date | theme

31. December 2018 | Additional taxation: Recognition – Avoidance – Designing with example

3 March 2022 | DTA and additional taxation under Union law

24. June 2022 | Double taxation in the case of additional taxation: Avoidance by the ATAD Directive (this contribution)

In the case of additional taxation, double taxation can occur, for example, by distributing profits of the foreign company to the domestic taxpayer after they were subject to the additional taxation. In addition, the profits can be subject to domestic and foreign taxation at the same time. National law provides for various possibilities to avoid double taxation based on the so-called ATAD Directive. We explain how these regulations work.

Additional taxation basically breaks the independent tax subject quality of a foreign controlled subsidiary. Therefore, the passive income of the subsidiary is directly attributed to the taxable person. Consequently, the domestic taxpayer must pay tax on the profits of a foreign company which does not have any substance there but in which he holds a share, in accordance with § 7 (1) AStG. Additional taxation is therefore relevant for both natural persons and legal persons. How the additional taxation works exactly, we have explained in one of our other contributions.

2. double taxation in the case of additional taxation

Double taxation occurs in international situations when several states collect comparable taxes for the same tax item from the same taxpayer. There are various cases in which such double taxation can occur in the context of additional taxation. On the one hand, the added income can be burdened with foreign and domestic taxes at the same time. On the other hand, the added income can already be subject to taxation under the national standard taxation as a result of a distribution of profits or the sale of shares and then be burdened several times by the additional taxation in Germany. Then there would be the case of domestic double taxation.

To avoid double taxation, there are regulations in the EU Anti Tax Avoidance Directive (ATAD). Article 8(5) to (7) shall apply. Paragraphs 5 and 6 concern the avoidance of double taxation resulting from a subsequent distribution of income already allocated or from a subsequent sale of shares. Paragraph 7 shall avoid double taxation with domestic and foreign taxes in the year of attribution of income.

3.2. Double taxation in the case of additional taxation of distributions

If there is a distribution of the foreign company to the taxpayer, this distribution increases the taxpayer’s tax base. Then, in order to avoid double taxation at home, the taxable amount referred to in Article 8(5) ATAD shall be reduced insofar as the distribution is based on income already subject to additional taxation.

3.3. Double taxation in the case of additional taxation relating to the disposal of shares

The same applies under Article 8(6) ATAD if the taxable person disposes of his participation in the foreign company or a business activity carried out by his permanent establishment. Therefore, the tax base increased by the capital gains should be reduced to the extent that part of the proceeds of the sale was already subject to additional taxation.

3.4. Double taxation in the case of additional taxation in the case of international double taxation

Article 8(7) ATAD provides that in order to avoid double taxation with domestic and foreign tax in the year of addition, the taxes paid by the foreign company or permanent establishment shall be deducted from the taxable person’s tax liability.

3.5. No arrangements for indirect holdings

The ATAD Directive does not, however, contain any rules on how to avoid double taxation in the case of indirect shareholdings. In particular, in the case of indirect holdings, there is a risk of multiple charges on income from an additional taxation system applicable both at the level of the taxable person and at the level of the intermediary company.

For EU law to apply in Germany at all, it must be implemented by the German legislator. § 7, § 11, § 12 AStG regulates double taxation in connection with additional taxation and is based on the EU regulations under the ATAD Directive. It shall be applied for the first time in the assessment period 2022. Section 7(2) of the AStG stipulates that certain indirect holdings are exempted from additional taxation. § 11 AStG grants the taxpayer a reduction amount so that the income already subject to additional taxation is not taxed again in the event of distribution or disposal. Finally, § 12 AStG provides for an offsetting of the tax levied at the expense of the intermediary company and in the context of an additional taxation at the level of the intermediary on the income tax or corporation tax of the taxpayer.

