In international corporate taxation, the choice of the right legal form is crucial. This is because partnerships (e.g. GmbH & Co. KG) are treated transparently in international tax law, so that they are rigidly focused on the operating sites behind them. In contrast, corporations (e.g. the GmbH) are independent tax entities in each country and are subject to independent taxation. Here, however, the problem of exit taxation and additional taxation often threatens.

Many companies are asking themselves these or other questions when setting up a company that is to become active in international transport. But existing companies are also looking for ways to improve their corporate structure in order to take advantage of tax advantages.

This seminar paper is intended to provide an overview of differences between partnerships and corporations in international tax law and to present possible advantages and disadvantages of the legal forms so that companies can choose the most favorable structure for themselves. The goal is to inform companies so that they have to pay as little tax as possible.

The seminar paper is divided into four chapters. Firstly, the taxation of partnerships is presented and explained in international tax law and its problems. In particular, the different case constellations that may arise in international partnerships are discussed. The second chapter takes into account the corporation in general and in the case of dual residence. The third and fourth chapters deal with additional taxation and exit taxation, as these are also important considerations that can be applied in international tax law.

2. partnerships

2.1 General

The partnership is a legal form frequently used in Germany for medium-sized companies. [1] Abroad, the legal form is also known, but is used more often by smaller companies. [2] In Germany, partnerships are not subject to income tax or corporate tax. [3] They are taxed in accordance with the principle of transparency, which means that, although the profit is determined at company level, taxation only takes place after attribution to the shareholder. [4] Foreign countries can also subject the partnership to the principle of transparency or tax it, like a corporation, according to the principle of separation.[5] Under the principle of separation, the company is separated from the person of the shareholder and taxed as an independent legal entity. [6] There is also the possibility that the foreign state has the right to vote, whether it treats the company according to the principle of transparency or separation. [7] As a result of this unequal treatment, the risk of double taxation in partnerships is particularly great. [8]

In Germany, national tax law determines whether it is the legal form of a partnership. [9] According to German tax law, a partnership is a partnership if a domestic partnership operates at home or abroad, a foreign partnership operates at home or a foreign partnership operates abroad and has domestic and foreign shareholders. [10] Decisive for qualification as a domestic or foreign company is the place of management. [11] According to § 10 AO, the place of the management is located where the center of the business overhead line is located. For the assessment of whether a foreign company in Germany is regarded as the legal form of a partnership or a corporation, a so-called type comparison is determined. [12] It is examined whether the foreign company corresponds in its structure and economic position to a German partnership or capital company. [13] How the company is qualified in another state is not important for the German assessment. [] 14]

2.1 Domestic partnerships

The legal form of a domestic partnership is when the management of the partnership is located in Germany. [] 15)

2.1.1. Domestic partnership – domestic partners – foreign permanent establishment

It is a domestic partnership if the management of the partnership is located in Germany. [15] Since they are German shareholders, they are subject to unlimited tax liability in Germany with their world income. [16] In principle, the shareholders in the foreign state are subject to limited taxation. [17] In order to avoid double taxation, the income is by type. 7 OECD-MA in the country of establishment and thus abroad. [18] The double taxation agreement may stipulate that Germany must exempt the income or that it can be counted against the German tax. [] 19]

2.1.2. Domestic partnership – foreign partners – domestic permanent establishment

If this partnership has one or more permanent establishments in Germany and is involved in its foreign shareholders without domicile or habitual residence in Germany, this is in accordance with § 1 para. 4 EStG with your domestic income according to § 49 Abs. 1 point 2 point. a EStG limited to taxation.[20] The assessment in the state of residence of the shareholder takes place independently.[21] The country of residence of the shareholders has the task of avoiding double taxation and the corresponding double taxation agreement determines whether the tax is credited or exempted. [] 22]

2.1.3. Domestic partnership – foreign partners – foreign permanent establishment

Since they are foreign shareholders, they are subject to limited taxation only on income attributable to the parent company.[23] These incomes are also to be taxed in Germany in accordance with treaty law and exempted or credited by the state of residence. [] 24]

