Alongside with withholding tax, licensing barriers and exit taxation, additional taxation is one of the most important instruments for securing tax revenue. The legislator wants to avoid artificial constellations that are created for pure tax optimization. Therefore, it is particularly important for international companies to know the pitfalls of additional taxation in order to avoid unexpected taxation from the German side.

In the video we explain to you what is with the additional taxation and which changes you have to consider since January 1, 2020.

1.

Additional taxation shall apply subject to the following conditions:

1.1. Prerequisite: Domestic control

For additional taxation to apply, an unrestricted taxable person must hold more than 50 % of a share capital company. The limited liability company may have neither its management nor its registered office in Germany. One then speaks of a national mastery.

1.2 Prerequisite: Passive income

In addition, additional taxation only applies if the foreign corporation generates so-called passive income. This includes, in particular, income from the granting of the use of rights (licensing).

But also income from trade in goods can be qualified as passive income if the foreign company does not act independently on the market, but purchases the goods from its German shareholder or in sales (regular use case: purchasing companies and distribution companies).

Service companies are also particularly critical. Income from services provided by the foreign company is generally active income and is therefore not subject to additional taxation. However, if the foreign company receives these services from its German shareholder or provides its services to its German shareholder, these incomes are regarded as passive income and are also subject to additional taxation.

1.3. Prerequisite: Low taxation

The income of the foreign corporation must also be subject to low taxation. Such a will be in accordance with § 8 Abs. 3 AStG if this is less than 25 %.

2nd example

A German M&A consultant would like to broker a company sale in Germany, for which he will receive a commission. In advance, he would like to set up a foreign company in the Bahamas (0 % tax) and would like to bill the consulting services through this foreign company. In this case, however, the foreign company did not provide the service with its own employees, but must first obtain the service from its German shareholder before it can calculate it further. This gives the company passive income taxed at a tax rate of less than 25 %. In addition, the company is nationally controlled (100 % of the voting rights are held by the German shareholder).

Consequence: The income of the foreign company is fully subject to additional taxation.

Additional taxation causes the addition of passive income, in the case of the unrestricted taxable person. Here, the legislator assumes that he has earned the income directly, so that the additional taxation raises the tax level of internationally active companies to the German tax level.

3.1. Example 1

A natural person holds more than 50% of the foreign corporation B-Ltd. It is based in other EU countries and generates income from renting and leasing, which is taxed at less than 25%.

In the legal consequence, the rental income is assigned directly to the natural person. These are then completely subject to German taxation, whereby the tax paid abroad can be counted.

3.2. Example 2

A-GmbH holds more than 50 % of the foreign capital company B-Ltd. It is based in other EU countries and regularly receives royalties from A-GmbH, which are taxed there at less than 25 %.

In the legal consequence, the license income of A-GmbH is directly attributed. These are then also completely subject to German taxation, whereby the tax paid abroad can be counted.

4. avoidance strategies

4.1. Avoidance of national control

As soon as the participation rate of domestic persons in the foreign company falls to 50% or less, the additional taxation can no longer apply. Here it may be worthwhile, for example, to sell a small percentage of the company or to transfer a family member living abroad.

Particularly often, German companies also merge with foreign companies. Both set up a company (usually also a patent company or licensing company as an IP box) in which both companies each hold a 50 % share. Both companies then transfer their patents and trademarks to the foreign company and then rent them back. Additional taxation is avoided by the fact that the German company does not hold more than 50% of the voting rights in the foreign IP box.

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In design consulting, we also like to provide the low-taxed foreign company with a disquotal profit distribution. This leads to the fact that the profit of the foreign IP company is distributed over two cost centers via a cost center calculation. This determines the profits from the patent that the German company has transferred to the IP company and exactly this profit share is distributed to the German company. The same applies to the foreign “partner company”. As a result, the German company receives a profit distribution in the amount at which the foreign IP company generated profits from the German patent.

We are happy to find a suitable solution together with you.

4.2 Commercially established business/Actual economic activity

Additional taxation offers an exception that taxpayers can make use of. If the foreign company has a commercially established business operation and carries out an independent economic activity, the income is not included. However, the prerequisite here is that the company is located in another EU country, so that the exception does not apply to companies in the third country.

It may be appropriate to set up an independent business abroad, through which additional passive income is then generated.

4.3. Realization of active income

Of course, we also regularly advise on the measures that must be taken in order for the foreign company to convert passive income into active income. However, this requires an individual case examination. Experience shows that approximately 50% of our clients make the transition to active income through our consulting.