: The German Minimum Tax Act

The Minimum Tax Act in brief

The Minimum Tax Act (Mindeststeuergesetz, MinStG) implements the OECD's Pillar Two global minimum tax and the EU Minimum Tax Directive (EU) 2022/2523 in Germany. It applies to German entities of groups with consolidated revenue of at least EUR 750 million in at least two of the four preceding financial years (§ 1(1) MinStG).

Where the effective tax rate of a group in a jurisdiction falls below 15%, a top-up tax is levied to bring it up to that level (§ 54 MinStG). Germany applies a qualified domestic top-up tax, an income inclusion rule for parent entities and, from financial years beginning after 30 December 2024, an undertaxed profits rule. The Act generally applies to financial years beginning after 30 December 2023 (§ 101(1) MinStG).

For in-scope groups, the Minimum Tax Act is above all a data and compliance challenge. Even where no top-up tax is payable, groups must calculate effective tax rates on a jurisdictional basis or qualify for a safe harbour, file a minimum tax report with the Federal Central Tax Office (BZSt) and submit a tax return. The first reports for calendar-year groups were due by 30 June 2026.

Who is within the scope of the Minimum Tax Act

The Minimum Tax Act applies to constituent entities located in Germany that belong to a multinational or large domestic group meeting the EUR 750 million revenue threshold. A group consists of entities included in consolidated financial statements of an ultimate parent entity, together with their permanent establishments. Joint ventures and their subsidiaries may also be subject to the tax. Certain excluded entities, such as governmental entities, international organisations, non-profit organisations, pension funds and certain investment funds at the top of a group, are outside the scope, although their revenue counts towards the threshold (§§ 1(4) and 5 MinStG).

Purely domestic German groups are within the scope as well. Because the threshold refers to consolidated revenue, family-owned groups and private equity portfolio structures should check whether they prepare, or are deemed to prepare, consolidated statements that would bring them over the threshold. Changes in group composition through acquisitions or disposals require recalculating the threshold, with special rules for mergers and demergers (§ 63 MinStG).

How the top-up tax works

The calculation is carried out jurisdiction by jurisdiction. For each jurisdiction, the group determines the minimum tax profit or loss of its constituent entities, starting from the financial accounting net income used in the consolidated statements and making a series of adjustments set out in §§ 15 to 43 MinStG. It then determines adjusted covered taxes, including current taxes and an adjusted amount of deferred taxes (§§ 44 to 52 MinStG). The effective tax rate equals adjusted covered taxes divided by the net minimum tax profit of the jurisdiction (§ 53 MinStG).

If the effective tax rate is below the minimum rate of 15%, the top-up tax percentage is the difference. It is applied to the excess profit, which is the net minimum tax profit reduced by a substance-based income exclusion based on payroll costs and tangible assets (§§ 58 to 62 MinStG). The resulting top-up tax is collected primarily through a qualified domestic top-up tax in the jurisdiction concerned, failing that through the income inclusion rule at the level of the parent entity, and finally through the undertaxed profits rule, which allocates residual top-up tax to other jurisdictions applying it.

Safe harbours and simplifications

Safe harbours are central to managing the compliance burden. The transitional country-by-country reporting (CbCR) safe harbour in § 84 MinStG allows the top-up tax for a jurisdiction to be set at zero for financial years beginning on or before 31 December 2026 and ending before 1 July 2028, if the group passes one of three tests based on its qualified country-by-country report:

• De minimis test: revenue in the jurisdiction below EUR 10 million and profit before tax below EUR 1 million, or a loss.
• Simplified effective tax rate test: a simplified effective tax rate at least equal to the transition rate, which is 15% for financial years beginning in 2023 and 2024, 16% for 2025 and 17% for 2026.
• Routine profits test: profit before tax not exceeding the substance-based income exclusion.

The safe harbour applies only if the country-by-country report is prepared from qualified financial statements, and its detailed conditions, including the treatment of jurisdictions in earlier years, should be checked for each jurisdiction. A permanent de minimis exclusion also exists for jurisdictions with average revenue below EUR 10 million and average profit below EUR 1 million over three years (§ 56 MinStG). Further safe harbours apply where another jurisdiction has a qualified domestic top-up tax that meets recognised standards (§ 81 MinStG), and simplified calculations are available for non-material constituent entities.

