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25. February 2021 | Tax assessment & tax collection at the German tax easing

5 January 2022 | EU blacklist – what measures do tax havens take?

9 May 2022 | Transfer pricing documentation: Details and notes

22. August 2022 | Foreign participation: these reporting obligations apply to domestic taxpayers (this contribution)

In some cases, domestic taxpayers are obliged to report to the tax administration on an officially prescribed form or by digital means about companies, permanent establishments abroad or their foreign participations. This obligation shall be in parallel with any obligations relating to the transparency register. Here we explain which declarations about your foreign participation you must make when in order to avoid sanctions.

1st foreign participation

The state classifies foreign participation as delicate because it is difficult for the German Treasury to become aware of the involvement abroad. Therefore, there is the general reporting obligation of § 138 AO. In addition, large companies meet the other obligations of § 138a AO, so-called Country-by-Country Report. How this works we have explained in one of our other contributions. For credit institutions there are also further notification obligations according to § 138b AO. This is to ensure that foreign income is taxed correctly in Germany. In addition, the Federal Central Tax Office is expressly given the opportunity to record the evaluated data in central databases.

2. reporting obligations of § 138 AO for foreign participation

2.1. Background to § 138 AO

§ 138 paragraph 2 AO standardizes different reporting obligations of a domestic taxpayer who develops activities abroad. It does not matter whether it is a natural person or a legal person. The provision also applies to partnerships.

The first requirement of § 138 AO is that an unlimited tax liability exists in Germany. The person obliged to report must therefore have his residence or habitual residence in Germany in order to be subject to unlimited income tax. For an unlimited corporate tax liability, the management or headquarters of the company must be located in Germany.

2.2 Establishment and acquisition of companies and premises abroad

Communication is to be made unsolicited about certain facts. This includes the establishment and acquisition of companies or establishments abroad. This also includes the transfer of an activity from home to abroad or from abroad to another country. The acquisition means in addition to the paid acquisition (in particular the purchase) also the free acquisition by donation or inheritance. The size of the company plays no role for the notification obligation of § 138 AO. The establishment or acquisition of a freelance business institution is also covered by the obligation to notify. If a permanent establishment exists only under the domestic tax law of the foreign activity state, but not at the same time under § 12 AO (so-called hybrid permanent establishment), there is no obligation to report if the activity is not deemed to be a business.

2.3. Notification of acquisition, cessation, change of foreign participation in foreign partnerships

Participation in foreign partnerships and the change, acquisition or cessation of foreign participation also trigger notification obligations. Whether a foreign partnership exists is determined by the type comparison. According to this, the foreign legal structure must be comparable to a German partnership in terms of its internal structure and external appearance. Therefore, it is also irrelevant whether the company is taxed as a corporation under foreign tax law. In addition, the co-employment of the domestic taxpayer does not matter.

The classification of the foreign legal entity as a partnership according to the type comparison is important for the obligation to notify, since no specific minimum shareholding is necessary. Therefore, even small shareholdings trigger the obligation to notify, whereas in the case of a foreign shareholding in a limited company, a minimum shareholding of 10 % is required for the obligation to notify according to § 138 (2) sentence 1 no. 3 letter a AO.

The cessation of the share of the co-entrepreneur means a sale of the shareholding, the liquidation of the foreign partnership or the transfer of the shareholding in the course of universal succession. Further acquisitions in the case of an existing shareholding in a foreign partnership are also subject to notification, since they mean a change in the shareholding. This therefore also applies to partial disposals of a continuing shareholding in a foreign partnership.

The obligation to notify enables the tax administration, for example, to check whether a uniform and separate determination of income pursuant to § 180 (1) no. 2 letter a AO of the domestic shareholders is possible.

2.4 Acquisition, sale of foreign participation in a corporation

In addition, the acquisition or sale of a foreign participation in a corporation is subject to notification if it achieves a participation of at least 10 % in the capital. Direct and indirect holdings should be included in the calculation of the minimum required shareholding of 10 %. At least 10% must be reached, which means that only the first time the minimum shareholding threshold is reached will trigger a notification obligation. Therefore, further acquisitions and increases in participation are not included in the case of an already existing foreign participation of 10 %. If the shareholding ratio falls below 10 % and subsequent acquisitions result in the minimum shareholding limit being exceeded, the taxable person must be notified again.

Includes the acquisition of indirect shareholdings. Therefore, the taxable person must also notify the acquisition of indirect shareholdings associated with the acquisition of the direct foreign participation. This occurs when the company in which the taxpayer is directly involved is involved in other companies. In practice, it is advisable to make two advertisements in such a case. One concerns the acquisition of the direct shareholding, while the other concerns the indirectly acquired shareholding.

2.5 Acquisition costs of foreign participation exceed EUR 150,000

Domestic taxpayers must also notify the acquisition or sale of a foreign participation in a foreign corporation if the sum of the acquisition costs of all currently existing participations in the foreign corporation is more than EUR 150,000 for the first time. This comes to bear if the percentage limit of 10% is not exceeded. When determining the amount of the acquisition costs of all currently existing investments, the acquisition costs of previously acquired investments must also be included. Subsequent increases in participation do not trigger the notification obligation again.

According to § 138 paragraph 2 sentence 1 no. 3 letter b sentence 2 AO, the acquisition of listed investments in foreign corporations does not have to be notified despite exceeding the EUR 150,000 limit, if the participation is less than 1 percent. The reason for this exception to the notification requirement is that it is intended to prevent share transactions without tax relevance from being subject to notification simply because the EUR 150,000 limit has been exceeded. The stock exchange clause is related to § 7 (6) sentence 3 AStG. For interim income with an investment character, a 1% shareholding is sufficient to trigger German additional taxation. There is only one exception if the foreign company concerned is a listed company.

2.6 First-time dominant or determining influence on a third-country company

Domestic taxpayers must also indicate that they, alone or together with related parties, can exercise for the first time, directly or indirectly, a dominant or determining influence on the company law, financial or commercial matters of a third-country company. The taxpayer has a dominant influence if he can essentially define the decision-making framework. The existing possibility is sufficient. Therefore, not only the participation relationships are relevant for the reporting obligation, but also other possibilities of influence, such as veto rights. The foreign company must be based outside the EU.

2.7 Procedure on reporting obligations in the case of foreign participation

If the facts of § 138 AO are fulfilled, the notification must be sent to the competent tax office. In the case of natural persons, the tax office of residence is regularly responsible. As a rule, the notification is made electronically together with the income tax return or corporate tax return or in writing according to the officially prescribed form, if no electronic tax return or tax return is to be submitted.

3. Sanctions for breach of notification obligation in case of foreign participation

A violation of the obligation to report foreign property may be punished as a tax threat with a fine of up to EUR 25,000 per foreign property not reported (§ 379 paragraph 2 no. 1 AO). However, the fine is increased up to EUR 50,000 if the offence of the reckless tax reduction (§ 378 AO) is fulfilled and thus the fine of § 379 AO falls behind it.