4.1. Rules for distributions and sale of shares

4.1.1. In principle, no double taxation in the case of additional taxation

The profits of a foreign company may be subject to additional taxation in Germany regardless of their distribution. If they are subsequently distributed, the distributions are subject to regular taxation. However, distributions by a foreign company to a domestic corporation are in principle tax-free pursuant to § 8b (1) sentence 1 KStG under the so-called box privilege. This applies mutatis mutandis according to § 8b (2) sentence 1 KStG also to the profits from the sale of shares. In these cases, therefore, double taxation cannot take place.

4.1.2. Cases of double taxation in the case of additional taxation

But there are also cases where the tax exemption does not apply. Then there will be double taxation. In particular, this arises in the case of free floating shares, distributions that violate the correspondence principle and, under certain conditions, in the case of financial companies. In addition, natural persons must always tax distributions.

In these cases, § 11 (1) AStG allows the taxpayer to deduct a reduction amount from the sum of income. The amount of the reduction shall be equal to the amount which is taxable as a reference to the taxable person. However, the reduction amount is limited according to § 11 (2) sentence 2 AStG.

It is therefore determined by way of example as follows: A sole proprietor holds an interest in a foreign intermediary company in his business assets, which pays him a dividend of € 200. According to § 3 no. 40 sentence 1 letter d EStG, this is taxable at 60 % with 120 €. The taxpayer may then also recognise this amount as a reduction amount. However, the possibility of reduction is limited to the sum of the add-on corrections recorded at the end of the previous assessment period.

For example, if in the example the add-on correction volume is € 50 and the add-on amount for the current assessment period is € 100, the total amount of € 150 would also be taxable at 60% in the case of a distribution under the Parts Income Procedure, so that the reduction amount in the result must be limited to € 90 (€ 60 x € 150). The volume of add-on corrections shall be determined separately for each taxable person at the end of a taxable period. How exactly the cut amount works and what impact it has, we explained in one of our other posts.

4.2. Scheme for international double taxation in the case of additional taxation

Art. 8 paragraph 7 ATAD provides that regulations must be made to avoid international double taxation as a result of the addition. The crediting to avoid double taxation is regulated in § 12 (1) sentence 1 ASTG.

According to § 12 (1) sentence 1 AStG, such taxes may be charged on the income subject to the additional amount. Accordingly, the tax levied at the expense of the foreign company can be counted against income. It shall be counted against the income tax or corporation tax applicable to the additional amount. However, it is not possible to apply business tax. Decisive for the tax credit is the period for which the tax has been paid and not the time of the tax payment. In addition, at most the tax actually paid abroad may be counted. In addition, the amount of tax credited shall not exceed domestic taxes. Finally, the crediting is also limited to the content of the domestic income tax or corporation tax, which is attributable to the foreign income. However, the foreign tax does not have to be comparable to the German income tax or corporate tax. Any resulting overhang shall be eliminated without replacement.

Exit taxation, additional taxation, tax entanglement

4.3. Double taxation in the case of additional taxation of indirect holdings

4.3.1. Non-significant indirect participation

Double taxation problems in indirect shareholdings governs § 7 (1) sentence 2 AStG. Accordingly, indirect shareholdings are irrelevant for tax liability, as long as certain conditions are met. On the one hand, an additional taxation comparable to the German scheme must have taken place at the level of the intermediary. In addition, the income added must not be subject to low taxation overall. In the absence of comparability or low taxation, additional taxation occurs at the level of the intermediary and at the level of the taxable person.

4.3.2. Crediting of the tax of the intermediary company

If there is an additional taxation at the level of the mediated company and that of the taxpayer, then according to § 12 paragraph 2 AStG the taxpayer can apply for the tax collected at the level of the mediating company. The tax can only be counted proportionally. Thus, the crediting depends on the proportion of the taxpayer’s participation in the intermediary company. In addition, it only extends to the extent that the income subject to comparable additional taxation corresponds to the income subject to German additional taxation.

At present, the case in which the intermediary company is located in Germany and thus the German additional tax would be counted.

5th Conclusion on Double Taxation in Additional Taxation