There are some ways to reduce the business tax burden. For some, operational functions need to be relocated to low-tax communities. For others, however, this is not necessary. In this article, we explain how you optimize business tax without relocating operational functions.

1. shift profits and optimize business tax

If you shift profits domestically, you can optimize the trade tax. This is due to the differences between the business tax levies set by the municipalities. It therefore makes sense to transfer the profits of the company to a municipality with a low business tax levy (so-called low tax municipality).

The reduction in the total tax burden is sometimes greater than in the case of cross-border profit shifts. Furthermore, it is generally easier to achieve a national profit shift than a cross-border one, because many tax correction rules apply only to cross-border situations.

The design models for reducing the trade tax burden can be divided according to whether operational functions are actually postponed or not. If operational functions are not to be relocated, it is decisive whether the municipality in which the undertaking providing the service is located has a higher or lower lifting rate than the municipality in which the recipient is located. Depending on this, the optimal design model can be developed.

If operational functions are transferred to a municipality that has set a low business tax levy, however, care must be taken that the profit transferred is actually taxed in that municipality. This presupposes that decomposition is avoided. This is achieved by moving the entire business to a low-tax community or setting up a subsidiary there. We explained how this works in another post.

2. optimize business tax without relocating operational functions

2.1. Skillfully make a decision about an establishment

The decision to establish or avoid a permanent establishment is particularly important in the context of trade tax. The reason for this is that a permanent establishment justifies the breakdown of the trade tax measurement amount.

In tax planning terms, therefore, the objective is to establish a permanent establishment in the municipality of the beneficiary, should the lifting rate of the municipality in which the company providing the service is located be higher than that in which the service is provided to the contracting party. The share of the commercial income is then taxed in the municipality at the lower rate of the levy. The more labour-intensive the service provided, the greater the advantage of setting up an establishment. In this way, the trade tax can be optimized.

Conversely, in the situation where the lifting load is lower at the place of the undertaking providing the service than in the municipality where the recipient is established, a permanent establishment must be avoided. As a result, the business proceeds remain to be recognised exclusively in the municipality from which the company carries out its business activities.

But then the question arises as to how to set up or avoid a company. A permanent establishment is any fixed business facility or installation that serves the activity of a company (§ 12 sentence 1 AO). Accordingly, it is a prerequisite that the performing entrepreneur has a certain, not only temporary power of disposal, i.e. entrepreneurial disposition power, via the business establishment. Therefore, the taxable person must have a legal position which can no longer be withdrawn without his cooperation. This characteristic is thus the gateway – depending on the desired objective – to establish or avoid a business establishment.

2.2 Choice between disassembly and individual disposition

However, the parent company may already operate one or more subsidiaries. Then the advantages of national success allocation can also be achieved by designing the organizational structure of the Group.

How this instrument is to be used depends on whether, in the case of a subsidiary, the independently determined profit is higher or lower than the share attributed in the context of a breakdown according to the wages paid by the group. If the subsidiary is located in a low-tax municipality, the aim must be to tax the largest possible share of the profit there. If the profit of the subsidiary is higher than the wages paid there, a breakdown should be avoided and otherwise achieved. If the objective is to achieve a dismantling, an organisation shall be established with the subsidiary. If, on the other hand, a disassembly is not desired, the existence of an organization must be avoided or an existing organization must be cancelled, for example by termination of the profit transfer agreement for the future.

In this arrangement, the trade tax advantage results from the difference between the wages and the independently determined profit of the subsidiary. This difference should normally be smaller than the difference in the number of hectares when the unit is relocated to a low-tax municipality. It is therefore necessary to examine whether the general benefits of an income tax organisation are not more important. In addition, the non-tax effects resulting from the change in the group structure must be considered.

We have explained in one of our other contributions how you can influence the scale of decomposition “wages” and thus optimize business tax. An advantage here is to be seen in the fact that the tax offices often take over the information of the company and that there is usually no adjustment of the trade tax breakdown after wage tax external audits. In this respect, the companies have a certain margin of discretion, the extent of which, however, cannot be stated in general terms.

2.3. Engagement of a property management company

In a further design, the reduction provision of § 9 no. 1 GewStG plays an important role. The reductions in § 9 GewStG serve to avoid double burdens. § 9 no. 1 GewStG is intended to avoid a double burden in relation to property tax and concerns real estate companies. In the provision of § 9 no. 1 GewStG, a distinction must be made between the simple and the extended reduction. The simple reduction is based on a flat-rate reduction of a multiple of the unit value. The extended reduction, on the other hand, leads to a reduction in the total beneficiary business income for certain real estate enterprises.

In the case of companies which manage and use their own real estate exclusively or in addition to their own real estate, the reduction pursuant to § 9 no. 1 sentence 1 GewStG is replaced by the extended reduction upon request. This concerns the part of the business income that is attributable to the management and use of one’s own real estate (§ 9 no. 1 sentence 2 ff). W/w.

The separate determination of the trade tax bases in the context of an organization means that the real estate managing organization can benefit from the extended reduction for real estate income. This also applies if the organ carrier itself does not meet the requirements. This allows you to optimize trade tax by outsourcing real estate activities to an independent subsidiary. It is irrelevant whether (1) the organ carrier or an organ company is involved and (2) another company of the same organ group carries out a harmful activity. However, the prerequisite is that the company leases the property to third parties and not to affiliated companies.

This design can lead to a complete reduction in property income. In this case, the lifting load at the place of the seat or at the place of the business premises is irrelevant. The location of the transferred property is also not significant. The transfer of use does not in principle lead to the landlord establishing a permanent establishment. Therefore, even an internal success shift is sufficient.

2.4 Dissolution of hidden reserves

Another way to optimize business tax is to release hidden reserves. The basic idea is to tax the hidden reserves in a municipality with a lower lifting rate and to offset the excess depreciation triggered in a municipality with a high lifting rate. In this decision-making situation, a balance must be made between a negative time effect and a positive tax rate effect.

The burden of the liquidation of the hidden reserves with corporate tax, solidarity surcharge and business tax arises at the beginning of the period under consideration. The discharges from the over-depreciation only occur in the years in which the hidden reserves are dissolved. If the transferred asset is a usable asset of the fixed assets which is depreciated linearly over the remaining period of use, the release of hidden reserves is therefore in principle advantageous if the burden arising from the taxation of the hidden reserves is less than the relief arising from the offsetting of the overwrites.

These considerations apply not only to the transfer of individual assets within a limited liability company group, but generally to internal group restructurings. If the receiving group unit has a higher business tax levy than the transferring group unit, it must be examined whether the exercise of the option rights granted in the Conversion Tax Act to continue the book values is waived.

These two arrangements require that the participating Group companies are taxed separately. If there is an income-tax organization, the negative time effect occurs unchanged. However, the benefit of the excess write-offs can no longer be fully exploited. It is determined by the average lifting rate of the organ circle. In many cases, the relief will therefore not be sufficient to compensate for the negative time effect arising at the time of the transfer or restructuring.

Optimize 5th trade tax – Conclusion

You can optimize the trade tax, even without relocating operational functions to other municipalities. However, the savings achieved in this case are regularly lower. Nevertheless, it is often not desired or possible in individual cases to actually postpone operational functions. Then the above designs turn out to be clever models.