The place of management and also the registered office of a corporation are relevant for the assessment of residence in international tax law. Should there be a dual residence by the company or the shareholder (as managing director and thus the place of management) moving abroad, this leads to double taxation. Read here therefore a contribution to the concept of the place of management and what effects this has in national and international tax law.

German companies are increasingly active in international transport. In general, in cross-border arrangements, the place of management is decisive for taxation. Basically, the decisive question is always whether the location of the management is in Germany or abroad and what consequences this can have for society. Cross-border arrangements are often accompanied by the risk of double taxation; this double taxation can have a negative impact on the internal market. [1] The OECD-MA is particularly important. [2] According to current case law of the ECJ, the disadvantages of double taxation do not constitute concrete discrimination or restriction of fundamental freedoms. [3]

The free movement of goods, the freedom to provide services, the freedom of capital and payments and the freedom of establishment are the fundamental freedoms in the EU and thus the foundation of the European internal market. [4] Freedom of establishment can provide a basis for discussion in international tax law. [5] Freedom of establishment means for EU citizens, with regard to company law, to be able to choose as far as possible the statutory seat of a company. In addition, it means for private individuals the possibility to choose the place of residence freely. A director of a domestic corporation can therefore be resident abroad and conduct business from there. [6] This activity abroad can quickly become decisive for determining tax liability if essential decisions are made there for the company.

International tax law covers “the entirety of tax law and tax law regulations applicable to cross-border situations”[7]; However, it has not been codified conclusively. [8] It brings some design possibilities for tax consulting practice. It should always be noted, however, that there is no inappropriate, uneconomic or superfluous arrangement, so that an abuse of tax arrangements according to § 42 AO can not be presumed. [9] In general, the establishment of foreign corporations according to BFH jurisprudence is classified as misuse of design according to § 42 AO, if there are neither economic nor extra-tax reasons in addition to the tax savings. [] 10]

The work is divided into four essential parts. First, a general introduction is made to the subject of international tax law, discussing the double taxation agreement and the recognition of foreign corporations, as this is important in terms of the location of the management. This is followed by the definition of the place of management in order to introduce the demarcation to Germany and abroad. The focus is on the location of the management abroad. Among other things, the double taxation agreement is discussed and an example is given for illustration. The work deals only with the corporate tax liability of companies. Furthermore, only examples with EU/EEA countries will be in the foreground, the third country will only be dealt with briefly in the case of relocation to domestic and foreign countries.

2nd General

For corporations, there is basically the headquarters and the management. [11] The registered office is a corporation acc. § 11 AO where it is established and registered in the commercial register. This means in the place determined by the law and the social contract (cf. § 11 AO). § 10 AO regulates the management. The two norms §§ 10, 11 of the AO are fundamentally important for determining corporate tax liability according to the KStG; also in relation to foreign cases in which the management or the registered office can fall abroad. [12] Has a corporation according to § 1 para. 1 KStG its place of management or its registered office in Germany, the legal consequence is the unlimited corporate tax liability with the world income. [13] This means that it is liable for corporate tax with rental income, profit distributions, profit shares, interest and permanent establishments from abroad (see § 1 para 2 KStG). If neither the registered office nor the management are located in Germany, only the limited corporate tax liability according to § 2 No. 1 KStG must be considered. [14] According to § 2 No. 1 KStG, the corporation is taxable only with its domestic income in Germany. [15] In the case of these domestic incomes, § 8 para. 1 KStG, § 49 EStG accordingly. [16] This can also be added to the compensation effect of the tax deduction according to § 32 No. 2 KStG.

2.1. Double Taxation Agreement

If different national tax jurisdictions tax the same tax object of the same tax entity with the same type of tax during the same period, one speaks of double taxation. [17] In order to avoid this, in the interests of both countries, Germany has negotiated agreements with around 100 countries to avoid double taxation. [18] A DTA denotes bilateral or multilateral international agreements; they form an independent regulatory system.[19] According to Art. 59 para 2 GG i.V.m. § 2 AO, these have priority over the respective national tax laws.[20] This regulatory system modifies when overlapping the taxation laws of two states is to be expected. [21] In doing so, the participating states regularly waive each other's tax claims, share tax sources or the taxable goods among themselves or mutually define their tax jurisdiction. [22] This sets limits on national tax law.[23] However, DTAs cannot create a tax liability, they only act as tax reductions or exemptions under national law.[24] The double taxation agreements are negotiated on the basis of the OECD-MA.[25] The OECD Model Convention on the Avoidance of Double Taxation in the Field of Income and Asset Taxation stipulates, among other things, the following: Art. 1 OECD-MA contains the right to use the Convention, which empowers the Contracting States to assert the rights of the Convention.[26] Art. 3 OECD-MA contains general definitions, such as in para 1 a, the person. Article 4 OECD-MA regulates residents. Both aforementioned articles constitute the prerequisites for the agreement eligibility according to art. 1 OECD-MA. Both in the DTA concluded by Germany and in the OECD-MA, the exemption method basically avoids double taxation (cf. art.) 23A OECD-MA.[27] However, for exceptions such as dividends or interest, the credit method is applied (cf. Art. 23B OECD-MA).[28] For countries with which no double taxation agreement is concluded, the double unlimited tax liability can be solved, for example, by § 34c EStG. [] 29]

