In tax planning in the national area, business tax is of considerable importance. This is because the lifting rates are set by the municipalities. Therefore, they fluctuate between 200% and 500% in the federal territory, which offers companies an incentive to tax planning. The trade tax burden can therefore be considerably reduced by tax design. Decomposition is also of considerable importance. Through clever design possibilities, the trade tax can also be reduced in the case of a disassembly. In this article, we explain which design models exist and which are useful.

1st Business Tax Disintegration Explained

1.1. Decomposition – Definition

If a company operates in several locations, the question arises as to which municipality is entitled to trade tax. The Trade Tax Act regulates this via disassembly. The tax base, i.e. the business income after deduction of allowances, is distributed among the participating municipalities. This is done according to the ratio of employees employed in the municipalities, i.e. according to § 28 GewStG according to the relative share of wages paid in a municipality in relation to the total amount of wages paid. The objective of the trade tax breakdown is to distribute trade tax fairly among the municipalities in which the company has a permanent establishment.

According to § 12 AO, a permanent establishment is any fixed business facility or installation serving the activity of a company. This includes, for example, branches or offices.

1.2. Disassembly procedure

The starting point for determining the business tax is the business tax return. If the tissue establishment has several premises, a disassembly declaration shall be submitted in accordance with § 14a sentence 1 GewStG. This includes the distribution of the paid wages within the meaning of § 31 GewStG among the individual establishments. The disposition decision assigns the municipalities concerned their share of the trade tax measurement amount. The cities and municipalities receive this dissection information. It includes the trade tax measurement amount, the scale of decomposition and the municipality’s share of the trade tax measurement amount. The municipality multiplies this share by the trade tax levy and thus determines the amount of the trade tax.

2. importance of design in the context of business tax

In tax planning in the national area, business tax is of considerable importance. This is because the lifting rates are set by the municipalities. Therefore, they fluctuate between 200% and 500% in the federal territory, which offers companies an incentive to tax planning. Through design possibilities, the trade tax burden can therefore be reduced from up to 19.25% to 7%. In particular, corporations benefit from a low business tax, as it accounts for a large part of their total tax burden.

3. design options for disassembly

3.1. Design models at a glance

Also in the context of the dismantling of business income according to §§ 28 ff. GewStG there are some ways to reduce the trade tax burden. This includes the real relocation of workers and the use of self-employed and temporary workers. These models are explained below.

The aim of the designs is all to move wages from high-tax communities to low-tax communities. As a result, the share of wages in the high-tax communities falls and increases in the low-tax communities. As a result, a low share of the business income is taxed in municipalities with high rates, so that the average business tax burden falls.

3.2. Real relocation of work processes

Companies can relocate their work processes in such a way that labour costs are incurred in low-tax countries. The sum of wages depends on the number of workers, hours worked and gross wages.

The organisation of hourly wages is in practice severely restricted by collective agreements, employment contracts, legal requirements and the like. Therefore, short-term adjustments of wages for the purpose of business tax planning are excluded.

Working hours can be adjusted, for example, by overtime. However, this possibility is also limited by practical requirements and by law. The number of working hours is strongly related to production processes and work processes. Therefore, working time cannot be used as a targeted tax planning instrument in the context of a breakdown.

The last factor remaining is the number of employees, allowing companies to increase the number of employees in low-tax communities. However, this is also limited by practical requirements, the legal protection against dismissal and existing employment contracts. In summary, therefore, it can be said that the real relocation of work processes is not a suitable means.

3.3. Use of freelancers and temporary workers

3.3.1. External temporary agency workers

The employment of freelancers or temporary workers is a way to optimize the scale of decomposition. The reason for this is that the payments made to these employees do not qualify as wages in the context of business tax breakdown. For tax reasons, it makes sense to use freelance employees and temporary workers in high-tax communities. In low-tax municipalities, on the other hand, regular employment contracts can be concluded.

Temporary agency workers are popular in practice mainly because of increased flexibility in personnel planning. However, third-party agency workers often have no operational knowledge and are therefore regularly used only for routine work.

3.3.2. Internal temporary agency workers

This practical restriction can be circumvented by granting employees internally. These are then leased as temporary workers in the Group to operating sites or subsidiaries in high-tax municipalities, although they are actually employed in the company in low-tax municipalities.

However, this model presents labour law problems. Until 2011, the so-called corporate privilege applied to employees within a group. However, the new version of § 1(3) no. 2 of the AÜG restricts this privilege to the effect that the provision of workers by not applying the AÜG is only possible if they are not recruited or employed for this purpose. This leads to the fact that the corporate privilege has lost its importance.

In addition, there may be complications with the works council. According to § 14(3) AÜG, the works council of the user company must approve the loan. He can refuse the assignment if the use of temporary workers in the customer company is not only temporary.