2.2. Foreign partnerships

If the management of a partnership is abroad, it is a foreign partnership. [] 25]

2.2.1. Foreign partnership – domestic partners – domestic permanent establishment

If Germany qualifies the foreign partnership as a partnership, then the domestic company with your world income is subject to unlimited taxation in Germany. [26] The income from the German permanent establishment is taxable in Germany.[27] The income attributable to the foreign parent company must be Germany acc. Exempt OECD-MA from taxation or count it against German tax. [] 28]

2.2.2. Foreign partnership – domestic partners – foreign permanent establishment

If Germany qualifies the foreign partnership as a partnership, then the domestic companies with their world income are subject to unlimited taxation in Germany.[29] With the income from a foreign permanent establishment, the shareholders abroad are subject to limited taxation.[30] In the case of a double taxation agreement, the income is to be taxed in the permanent establishment state and the state of residence must either exempt the income or count it against the tax. [] 31]

2.2.3. Foreign partnership – foreign partners – domestic permanent establishment

The foreign shareholders are only subject to limited taxation in Germany on domestic income. [32] These are also to be taxed under agreement law in the permanent establishment state, i.e. in Germany. [] 33]

3. corporations

3.1. General

The capital company is one of the most important legal forms for participation in international trade.[34] Capital companies are in accordance with § 1 para. 1 No. 1 KStG ‘European companies, joint stock companies, limited partnerships on shares and limited liability companies’. Foreign corporations which are similar or comparable to domestic corporations are also treated as corporations. [35] As what the company is regarded and taxed abroad is not to be considered. [36] For the assessment as a corporation, it does not have to be a legal person, since persons who are not legally competent by § 1 para. 1 no. 5 KStG are covered by the unlimited tax liability. [37]

For companies in the legal form of corporations, the principle of separation applies in national and international law, which means that the company is taxed as a separate legal entity independently of the shareholder. [38] The company is according to § 1 Abs. 1 KStG unlimited taxable if it has its registered office or management in Germany. Restricted tax liability arises according to § 2 No. 1 KStG if a corporation has neither its registered office nor its management in Germany, but generates domestic income within the meaning of § 49 EStG. [] 39]

3.2. Double resident corporations

The place of management or the registered office of the company is decisive for German taxation.[40] Accordingly, a corporation can be located in two different countries if it has its registered office in one country and the place of management in another.[41] According to Art. 4 para. 3 OECD-MA, it is then deemed to be domiciled in the country where the place of effective management is located. [] 42]

Profits of a company acc. Article 7, par. 1, V. m. 3 para 1 OECD-MA taxed in the country of residence.[43] In the country where the registered office of the company is located, the company is subject to unlimited taxation, but according to the DTA can only tax the profits that have arisen in its own country. [44] If the limited liability company has a permanent establishment in a third country, then the DTA with the country of residence and the state of management is decisive for the permanent establishment state.[45] If the DTAs differ, then the taxpayer can apply the more favorable for him.[46] For the permanent establishment state, the company is resident both in the state of management and in the state of the registered office.[47] Since the permanent establishment principle applies, the profits are taxable in the country where the permanent establishment is maintained. [] 48]

In the case of dividend distribution, the double residence means that the shareholder has to pay capital gains tax in the country of residence and in the state of the management.[49] The capital gains tax paid from both states can be counted back under German law if it is foreign income acc. § 34 d EStG acts.[50] Foreign income according to § 34 d no. 6 EStG is present “...if the debtor has residence, management or registered office in a foreign state ...”. In the case of a dual-domiciled company outside Germany, the capital gains tax of both states can be credited in Germany. [] 51]

Without the existence of a DTA, the company is taxable without restriction in the country of residence and in the state of management and taxable with its entire income. [52] The crediting to the German tax can be in accordance with § 26 Abs. 1 KStG can only be carried out if it is foreign income and the income has arisen in the foreign state. [] 53