2.2 Foreign legal forms

If a foreign corporation transfers its registered office or management to the Federal Republic of Germany, the foreign legal form is to be classified under German law. [30] For most foreign legal forms, this is not a problem.[31] For example, the French S.A.R.L, US-American Inc. or the Dutch N.V. are clearly recognized as a corporation in Germany. [32] This means you are subject to corporate tax and limited liability domestically. However, there are so-called hybrid legal forms. In these hybrid legal forms, a legal type comparison must be made in order to classify them as a capital or partnership in Germany.[33] A famous example is the US-American LL.C., through which there is the LL.C. Decree of 19 March 2004, in which the criteria of the legal type comparison are finally listed. [] 34

When relocated to the country, a separate distinction is still possible. A distinction is made between transfers from an EU/EEA country, the USA or the rest of the third country. Legal forms from the EU/EEA country are recognized in Germany as a corporation, but also those from the USA.[35] This is related to the Friendship, Trade and Shipping Treaty between the Federal Republic of Germany and the United States of America of 29 October 1954.[36] However, the situation is different when transferring legal forms from a third country, such as PC Ltd. from Australia; This legal form is classified as a partnership in Germany and is therefore subject to income tax and not limited in liability. [37]

In international and national tax law, the term has a fundamental meaning for determining the unlimited tax liability acc. § 1 Abs. 1 KStG.[38] The existence of a management in Germany justifies the unlimited corporate tax liability in the Federal Republic of Germany.[39] In § 1 para. 3 KStG is the domestic defined. But also in the double taxation agreement, the location of the management is important.[40] Art. 4 para. 1 OECD-MA defines the residence of legal entities with the country where the place of management is located. [] 41

The location of the management is in accordance with § 10 AO the "center of the business overhead line". Where decisions about day-to-day operations are made, the focus of the business overhead line is.[42] The business overhead management generally means the formation of the decisive will of the management, this was made clear by the BFH in a judgment of 20.12.2017.[43] The authoritative will is regularly formed by the persons authorized to represent, the managing directors.[44] The place is regularly located where the managing directors decide on actual, organizational and legal acts that the daily operation of the company entails.[45] Within a marketing year, this place can be moved and does not necessarily have to remain in the same place. [46] The place of management "wanders" with the managing director, as no permanent business institution serving the company's activities is necessary. [47] Individual decisions, for example on business trips, are not decisive. [] 48]

Often it is problematic to determine the exact location of the management. Where there are different locations where management takes place, the activities shall be weighted according to the importance for society. [49] If a limited liability company operates only as an asset manager, the centre of the business overhead line can also be, for example, where the tax returns are prepared or securities are kept. [50] However, this is only possible if no other place exists where more important decisions are made. [51] With regard to the problems, the type is here. 4, par. 3 OECD-MA of importance, where the so-called "tie-breaker regulation" is regulated. [52] Meets the condition of art. 4, par. 1 OECD-MA under the domestic law of both Contracting States, the “tie-breaker settlement” on residency is granted for the purposes of the application of the Agreement. Thus, para 3 limits the residence, namely to the state in which the actual management is located. [54] However, the States Parties must reach an understanding agreement on the actual State of residence. [] 55

In international tax law, in connection with the place of management, the concept of permanent establishment is of particular importance.[56] Where the place of management is located, there is also a permanent establishment of type. 5 par. 2 OECD-MA. Thus, the limited company with a permanent establishment, in Germany or abroad, can become limited or also liable for unlimited corporate tax. [57] I.S.d. Art. 3 para. 1 OECD-MA, however, the establishment is not a person; Only the owner of the permanent establishment is entitled to the agreement.[58] This legal definition is not just a temporary, but a permanent business establishment. [] 59]

4th place of management in Germany

Normally, domestic corporations such as the GmbH have their registered office and place of management in Germany. In this case, the constituent elements of § 1 Abs. 1 KStG and the limited company is subject to unlimited corporate tax in Germany. However, it is sufficient if only one of the two constituent elements is fulfilled (cf. § 1 para 1 KStG). Therefore, if a limited liability company has only the place of management in Germany, but still has its registered office abroad, it is an incoming foreign limited liability company. [] 60]

4.1 Domestic transfer

If a foreign company moves the place of management to Germany, it must first be considered how the newly acquired company is classified in Germany. By relocating the place of management to Germany, the assets of the permanent establishment are also relocated to Germany; the tax entanglement according to § 4 para. 1 p. 8 EStG.[61] The assets are in accordance with § 6 Abs. 1 no. 5a EStG at common value.

However, if the incoming corporation is, for example, a PC Ltd. from Australia, which is not recognised as a corporation in Germany, there is no obligation to pay corporate tax. [62] Rather, the incoming company would be subject to income tax in Germany, since it is classified as a partnership. This means that personal liability would also revive.

4.3. Example

D-N.V. has its headquarters in The Hague, it is founded and registered there. However, managing director S has recently been living in Munich with his family. Since his children go to school in Munich, S works from Munich. In his home office, he makes the essential decisions.

SEGMENT023 Solution:

This is an incoming foreign corporation. D-N.V. is a corporation from the EU/EEA country and is recognized as such in Germany. Since it is clearly specified in the example that S makes the essential decisions for the day-to-day business of D-N.V. in his office in Munich, the location of the actual management is undisputedly in Germany. The conditions of § 1 Abs. 1 KStG are fulfilled and the D-N.V. is liable for unlimited corporate tax.

However, the capital company is also subject to unlimited taxation in the Netherlands, which means that both contracting states have a taxation right. According to Art. 4 para. 3 OECD-MA in the case of legal persons, the place of effective senior management must first be determined. In this case, the place is in Munich, since there the general will is formed by S for the D-N.V.. D-N.V. is therefore considered to be based in Germany. The corporate profits of D-N.V. are thus taxed in Germany (cf. Art. 7 UECD-MA).

Source: own example

In principle, a corporation can also operate according to § 1 para. 1 KStG shall be liable for unlimited corporate tax if the place of management is abroad or is transferred abroad, as long as the registered office of the corporation is in Germany (see § 1 para 1 KStG). The limited corporate tax liability according to § 2 No. 1 KStG must be distinguished from this. If the capital company has neither the registered office nor the place of management in Germany, the capital company can only be taxed on its domestic income according to § 49 EStG (see § 2 no. 1 KStG). In accordance with § 32 (1) No. 2 KStG, the effect of the tax deduction can be added. This means that the corporate income subject to the tax deduction is paid for by the tax deduction.

5.1. Transfer abroad

Relocation means giving up the seat or management in one place and re-establishing it in another place. [63] When transferring abroad, a distinction must be made between transfers to EU/EEA countries and to third countries. In both cases, the freedom of establishment must in principle be invoked. [] 64

By relocating the actual administrative seat (place of management) in third countries § 12 para. 3 KStG, that is, the dissolution of the corporation is fabricated. [65] A liquidation taxation according to § 11 KStG is triggered. [66] This means uncovering all hidden reserves, including the company's value at the common value.[67] The transfer profit is according to § 8b Abs. 2 S. 3 KStG to be exempted. [68] If the company has neither the registered office nor the place of management in Germany after the transfer, it is neither in accordance with § 1 para. 1 KStG unrestricted, nor subject to § 2 no. 1 KStG limited taxable in Germany. It can only remain subject to limited taxation on domestic income.

Another case is the transfer of the place of management to another EU/EEA country. This is done by § 12 Abs. 3 KStG not affected. [69] If assets are transferred abroad when the place of management is moved, the exit taxation according to § 12 para. 1 KStG.[70] The formation of a balance sheet according to § 4g EStG is possible in this case. [71]

An exception, however, is the SE, the special provisions of §§ 15 para. 1a, 4 para 1 sentence 5 EstG i.V.m. § 12 para. 1 KStG.[72]

If a company has the place of management now abroad, some problems with regard to double taxation can occur. The collision of the unrestricted and unrestricted, as well as unrestricted and limited tax liability will now be shown with reference to two examples.

5.2 Collision of Unlimited and Unlimited Corporate Tax Liability

If the place of management is abroad, such as after a transfer, the corporation is subject to unlimited taxation abroad. If it is a German corporation, the statutory seat is still in Germany. This means that the corporation is also subject to unlimited taxation in Germany according to § 1 para. 1 KStG. Consequently, both countries have unlimited taxation rights on the world income of society. Often, such a transfer of the place of management, especially in international companies, occurs unconsciously.[73] In certain cases, however, this can also be done out of a tax arrangement that is beneficial for the company.

5.2.1. Problem of dual residence

In the collision of unlimited and unlimited tax liability, the legal person has a double residence. The legal person is considered to be a resident of both Contracting States, since the place of management and the seat is a prerequisite for this. In principle, residence makes the company entitled to treaty (cf. Art. 1 OECD-MA). According to the current version of the OECD-MA, in this case the two States Parties have to agree on an understanding agreement.[74] This understanding agreement runs through the competent authorities of the Contracting States (cf. Art. 4 para 3 OECD-MA). The result of the understanding agreement should be the determination of the actual residence.