3.3.3. Freelance staff

Instead of temporary agency workers, self-employed employees can also be used. In connection with self-employed work, the distinction to false self-employment must always be observed. This is always the case if the person is registered as a self-employed worker, but the conditions for this do not exist. In particular, there must be no professional, temporal or spatial involvement of the self-employed employee in the operational process. The employment of a bogus self-employed person has far-reaching financial consequences for the company. Therefore, the use of self-employed employees creates a considerable risk.

3.4. Discretionary powers under the Disposition Declaration

Discretionary powers are not concrete designs. Rather, it is about the extent to which taxpayers can deviate from the real allocation of wages in their dismantling declarations without problems with the financial administration. In practice, the authority will only complain about the scale of division if it deviates roughly from the distribution of wages that appears plausible to the authority. The allocation of individual employees to each permanent establishment is neither documented in the annual accounts nor in the tax accounting. Since workers can also work in several establishments, it is regularly justifiable to estimate the share of wages in low-tax municipalities slightly higher and in high-tax municipalities slightly lower. Such discretionary powers are, however, limited by the fact that the administration here has access to information from the annual accounts of the organ companies and that the employees here are employed either directly by the organ carrier or by the organ company, so that the place of first activity is usually fixed. This makes it easier to check a breakdown in an organ shaft.

Examination of the dissection declaration

4.1. Examination in taxation proceedings

4.1.1. Test procedure

However, there is also the question of what possibilities the administration has to check the information of the taxpayer in the dissection declaration and tax arrangements. The verification of the wage data in the disposition declaration according to the amount and distribution can be carried out by all authorities involved in the disposition, for example by the tax office or the local government.

The tax office has the documents submitted by the taxpayer, i.e. the business tax declaration and the disassembly declaration available for review. In addition, the employee can also evaluate the balance sheet and the profit and loss statement. Under certain circumstances, he may also be able to access the information from the external payroll tax audit. One way of checking the amount of wages paid is to compare the wages paid in accordance with the profit and loss account and the information in the dissection declaration. However, it is problematic that the values usually do not coincide, since the definition of wages in the sense of the Income Tax Act does not coincide with that of the Trade Tax Act. In particular, the capping of wages according to § 31 paragraph 4 GewStG can lead to major differences.

4.1.2 Possibility of examination by organs

The possibility of examination depends on whether an organ is present. In the case of an organisation, the organisation company constitutes a permanent establishment of the organ carrier for trade tax purposes. Then the tax authority can audit the annual accounts and the tax balance of the organ company. In addition, the employment contracts are concluded with the organ company. This leads to conclusions about the distribution of wages in the organ circle.

4.1.3. Possibility of testing on a mere establishment

In the case of a permanent establishment without its own legal personality, however, the possibility of reviewing a disassembly looks different. Due to their lack of legal personality, the permanent establishment has no annual accounts and no accounting records. The employment contracts are not concluded with the establishment, but with the company headquarters. Thus, they hardly allow conclusions to be drawn about the first place of activity. Since neither the profit and loss account nor the balance sheet shows the distribution of employees to individual establishments, there is no reliable way of checking the distribution of wages in such cases. At best, an attempt can be made to detect possible misstatements using historical data or plausibility checks. However, deviations can also be based on other factors, such as economic fluctuations.

4.2. External testing possibilities

Another possibility of reviewing the disassembly declaration lies in the external audit by the tax office. However, according to § 194 BPO, the scope of the audit is at the discretion of the auditor. Business tax is regularly the subject of the examination. However, the dissection declaration is not regularly reviewed.

On the one hand, even in external auditing, it can be difficult to check the distribution of paid wages among the various establishments. Another point in favour of the rare inspection is the lack of incentive on the part of the auditor. The auditor is regularly guided by an additional result for the financial administration. However, this additional result is not necessarily available in the review of decomposition, as redistribution effects between municipalities occur for the most part. A relevant additional result is obtained only in cases where the examination leads to a sharp increase in the wages relevant for the dismantling in the premises of high-tax municipalities. In cases where the difference in business tax levies is very high or where wages are very much distributed to the benefit of the taxpayer, a precise review of the dissection declaration by the tax office is more likely. However, even in these cases, the practical examination possibilities are limited.

Conclusion on the design possibilities for disassembly

Finally, it can be stated that disassembly declarations can only be examined on a small scale in practice. In particular, in the case of establishments without legal personality, the authorities do not have sufficient information to carry out more than one plausibility check. Even in the context of an external inspection, the examination possibilities of the administration are limited by the fact that the first place of activity of the individual employees can be checked only partially during a company visit. In addition, the dismantling of trade tax in external audits is rarely subject to audit due to a lack of incentives for the auditor. In fact, this means that corrections to the information provided by companies should not normally be expected as long as this information can be justified externally and appears plausible.