4. Exit taxation

4.1 Departure of natural persons with shares in a corporation

If a German taxpayer moves away with shares in a corporation, Germany loses the right to tax on the capital gains of the company shares at the time of the move, since acc. Art. 13 OECD-MA, the residence state is entitled to the right of taxation.[54] In order for Germany not to lose the right of taxation, § 6 AStG was introduced. [55] This paragraph allows Germany to tax the increase in assets at the time of departure. [] 56

With this provision Germany does not violate the law of the double taxation agreements, since § 6 AStG is implemented before the DTA takes effect. [] 57]

According to § 6 AStG, it must be a natural person who has been subject to unlimited taxation for at least ten years, is involved in a corporation and whose unlimited tax liability ends by giving up his residence or habitual residence.

The requirements apply to all natural persons acc. § 1 BGB, regardless of their nationality.[58] § 6 Abs. 3 AStG stipulates that the tax liability ceases if the taxpayer is only temporarily absent and becomes subject to limited taxation again within five years. The tax liability can only be waived at the time of the new unlimited tax liability and not already at the time of departure, even if the new influx within five years is already intended at that time. [] 59]

It is irrelevant whether the taxpayer moves to a low-tax country or to a country that has a higher tax rate than Germany. [60]

It also does not matter whether Germany actually loses the taxation right on sale. [61] When moving to a country without a DBA, the taxpayer acc. § 1 Abs. 4 § 49 Abs. 1 point 2 point. e EStG limited taxable at the time of sale. [62] The exit taxation according to § 6 AStG is also applicable in these cases. [] 63]

The period of ten years for which at least one unlimited tax liability must have existed does not have to have existed continuously, but can also be composed of individual sections. [64] If the shares are acquired through a free legal transaction, the periods during which the legal predecessor was subject to unlimited taxation are included in the ten-year period.[65] § 6 AStG does not apply if the taxpayer retains a residence or habitual residence in Germany. [] 66

Shares in a corporation are considered to be the constituent elements referred to in § 17 EStG. It must be a participation in the private assets of the taxpayer, since in the case of participations in business assets the exit taxation is not necessary because the taxation acc. Art. 13 para 2 OECD-MA remains. [68] The participation rate must have existed directly or indirectly at least one percent within the last five years. [69] In the case of § 6 AStG, a fictitious capital gain is determined and taxed.[70] The sale price is determined by the common value of the shareholding minus the acquisition costs. [] 71]

If the taxpayer has been drawn in and the share already existed before that date, then the common value of the shares should be recognised at the time of the transfer instead of the acquisition costs. [72] The allowance according to § 17 Abs. 3 EStG is to be taken into account as in the case of a sale[73] and the calculated profit acc. § 3 no. 40 c EStG to submit to the partial income proceedings.[74] Under certain conditions, the tax burden can be deferred. [] 75

4.2 Departure of corporations

The departure of corporations and their taxation is regulated in § 12 KStG. [76] According to § 12 Abs. 3 KStG, the corporation is deemed to be dissolved if it transfers its registered office or management to the third country and thereby withdraws from unlimited tax liability. This dissolution is treated as a liquidation according to § 11 KStG, in which the assets to be distributed are replaced by the common value of the existing assets.[77] The transfer profit to be determined shall be determined for all the assets of the limited liability company, even if part of the assets remains in the country. [78] This regulation also applies if the corporation remains taxable without restriction, but is deemed to be domiciled in a third country according to the DTA.[79] When the seat is transferred within the EU, the “general taxation of entrapment” acc. § 12 Abs. 1 KStG.[80] The assets are considered to be sold and are valued at the common value in order to tax the hidden reserves. [] 81]

Additional taxation is the taxation of a foreign company in a low-tax country in which a tax resident is involved. [84] This serves to prevent tax residents from setting up companies in a low-tax country only for the purpose of taxing profits abroad at a low tax rate. [85] Additional taxation is intended to treat the taxpayer as if he had not interposed the foreign company. [86] According to § 7 Abs. 1 AStG are subject to unlimited taxpayers who hold more than fifty percent of a foreign intermediary company with their share of the income of additional taxation.

The following criteria must be met in order for the additional taxation to apply:[87]