In order to reduce the business tax burden, it is common to relocate operational activities to communities with low business tax rates. If the company is then located there, it may be that it wants to expand the operational activity. To do so, it could have to move production capacity to a higher lifting community. We explain why there is a tax burden and show how you can reduce this threat of tax burden and save business tax.

1. business expansion and business tax

1.1. Company expansion

It is common to place the business activity in a municipality with a low business tax rate. This reduces the trade tax burden.

If demand increases, it is logical to invest in additional production capacities. It is then desirable, of course, that the new location is located in close proximity to the existing factory. If there are no suitable spaces at the previous location, it regularly happens that a new location is selected in a nearby municipality with a higher trade tax rate.

1.2. Tax Problems in Business Expansion

The consequence of the expansion is that the entrepreneurial activity is no longer only carried out in the low-tax community, but also in a high-tax community. As a result of the higher business tax levy, there is an additional business tax burden. However, there are then ways of limiting the additional trade tax burden to a minimum.

Saving business tax: possibilities

The additional trade tax burden can be reduced in different ways. On the one hand, there is the possibility of selecting the location from a tax point of view. The selection was made in the above case, but already and therefore cannot be reversed. Another way, however, is to select the legal form in such a way that the trade tax burden is influenced.

Save business tax: choice of legal form

Save trade tax: New location as a permanent establishment

In a first design possibility, the new location will be managed as a legally independent part of the entire company. This is possible in that no further legal structuring is carried out, but the assets, for example land, buildings or machinery of the new location, are acquired by the company and the business is also operated from the new beach town. Then there is a permanent establishment within the meaning of § 12 sentence 2 no. 4 AO.

The division of the trade tax measurement amount according to §§ 28 ff. GewStG is a role. The objective is to ensure that each municipality receives, in accordance with the principle of equivalence, financial compensation for the burdens incurred by an establishment in its territory. If, during the period covered by the survey, premises are maintained in several municipalities, the dismantling takes place in accordance with the provisions of § 28 (1) sentence 1 GewStG. According to § 29 (1) no. 1 GewStG, the criterion for dismantling is the ratio of wages. What is meant by wages is regulated by § 31 GewStG. However, there is often room for manoeuvre with regard to the decisive level of wages.

The fact that wages were chosen as a distribution measure seems strange at first. But the yardstick is for simplification. Therefore, the aim of the dismemberment is not to allocate to the participating municipalities the economically correct share of the total result as a taxable medium.

With regard to the real estate transfer tax, a tax-neutral transfer can take place under this design model under the conditions of § 5 GrEStG.

Save trade tax: New location as a subsidiary

3.2.1. Design of the subsidiary

A second design option is to operate the new location as a new legally independent company in the legal form of GmbH & Co. KG. It is recommended that the subsidiary purchases the assets directly. Otherwise, it is important for a tax-neutral transfer according to § 24 UmwStG to transfer a partial operation with all the essential operating bases. However, it is harmless if some assets only become special business assets.

The performance relationships between the parent company and the subsidiary are now – unlike in the first case – legally relevant and not purely internal transactions. In the context of trade tax, partnerships are not treated transparently. They have a separate business, which must be assessed separately from the business of their shareholders (§ 5 (1) sentence 3 GewStG). A double registration is ensured by the reduction of § 9 no. 2 GewStG at the shareholder. The use of a partnership also offers the advantage of the allowance according to § 11 (1) sentence 3 number 1 GewStG in the amount of EUR 24,500.

3.2.2. Design of the performance relationship

Therefore, the subsidiary should be assigned as little business income as possible. For tax purposes, the performance relationships are recognized as far as they are foreign customary. Therefore, a full attribution of profits to the parent company is not possible. It is not unusual to maintain a company that does not generate a profit. Therefore, transfer prices between the two companies must be correctly structured. You can orient yourself on what is also common and recognized in a cross-border context.

It is advisable to provide the GmbH & Co. KG with the necessary materials by the parent company. The GmbH & Co. KG should hardly bear risks and carry out entrepreneurial activities alone. It is customary to provide a compensation at the level of the costs plus a small profit premium. It is important to document the functional and risk profile of the parent company in a comprehensible manner. In addition, evidence that the agreed premium is external should be provided using a recognised transfer pricing methodology.

This design completely avoids an additional trade tax burden.

Save trade tax: New location as a corporation

It is also conceivable to set up a corporation at the new company location. However, the establishment of an organ body is harmful. In this case, the organ company is deemed to be the permanent establishment of the organ carrier in accordance with § 2 (2) sentence 2 GewStG. Then a dissection would have to be made. So it comes to the same consequences as the greening of a company.

4th Conclusion: Save trade tax on company expansion

The selection of a location favorable for trade tax is tax-wise for companies. If the company wants to expand, it regularly expands into surrounding communities. It may happen that the new location is located in a high-trade tax community. However, the additional tax burden can be solved by a clever choice of legal form. By setting up a subsidiary company, the total tax burden can even be reduced. We are happy to advise you on this.