Participations of a corporation in another corporation are referred to as box holdings and regularly occur in corporations. For them, tax privileges can apply. These so-called box privileges are defined as benefits granted to a corporation which directly or indirectly holds a qualifying interest in another corporation as specified in the underlying law. As a result, double burdening of yields is avoided. The relevant standard in Germany is § 8b KStG. This means, inter alia, that there are reliefs in the case of business tax, reductions in the withholding tax rate (Article 10(2)(a) OECD-MA) and exemption from corporate tax. We explain the tax reliefs for a box participation and their conditions.

In the case of a box holding, a corporation is involved in another (foreign) corporation. The problem is that the parent company and the subsidiary are treated as separate legal entities. Thus, the profit can be taxed on the one hand at the subsidiary and on the other hand at the parent company after the distribution. Therefore, a double burden on income can occur in case of box holdings. Consequently, this so-called economic double burden must be avoided. With regard to international participation, this requires both measures in the residency state and those in the source state. A further reason for the exemption of box holdings is that group companies are treated in the same way as those that act as a single legal entity. Therefore, under certain conditions, so-called box privileges apply to box participations.

Another means of achieving the avoidance of economic double taxation is the creation of an organization. The decisive characteristic of this is that the dependent company does not pay tax, but all tax bases of the entire organ companies are subject to taxation by the organ carrier. Therefore, an organization can also make sense for your group. Therefore, you should also think about whether you justify such a.

In national tax law § 8b (1) KStG applies. The standard assumes the preloading of distributions. Therefore, they are exempted from corporate tax. Nevertheless, according to § 8b (4) sentence 1 KStG, it is necessary that the parent company holds at least 10 % of the subsidiary. As soon as this 10% is not reached, it is called scattered participation. Box privileges shall not apply to scattering. Furthermore, according to § 8b (5) KStG, 5 % of the box dividends are to be taxed, since they are fictitious as non-deductible operating expenses. Therefore, the actual amount of non-deductible operating expenses is irrelevant. Only 5% is not deductible.

According to § 9 no. 2a GewStG, the trade taxpayer is the beneficiary. This requires that at least 15 % of the share capital, share capital, business assets or assets of the subsidiary are directly involved. The box privilege applies to profits from shares in corporations. Therefore, both open and hidden profit distributions are included, but not the profits from the sale of the shares. In addition, the sub-depreciation of the nest shareholdings in previous years which reduced the transfer of tissue should be corrected. Therefore, according to § 8 no. 10 GewStG, they are to be added back to the profit from business operations.

Almost all German double taxation agreements grant the international box privilege. The exemption granted by the box privilege at international level may extend beyond the tax exemption according to § 8b KStG. For this reason, despite the exemption of § 8b (1) and (2) KStG of dividends and proceeds from the sale of shareholdings obtained from a limited company, the convention-law box privilege is of some importance. As an example, the term dividend in DBA Japan 1966/83 should be listed here. This includes income from participations as silent partner. In addition, there may also be a case in which, according to national law, § 8b paragraphs 7 and 8 KStG exclude certain shares from the box privilege. Consequently, only the international box privilege can apply. Ultimately, the convention-law box privilege should also apply if the requirements of § 9 no. 7 GewStG, i.e. the reduction provision for business tax, are not fulfilled.

Consequently, the international box privilege also has some relevance. Therefore, of course, you should also include this in the assessment of your share capital participation.

Nevertheless, the complete tax exemption of such income is deceptive. According to §8b(5) KStG, 5 % of the dividends are treated as non-deductible operating expenses on a flat-rate basis. This idea should correspond to the principle of § 3c EStG of the Income Tax Act, according to which in the case of tax-exempt income components also the related expenses must be disregarded. Consequently, only 95 % is exempt.

4.3.1. Dividend

For now, income must represent dividends. Most German DBA, unlike the DBA-MA and national law, contain an extended dividend term. Nevertheless, there are different regulatory contents. In particular, many DBA see profit shares from typically silent participations as dividends only if Germany is the source state. It is therefore always necessary to check with regard to the DTA whether the income constitutes a dividend in this sense.

4.3.2. Conditions for participation

It is also necessary that the shareholder and the distributing company are corporations. The contribution must continue to exceed a minimum amount. Usually a 10 % contribution is sufficient. This share is determined by the share of the company in the capital of the other company. However, older DBAs often see the number of voting shares as decisive. The shares must also belong directly to the dividend-providing company.

4.3.3. Newer DBA – Exclusion if dividends are deductible in the source country

The newer DTAs restrict the exemption to the effect that the dividends paid may not be deductible in the source country.

According to § 8b paragraphs 2 and 3 KStG, the box discount for intergovernmental dividends also applies to capital gains. It is necessary again that the conditions specified therein are met. Therefore, the performance at the recipient must lead to income from capital assets. It is important to realize that expenses that are economically related to these revenues can no longer be claimed. The principle of § 8b (3) sentence 1 KStG applies that only 95% of operating expenses are deductible on a flat-rate basis.

The box privilege of § 9 no. 7 GewStG governs the international box participation. The result is that the income from the participation from a subsidiary is excluded in the determination of the business income, if the conditions for this are met.