The legal consequence of the additional taxation is that the income subject to additional tax in accordance with § 7 (1) AStG in conjunction with § 10 AStG is to be recognised as an additional amount by the taxpayer. When determining the additional amount, the German principles apply in accordance with § 10 (3) sentence 1 AStG. Therefore, the additional amount by law belongs to the income from business operations. Now, however, it may be that the additional amount has already been taxed locally in the tax residence of the intermediary company. This case concerns § 12 (1) sentence 1 AStG. Therefore, the local tax burden is to be counted against the national corporate tax. We clarify how the crediting of foreign tax in the case of additional taxation works and what problems exist.

1st legal consequence of additional taxation

The income which is subject to additional tax in accordance with § 7 (1) AStG in conjunction with § 10 AStG shall be recognised by the taxpayer as an additional amount. When determining the additional amount, the German principles apply in accordance with § 10 (3) sentence 1 AStG. Therefore, the additional amount by law belongs to the income from business operations.

For business tax purposes, the additional amount due to the fiction of § 7 sentence 7 GewStG is considered to have been incurred in a domestic permanent establishment. As a result, the additional amount is subject to both corporation tax and business tax.

2.

2.1. Meaning and purpose of crediting the foreign tax

The additional amount is also regularly subject to local corporate taxation in the country of residence of the intermediate company. As a result of the combination of local taxation in the country of residence and taxation by way of additional taxation in the country of residence, there is therefore a double cross-border taxation of the additional amount. Double taxation only does not occur if the tax burden abroad includes 0%. The aim of applying the local tax burden is therefore to avoid this double taxation.

2.2. Structure of crediting

§ 12 (1) AStG stipulates that the local tax burden of the foreign intermediary company is credited to corporate tax. Furthermore, according to § 12 paragraph 2 AStG it is possible to charge foreign additional taxation on request. Explicitly, however, the law only provides for crediting to corporate tax. Conversely, there is no crediting to business tax.

Consequently, the rejection of the crediting to the business tax is not. The additional amount shall be deemed to have been incurred in a domestic permanent establishment for business tax purposes. Thus, he is basically burdened with trade tax. On the other hand, the business tax burden cannot be reduced due to the lack of creditability of the tax burden incurred abroad.

Withholding taxes, which are levied on profit distributions of the intermediate company, are also not eligible. The reason for this is that the intermediary company is neither liable for tax nor is the withholding tax levied at its expense.

2.2. Problem: Which foreign taxes are to be charged

2.2.1. Eligibility of taxes from other countries?

However, the question arises as to which foreign taxes are eligible. It could only be the taxes that the intermediate company owes directly. However, it is also conceivable that the income of the intermediary company is taxed also or only in another country. Such a case arises, for example, if the profits are attributable to another company under group taxation.

§ 12 (1) sentence 1 of the AStG allows only the offsetting of taxes that were “actually collected at the expense of the foreign company”. Some therefore demand tax subject identity. Therefore, the intermediary company would have to be the taxpayer and bear the tax burden.

2.2.2. Crediting of foreign tax that economically burdens intermediaries

Others, on the other hand, believe that the foreign company itself is not required to be the debtor of the tax to offset the foreign tax. It is sufficient if the tax is economically borne by it.

Rightly, it is indistinguishable who is liable for payment. The foreign intermediary company would only have to bear the tax economically or the tax would have to be at its expense. The reason why the intermediary company had to bear the tax is irrelevant. It therefore does not matter whether a tax levy is required by law or whether the tax levy was agreed on a voluntary basis.

If such taxes were not eligible, the crediting in the cases would go to nothing. The consequence would be that additional taxation would turn into a criminal taxation.

Other considerations also suggest that such an understanding should be assumed. The tax administration also assumes a broad understanding when calculating the low taxation of foreign income. Thus, a company cannot be considered to be taxed low because the tax on its income was paid by another company. Accordingly, the actual tax burden is relevant taking into account the tax paid in other countries. If the charge calculation does not depend on the tax liability of the foreign intermediary company, nothing else can apply for the foreign tax.

The legal system also suggests such an understanding. According to § 12 paragraph 2 AStG, it is also possible to charge foreign additional taxation on request. In this case, however, the foreign additional taxation was levied on another tax subject. Nevertheless, § 12 paragraph 2 AStG allows the crediting. Therefore, it cannot be relevant in the context of § 12 (1) AStG who is liable for tax.

3. Remaining tax burden

For a company, it is therefore of considerable importance whether the tax burden abroad determined according to German principles is 14.99 % or 15 %.

The taxable income of the foreign intermediary company is 100. With a tax rate of 14.99 %, the local tax burden is 14.99, so that the additional taxation is triggered. This would result in a German tax burden with corporation tax of 15. However, the foreign tax would be eligible, so that the tax burden is eliminated. However, the business tax burden remains. With a lifting rate of 490 %, the business tax burden is 17.15 %. In addition to the local tax burden of the intermediary company (14.99), there is therefore the trade tax burden (17.15). The total tax burden is therefore 32.14.

If the intermediary company is subject to a foreign tax burden of 15%, the additional taxation is not triggered. Thus, there is no additional tax burden in Germany.

This example shows that if the additional taxation is applied, the additional amount is actually taxed as if the income had been earned in Germany.