As a result of the high tax burden in Germany, a growing number of companies and private individuals are attempting to shift income and assets abroad in order to minimise their tax liabilities. The German fiscal authorities seek to prevent this tax avoidance through numerous statutory provisions. In some cases, the tax provisions also capture "normal" commercial transactions that have no connection to tax avoidance.
One such provision is the controlled foreign company (CFC) taxation regime pursuant to Sections 7 et seq. of the Foreign Tax Act (Aussensteuergesetz - AStG).
In principle, foreign companies (such as a GmbH, a stock corporation (Aktiengesellschaft) or corresponding foreign legal forms) that have neither their registered office nor their place of management in Germany, nor any German-sourced income, are not taxed in Germany. This means that such companies provide a shielding effect against their (domestic and foreign) shareholders.
However, pure letter-box companies - that is, companies that have neither business premises nor employees in the foreign country and exist only on paper - are not recognised by the German fiscal authorities.
In addition, the CFC taxation rules may apply in certain circumstances, meaning that the profit of the foreign company is attributed directly to the domestic shareholder, who must then subject it to income tax and, where applicable, trade tax (Gewerbesteuer) in Germany. This applies even if that profit has not been distributed to the shareholder and they are therefore unable to pay the tax from their share of the profit. The German tax falls in addition to the foreign income taxes.
The CFC taxation regime applies under the following conditions:
- The foreign company (intermediate company, Zwischengesellschaft) is controlled by German residents.
- The foreign company generates so-called passive income within the meaning of Section 8 AStG. Passive income includes, for example, licence income or interest income as a rule.
- The foreign company is subject to low taxation abroad. This is already the case when the tax rate is below 25%.
Special exemptions exist for companies with their registered office in the European Union or in the European Economic Area (Norway, Iceland, Liechtenstein).
We assess for you whether there is a risk of CFC taxation applying. We advise on ways to avoid CFC taxation. If this should not be possible, we will find ways to minimise your tax burden.