Both the factual requirements and the legal consequences of the general additional taxation are regulated in § 7 (1) sentence 1 AStG. Accordingly, it is assumed that an unlimited taxpayer “dominates” a foreign company. The dominated foreign society is then called Intermediate Society. The legal consequence is that the income for which the foreign company is an intermediary company must be added to the domestic taxpayer in accordance with the participation in the nominal capital. We explain when there can be talk of control of the foreign company by a domestic taxpayer.

1. control of the foreign company

1.1. Legal definition of control of the foreign company: § 7 paragraph 2 AStG

What is meant by control is regulated in § 7 paragraph 2 AStG (so-called legal definition). Control therefore exists ‘where the taxable person, alone or together with persons close to him, is directly or indirectly attributable to more than half of the voting rights or more than half of the shares in the nominal capital or is directly or indirectly entitled to more than half of the company’s profits or liquidation proceeds’. This basic fact of control is supplemented and extended by § 7 (3) and § 4 AStG by further aggregation regulations for (fingiert) related persons.

1.2 Unlimited taxable person

An unlimited taxpayer within the meaning of § 7 (1) sentence 1 AStG is both a

unlimited income taxpayer according to § 1 (1) to (3) EStG as well as a

unlimited corporate taxpayer according to § 1 KStG. The latter also includes optimistic

Companies within the meaning of § 1a KStG.

1.3. Foreign Company

According to the legal definition contained in § 7 (1) sentence 1 AStG, a foreign

Company is a corporation, association or asset within the meaning of

KStG, which has neither management nor headquarters in Germany and which does not acc. Section 3

Paragraph 1 KStG is exempted from corporate tax liability. Corresponds

a legal entity that has neither management (§ 10 AO) nor registered office (§ 11 AO) in Germany, structurally of a corporation, association of persons or assets within the meaning of the KStG – a so-called hybrid company – and its income is not directly at another legal entity.

taxable, it is a foreign company within the meaning of § 7 (1)

sentence 1 AStG.

1.4. The individual elements of control of the foreign company

1.4.1. Control elements

In summary, therefore, it can be stated that the taxpayer must have a quantitatively sufficient participation in certain “elements” that should enable him to control the foreign company. These items include voting rights, shares in nominal capital, entitlement to profit and entitlement to liquidation proceeds. In the application decree on the AStG, the BMF explicitly clarified that these criteria are coherent and independent. Therefore, fulfilling a criterion is sufficient. There is no cumulation and there is no need for it.

1.4.2 Voting rights and nominal capital

A certain influence on the company is exercised if more than half of the voting rights are attributable to the taxpayer at the end of the year. Then the domestic taxpayer can easily influence the decision-making of the foreign company. According to the legal concept in § 7(2) Alternative 2 AStG, the taxpayer also has a dominant influence if more than half of the nominal capital is attributable to him.

The latter proves to be problematic. It is doubtful whether the participation in the nominal capital alone can give the taxpayer a dominant influence on the foreign company. It seems questionable how the taxpayer is actually to determine the company’s business in the case of a mere nominal capital participation if the company is not entitled to voting rights. This is the case, for example, for non-voting preference shares.

1.4.3. Entitlement to profit and liquidation proceeds

Control should also exist if the taxpayer is entitled to more than half of the profit or liquidation proceeds of the foreign company. With regard to the entitlement to the liquidation proceeds, the German legislature goes beyond the requirements of the ATAD Directive. A purely debt-related claim to the profit or liquidation proceeds without a social participation in the company should already be sufficient according to the application decree for the AStG. Such a claim is conveyed, for example, by a right of enjoyment.

Actually, a claim to more than half of the profit or the liquidation proceeds does not in itself have a certain influence on the decisions of the company. As a rule, profit participation rights do not grant control over the issuer, but at best an information right. A taxpayer would also not acquire such a share in order to exercise influence over the company, but only in order to obtain capital from the company. Otherwise, he would just acquire voting rights in society.

The liquidation proceeds are in any case only at the time of the liquidation of the company. However, this in no way affects the company’s business activities during its existence. Therefore, it cannot be assumed that the domestic taxpayer does not have a dominant position through a mere right to part of the liquidation proceeds.

1.5. influence of related parties on the control of the foreign company

The domestic taxpayer can expressly control the company according to § 7 paragraph 2 AStG alone and also together with a related party. When a person is close to the taxpayer is legally defined in § 1 (2) AStG. The scope of application of the related party is also extended for the purposes of additional taxation by § 7 (4) AStG. However, the wording of § 7 (2) AStG leaves completely open the way in which related persons are to be considered in the context of control.

Control of the foreign company according to the new application decree on the AStG

2.1 Understanding the control of the foreign company over the right to profit

The new application decree on the AStG also sets requirements for the control ratio. If control of the foreign company results from a claim for more than half of the profit or liquidation proceeds, this claim must regularly result from a synallagmatic legal relationship. The synallagmatic legal relationship primarily covers hybrid financial instruments such as profit participation rights, shareholder loans or silent participations. It is not necessary that the domestic company is also a shareholder with voting rights.

This understanding is based on the fact that domestic taxpayers can “dominate” a foreign company without being a shareholder at all. The individuals would not even have any influence on decision-making in foreign society. This is rightly criticized in the literature. In particular, control without the creation of a shareholder is contrary to the legal consequence of § 7 (1) sentence 1 AStG, which in principle provides for the addition of the share in the nominal capital. The link to the participation in the nominal capital requires the creation of a shareholder. The aim of § 7 (1) AStG and the EU legal basis is also to cover so-called “controlled foregin companies”. Therefore, the tax administration’s view that the domestic taxpayer should not be a shareholder is too broad.

2.2 Related persons: influence on the control of the foreign company

2.2.1. Control of the foreign company alone

The new application decree on the AStG (AEAStG) also sets out the extent to which indirect holdings are to be taken into account when assessing control of the foreign company. It differentiates according to whether the taxpayer controls the foreign company alone or together with the related party.

In order to verify whether the domestic taxpayer alone controls the foreign company, direct holdings are to be combined with indirect holdings. The assessment of control of an indirect holding shall be reviewed individually for each control element.

The amount of the indirect holding shall be taken into account by multiplying the holding held by the taxable person and the downstream companies. If the direct and indirect holding in a control element cumulatively exceeds the threshold of 50 %, the taxable person controls the foreign company ‘alone’.

For example, domestic A-AG may hold 80% of the shares in the nominal capital of B-GmbH, which in turn holds 50% of the shares in C-KG. C-KG alone holds a 20 % stake in the foreign intermediary company.

In order to determine whether the domestic taxpayer (A-GmbH) controls the foreign intermediary company, the shareholdings must “highly multiply” the shareholding string. A-AG would therefore hold 8 % of the foreign intermediary company (80 % x 50 % x 20 % = 8 %). Thus, A-AG would not alone dominate the foreign intermediary company.

2.2.2. Control of the foreign company together with related parties

If, after this assessment, there is no control alone, then it shall be checked whether there is control with related parties. In this context, the shareholdings of the persons close to him are attributable to the taxable person in an additive rather than multiplicative manner. In particular, mastering foreign society with close persons can lead to surprising results in practice. It must therefore be given particular attention.

For example, a domestic company may hold a 25% interest in a foreign company A. There is no participation in profit, liquidation proceeds or voting rights other than nominal capital. Then the domestic company does not control the foreign company due to lack of sufficient participation in the elements of control.

Slightly modified, however, it comes to an astonishing result. The domestic company continues to hold 25 % of the nominal capital of foreign company C, which in turn holds 100 % of the nominal capital of foreign company A.