date | theme

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13.07.2020 | Limited and unlimited tax liability in Germany

22.07.2020 | Functional relocation and functional doubling in International Tax Law (this article)

02.10.2020 | Founding a company abroad: tax and other implications

30.10.2020 | Avoid moving tax: establishing a family foundation and transferring GmbH shares

A relocation of functions occurs when a sole proprietor or partnership relocates operational functions from Germany to abroad. A function is to be understood as a business activity that is also an essential part of the company. Since this is accompanied by a cut in the tax sovereignty of the Federal Republic, functions are subject to tax easing. In the case of function doubling, instead of a relocation of the function, a doubling takes place abroad. Since this does not constitute a restriction on tax sovereignty, the doubling of functions is without tax impact. However, this only applies if a functional doubling for at least five years does not lead to a functional relocation.

The taxation of the relocation of functions thus complements the factual tax easing and the exit taxation. On the one hand, the tax office can apply the simplified income value method. In most cases, this leads to values that are above the actual value of the company. On the other hand, the evaluation of functions is often a major challenge, because reliable standards for this are often missing.

In the video we explain the advantages & disadvantages of the commercial stamping of a classic GmbH & Co. KG and the possibilities of avoidance.

1. background to the Foreign Tax Act

Before we get into the explanation of the relocation of functions and the doubling of functions, a short detour into the realm of the Foreign Tax Act is proposed. After all, the terms function relocation and function doubling feel at home here. The reason for this is that their good neighbours, the factual and the personnel tax deregulation, are also at home in the foreign tax law. Thus, in all these cases, it is a question of determining the tax aspects under which the expiration of the right to collect taxes in the domestic territory of a taxable person is to constitute an element of exceptional taxation; Germany, a tax sovereign. After all, the state loses tax revenue because entrepreneurs or companies, even partial companies or even individual functional areas in Germany cease to generate taxes. Thus, the External Tax Act contains the rules that must be applied if one of the above-mentioned situations occurs. Tax flight in the realm of the foreign tax law must not be a privilege of the few.

2. What is a function in the sense of external tax law?

While the matter with the tax loss for Germany in the case of a departure of a GmbH shareholder is quite clear and the transfer of assets of the fixed assets of a domestic company to another permanent establishment abroad is also clear, a more detailed explanation is necessary in the case of the relocation of functions.

First of all, it may be helpful to understand what is meant by the term function. In fact, there is also a legal definition that states in the little-known Functional Relocation Regulation that a function is a business activity “consisting of a summary of similar operational tasks performed by certain bodies or departments of a company”. It is an organic part of a company without a partial operation having to exist in the tax sense (§1 (1) FVerlV).

This means that even individual functions of a company that serve more or less a specific goal within the company can be considered as a unit. This function can thus independently help the company to develop its business activities. Here are three illuminating examples, which have been selected because they do not represent a part of the company from a tax point of view, but only functions: