date | theme

31. December 2018 | Additional taxation: Recognition – Avoidance – Designing with example

3 March 2022 | DTA and additional taxation under Union law

01. July 2022 | Reduction amount in the case of additional taxation (§ 11 AStG n.F.): Profit distributions by foreign companies (this contribution)

Profit distributions of foreign companies are subject to regular taxation. Before this, however, the profits of the company can already be made under the conditions of §§ 7 ff. AStG by way of additional taxation at the domestic shareholder. Then there will be double taxation. We explain how the new § 11 AStG should avoid any double taxation through the reduction amount and what you should pay attention to.

Shareholding income collected after additional taxation has taken place is now subject to new regulations to avoid double taxation. First of all, however, we must understand how this double taxation actually comes about.

Actually, distributions of a foreign company to a domestic corporation are tax-free under § 8b (1) sentence 1 KStG under the so-called box privilege. In these cases, therefore, double taxation cannot take place. However, there are also cases in which the tax exemption does not apply, for example in the case of scattered shares, distributions that violate the correspondence principle and, under certain conditions, in the case of financial companies.

In addition, natural persons must always tax distributions. In the context of partial income proceedings, they are subject to the tax exemption of § 3 no. 40 EStG. Accordingly, they are still taxable at 60%. If, on the other hand, the capital gains are taxed by way of capital gains tax (withholding tax), the entire income is taxable.

In all these cases, the distributions themselves are taxed regularly. In addition, however, the profits of the foreign company were already attributed to the domestic shareholder under the conditions of §§ 7 the following AStG, so-called additional taxation. How the additional taxation works exactly we have explained in one of our other contributions. If regular taxation and additional taxation cumulate, Germany levies comparable taxes on the same taxable object from the same taxpayer. Then there will be double taxation. However, this is also conceivable in other cases. We have explained all such other cases in one of our other contributions and described how double taxation can be avoided.

In order to avoid the described double taxation of distributions of foreign companies, the legislature has amended § 11 AStG. If the income from the shareholding is then at least partially taxable, the so-called reduction amount is subsequently deducted when determining the sum of the income. However, the shareholding income included in the cut-off amount is not only profit distributions, but also the profits from a share sale.

The deductible reduction amount is limited. When determining the limited height, certain terms are relevant. According to § 10 (1) sentence 1 AStG, the additional amount means those incomes which are subject to additional taxation pursuant to § 7 (1) AStG. The add-on correction volume denotes all add-on amounts not yet distributed.

The limitation of the reduction amount is to be determined in accordance with § 11 paragraph 2 AStG. Therefore, the amount of the reduction is only available to the taxable person to the extent that all previously undistributed additional amounts (adjustment volume) plus the additional amount of the current assessment period would be taxable if it were intended to be distributed to him.

(total correction volume = add-on correction volume last BZ + add-on amount of current BZ)

This is to ensure that subsequent shareholding income is reduced only to the extent that it comes from passive income previously taxed under additional taxation.

The following example:

The amount added for the current investment period is 100, the amount added correction is 0 of the shareholding income 50. The shareholding income would then only be taxable to 30, while the hypothetical taxable part is 60 (60 % of 100 (0+100). Since the smaller amount is the reduction amount, it amounts to 30 (60>30). This is to be deducted from income (100 additional amount + 30 shareholding income) so that the sum of income is 100.

Determination of the add-on correction volume

The volume of additional corrections remaining at the end of an assessment period is to be determined separately for each taxpayer according to § 18 AStG. This remaining addition correction volume at the end of an assessment period is determined as the addition correction volume at the end of the preceding assessment period plus the addition amount and minus the remuneration within the meaning of § 11 (1) AStG, i.e. the income from investments in the assessment period.

(volume of corrections preceding VZ + amount added to this VZ – income from investments in this VZ)

The remaining add-on correction volume in the above example is then 50 (100 add-on amount – 50 shareholding income + 0 correction volume previous year).

The add-on correction volume determined after this calculation is intended to represent the passive income of the company that has not yet been distributed. However, the amount may not be negative according to § 11 (3) sentence 3 AStG.

According to § 11 (1) AStG, all dividends are first included in the taxation. The amount of the reduction must then be deducted so that the pre-charged dividends are not subject to re-taxation. Due to this special legal technique, the distributions are generally considered “normal” for tax purposes, for example, so that any foreign withholding tax can also be charged in principle in Germany – taking into account the other general regulations.

If a natural person achieves income from shareholdings after the application of the additional taxation, ask what impact the new regulations have. Firstly, the general rules on the taxation of shareholding income apply. Therefore, either the partial income procedure or the withholding tax applies to the share income.

We declare withholding tax and parts income procedure and when what is beneficial.

3.1.1. Withdrawal tax

If the taxation of the income from the natural person is carried out by way of withholding tax, the following procedure shall be followed. The profit distributions are initially subject to the separate 25% tariff according to § 32d Abs. 1 EStG and proceed according to § 2 Abs. 5b EStG is not included in the sum of income.

Any foreign withholding taxes in the VZ of the inflow of the profit distribution according to § 32d para. 1 sentence 2 EStG eligible. The result of the reduction amount according to § 11 AStG is that the eligible foreign withholding tax is also reduced. The reason for this is that the crediting of capital income according to § 32d (5) sentence 3 EStG is limited to the German tax for the individual capital income. However, the German tax is reduced by deducting the reduction amount from the capital gains.

3.1.2. Partial income method

If the capital gains are taxed in a regular manner under the partial income procedure, only 60 % of the income is taxable. The taxpayer is then only entitled to the amount of 60 % of the smaller amount from gross profit distribution and total correction volume (see above). The amount of the reduction thus determined shall then be deducted in determining the sum of the income.

The consideration of any foreign withholding taxes is governed by § 34c paragraph 1–3, § 34d no. 6 EStG. Unlike in the context of the withholding tax in § 32d EStG, however, the deduction in the determination of the sum of income remains unchanged the amount of foreign income relevant for a tax credit according to § 34d EStG. In the case of the maximum amount to be recognised, however, foreign income is set as gross (before reduction amount) in relation to taxable income as net (after reduction amount). The lower denominator then results in a higher maximum amount of credit. In addition, there are always sufficiently high incomes in addition to those for which the reduction amount is deducted, in order for it to be at all possible, because the offset is limited to the actually incurred German tax, which is lower due to the reduction amount.

3.1.3. Amount of reduction in business tax

If the natural person holds the participation in the business assets, the trade tax also becomes relevant. Then the taxable 60 % of the shareholding income according to § 7 sentence 1 GewStG goes into the profit from business.

In the case of profit distributions and the participation in the capital of the intermediate company at the beginning of the calendar year is at least 15 %, the 60 % of the remuneration still included in the business income according to § 9 no. 2a or 7 GewStG shall be reduced. No reduction amount is deducted, since the profit distributions were completely excluded from the business income (§ 11 (5) sentence 1 AStG). Consequently, double loading can no longer occur.

If the shareholding amount is less than 15 %, the previously tax-exempt 40 % of the emoluments according to § 8 no. 5 in conjunction with § 9 no. 2a or 7 GewStG must be added again. The reduction amount according to § 11 (2) AStG is the taxpayer in the amount of 60 % of the emoluments. It increases by the amount of the additional charge (§ 11 (5) sentence 2 AStG) and now also reduces the business income. A double loading is therefore avoided.

If a corporation participates in the foreign company, the profit distributions according to § 8b (1) sentence 1 KStG are tax-free. Then the taxpayer is not entitled to a reduction because of the complete tax exemption. If, on the other hand, one of the reversals of § 8b KStG is relevant, then the reduction amount must be deducted according to the above invoice. Foreign withholding taxes are to be taken into account in accordance with § 26 KStG in accordance with § 34c EStG, so that there are effects on the tax crediting, as in the partial income procedure.

It can be seen that in particular the calculation of the reduction amount is difficult and has an impact on the crediting of foreign withholding taxes paid. If you are to tax the profit distributions by means of withholding tax, there are cases in which the request for a favorable examination could be advantageous for you. Our tax consultants specialising in international tax law will be happy to advise you on this.