Filing and payment under the Minimum Tax Act

German constituent entities must submit a minimum tax report to the BZSt no later than 15 months after the end of the financial year, or 18 months for the first year in which a report is required, and in no case before 30 June 2026 (§ 75(3) MinStG). The obligation can be fulfilled by one German entity on behalf of the others, and it does not apply if the ultimate parent entity or a designated filing entity files the report in another EU member state or a state with an effective exchange agreement (§ 75(2) MinStG).

Germany uses the concept of a minimum tax group: all German constituent entities of a group form a group, and the group head (Gruppenträger) owes the minimum tax for the whole group (§ 3 MinStG).

The group head must file a tax return in the form of a self-assessment, and the tax is due one month after filing (§ 95(1) MinStG). The return deadline is aligned with the deadline for the minimum tax report. Other German entities must provide the information needed. Failing to file the report correctly and on time can be fined up to EUR 30,000 (§ 98 MinStG); during the transitional period, no fine is imposed if the group shows that it took reasonable measures (§ 101(3) MinStG).

Governance and documentation

Pillar Two calculations draw on data from accounting, tax, treasury and HR systems, including payroll costs and tangible asset values for the substance-based income exclusion. Responsibility for this data often sits outside the tax function. Groups should therefore set up a documented process with clear ownership, version control and review steps, and align it with the controls already in place for country-by-country reporting. Tax auditors will expect to see how figures in the minimum tax report reconcile with the consolidated financial statements, and inconsistencies can lead to adjustments and fines. Board members should receive regular reporting on the group's Minimum Tax Act position, because top-up taxes and compliance failures can affect earnings and reputation.

Interaction with German taxes and planning

German entities usually have an effective tax rate well above 15% because corporate income tax, solidarity surcharge and trade tax combine to around 30%. Even after the stepwise reduction of corporate income tax to 10% by 2032, trade tax keeps the combined rate above the minimum in most municipalities, especially with the minimum trade tax multiplier rising to 280% from 2027; see our article on the corporate tax rate cut. German top-up tax can nevertheless arise in specific cases: entities with large tax-exempt income, significant incentives such as investment allowances, losses offset against current profits, or deferred tax effects that reduce covered taxes.

The Minimum Tax Act also interacts with the German controlled foreign company rules, which treat foreign income as low-taxed below a 15% rate, and with treaty entitlements (§ 100 MinStG). Groups should review incentive regimes, intellectual property structures and intra-group financing to understand their effect on jurisdictional effective tax rates. International developments, including discussions about the coexistence of Pillar Two with other countries' minimum tax systems, may lead to further changes, and groups should monitor German implementing measures and BZSt guidance closely.

Practical steps for in-scope groups

1. Confirm whether the group meets the revenue threshold and map all constituent entities, permanent establishments, joint ventures and excluded entities.
2. Determine the German group head and the filing entity, and agree internal responsibilities between tax, accounting and IT.
3. Test safe harbours per jurisdiction for each year of the transitional period and document the results.
4. Build data processes for the full calculation, including deferred tax adjustments and substance-based income exclusion data.
5. Review the effect of incentives, losses and restructurings on effective tax rates.
6. Reflect Minimum Tax Act exposures in M&A due diligence and purchase agreements, including allocation of top-up taxes for pre-closing periods.

Illustration: a German-headquartered group with EUR 1.2 billion revenue has subsidiaries in twelve countries, including a distribution company in a low-tax jurisdiction with a 9% headline rate. The CbCR data shows that the distribution company's profits exceed the routine profits threshold and its simplified effective rate is below the transition rate. The safe harbour therefore does not apply, and the group must calculate the top-up tax for that jurisdiction under the income inclusion rule unless that jurisdiction has introduced a qualified domestic top-up tax.

For the wider context of international tax structuring, see our page on international tax and our article on transfer pricing documentation.

How TRW & Co helps with the Minimum Tax Act

We advise groups on the Minimum Tax Act: scope analyses, group structures and the designation of group heads and filing entities, safe harbour testing, the treatment of incentives and restructurings, and Pillar Two provisions in transaction documents. We work alongside the group's auditors and tax compliance providers on the legal interpretation of the MinStG and represent clients in discussions with the BZSt and tax offices. To discuss your Pillar Two position, contact us. This article provides general information and is not tax or legal advice.