5.2.2. Example

T-GmbH has its statutory headquarters in Munich. Managing Director M has now moved with his family from Munich to Brussels. He no longer has his office in which he makes the essential decisions in Munich, but in Brussels.

SEGMENT040 Solution:

T-GmbH has its registered office in Germany, which means that there is an unlimited corporate tax liability according to § 1 para. 1 KStG in Germany. Since the place of management "wanders" with the managing director, this is after the move in Brussels. Here too, the requirements of § 1 Abs. 1 KStG, which means that the GmbH is also subject to unlimited taxation in Belgium. Consequently, double taxation threatens here, as both countries have full taxation rights. Both countries have the right to tax the world income of T-GmbH. According to Article 4(3) OECD-MA, the competent authorities in Brussels and Munich must decide on the residence. If one of the residency and withholding states has been determined, taxation may be based on the principle of art. 7 par. 1 OECD-MA.

Source: own example

5.3 Collision of Unlimited and Limited Corporate Tax Liability

The unlimited one often conflicts with the limited tax liability, especially if a foreign corporation has a permanent establishment in the country, but this permanent establishment is not also the place of management. [75] In this case, the statutory seat is compulsory, but also the place of management abroad. This means that the main decisions are made by the managing director abroad.

Especially for international companies, the permanent establishment is crucial for the taxation law in the source state.[76] The permanent establishment must in this case i.S.d. Art. 5 par. 1 OECD-MA mean a fixed business establishment through which the business activity is carried out in whole or in part. If there is a permanent establishment of this kind, the company is taxable with its domestic income. These domestic incomes are specified in § 49 EStG. In addition, the domestic permanent establishment is subject to § 2 Abs. 2 GewStG of trade tax liability in Germany.

If, however, the foreign limited company, which has only one permanent establishment in Germany, transfers the place of management to Germany, it is no longer subject to limited taxation in Germany.

5.3.1. Establishment and double taxation agreement

By art. 7 par. 1 OECD-MA, the profits of a company may be taxed only in the state in which the company is resident. [78] In the event that the foreign corporation has its place of management abroad, it is subject to unlimited taxation. This means that it is taxable with the entire world income. The following applies to the domestic permanent establishment: If the company still has an independent permanent establishment in another state, the other state may tax the profit attributable to the permanent establishment.[79] This is referred to as the so-called “reference”. Establishment Principle.[80] The State in which the statutory seat is located shall exempt the income from the permanent establishment. [81] In Germany, this is subject to the progression reservation acc. § 32b EStG.

5.3.2. Example

SEGMENT000 solution:

The legal form of N.V. is generally recognized in Germany because it comes from an EU/EEA country. Since the company has neither headquarters nor place of management in Germany, it is not subject to unlimited corporate tax in Germany. The requirements of § 1 Abs. 1 KStG are therefore not fulfilled. However, A-N.V. is subject to unlimited taxation in the Netherlands, as the headquarters and place of management are located in the Netherlands. It must now be checked whether there is a limited corporate tax liability. Since the permanent establishment of A-N.V. is located in Germany, the company is subject to limited corporate tax in Germany with its domestic income according to § 49 EStG.

Source: own example

6th Conclusion

It became clear that the place of management is important in both national and international tax law, since the determination of tax liability depends on it. In cross-border corporate designs, both countries almost always have a taxation right. The conflict of objectives in the double taxation agreements lies in the fact that economic traffic should not be affected, but also that companies are not unthinkingly exempted from taxes. [82] Although the DTAs concluded by Germany regulate taxation and prevent double taxation, it is nevertheless important, for example when relocating the place of management, to know in advance the consequences for taxation.

If the place of management is abroad, it must be noted whether it is a domestic or foreign corporation. If it is a domestic corporation, it is subject to unlimited taxation even if the place of management is moved abroad, in Germany through the statutory seat. When moving, it should also be noted that a de-tricken tax can be triggered if the assets are transferred abroad. In these cases, it is advisable to keep the economic goods in the country. At least insofar as it is possible for the company to prevent a de-tricken tax. If it is a foreign capital company recognised in Germany, there may be unlimited tax liability in Germany if the company is located in Germany. However, if both the registered office and the place of management are located abroad, the company may still be subject to limited taxation with a domestic permanent establishment.

The work has shown how quickly you can “slip” from the limited to the unlimited tax liability. Especially for internationally active companies with cross-border designs, determining the location of the management is important. Often the location of the management is unconsciously moved and this is only recognized at a later time. For international companies, this represents a significant tax risk.[83] Good tax advice is therefore important in such cases. Especially because the location of the management is often not clearly recognizable and there can be difficulties in determining.