date | theme

10.07.2020 | Perpetual Traveler: center of life and habitual residence as a criterion in taxation

13.07.2020 | Limited and unlimited tax liability in Germany

22.07.2020 | Functional relocation and functional doubling in International Tax Law

02.10.2020 | Founding a company abroad: tax and other implications (this contribution)

30.10.2020 | Avoid moving tax: establishing a family foundation and transferring GmbH shares

If you want to leave Germany to start a business abroad, you should make sure that the unlimited tax liability towards Germany ends beforehand. In this way a tax liability is facilitated, the establishment of the company is only affected by the conditions abroad. However, if you want to start a company abroad from Germany, you also have to face numerous tax challenges. In particular, additional taxation and exit taxation are of great relevance here.

In addition, the requirements for starting a company abroad are naturally very diverse. Thus, the process of foundation can be from a few days, without documents or data, up to several months.

Especially in many classical control havens, another aspect can come to the fore. Because the opening of a business bank account may require proof that is far higher than that for the establishment of the company. In certain situations, banks even refrain from opening an account.

Starting a company abroad is part of the dream of many entrepreneurs. Younger people in particular also associate a combination of longing for independence, wanderlust and adventure. Such a project can also have many financial advantages. In particular, the tax incentives with which many new tax havens advertise the favor of young entrepreneurs are quite interesting.

Because the affinity of young entrepreneurs to new technologies and new services also creates new potential locations. It is no secret that young people in particular are more willing to leave for new shores – in several ways. Anyone who thinks of Marco Polo will quickly realize that the aspect of profit also plays an important role. This is why new tax havens are so successful in attracting young entrepreneurs. And if you implement a skilful planning, then a later return to Germany is quite conceivable.

But how exactly can you start a company abroad? What should be considered when you distance yourself from Germany for this purpose – and personally in a spatial dimension? Or vice versa: what are the implications if you want to start a company abroad from Germany in order to emigrate there later, if at all? We address these questions based on tax expertise in this article, supplemented by some other important aspects that should also be considered, because they are often hardly in the foreground at the beginning.

Founding a company abroad: from Germany or from abroad?

The basic question you have to ask yourself if you want to start a company abroad is whether this is better from Germany than if you first emigrate and only then start up. This requires, above all, a consideration of the relevant German tax laws. This is because it has to be checked whether taxes are also incurred in Germany.

It should be noted at the outset that Germany, due to its economic success as an exporting nation, naturally strives to secure the basis for this. Since it is the companies that essentially justify this success story, the legislator takes many steps to avoid the migration of companies abroad. In other words, many rules and procedures for taxation have been introduced, proving that entrepreneurs or companies, or even branches and functional units, are moving abroad.

Although we will go into detail about the various regulations that fall under this in a moment, it is already clear, anticipatingly, that the option of starting a foreign company from Germany is heavily regulated. Therefore, in general, the establishment of a company from abroad makes more sense than from Germany.

Regardless of whether an entrepreneur sets up a corporation in Germany or abroad, an exit tax is usually expected when he moves abroad. This is because he thereby abandons his unlimited tax liability in Germany. As a result, a sale of his shares in the company would take place without tax participation of the Federal Republic. So the legislature has devised the taxation at the departure, which, by the way, has already existed since the beginning of the 20th century. century in various forms in Germany. The basis for taxation is an assumption enshrined in § 6 AStG. At the time the shareholder leaves, a fictitious sale of the company in which he holds a share takes place. Furthermore, the assumption is based on a value of the company, which is to be calculated by means of the so-called simplified income value method. This is done by multiplying the average tax profit of the previous three years by a factor of 13.75.

So as you can quickly see, exit taxation, especially for successful entrepreneurs, is a tax that you would like to avoid. Although one would actually have to pay taxes in the same amount as in the case of the exit tax, this is anything but advantageous, especially in a phase of the entrepreneurial change caused by the departure.

If, however, the corporation is founded with only a small value before the shareholder moves abroad, then the exit tax is only incurred to a small extent. Nevertheless, this tax could also be avoided completely by first moving away from Germany as an entrepreneur and only then founding the company from abroad. Although in exceptional cases it may make sense to set up a corporation abroad before the shareholder moves there, this is usually not recommended.

4th additional taxation

Additional taxation refers to the taxation of passive income earned by a company in a low-tax foreign country in which most residents are involved. The criterion of passive income via a list of ten different points is legally fixed in § 8 (1) AStG. However, the list only lists things that do not constitute passive income. These are therefore exclusion criteria. For example, certain income in the case of rental or leasing, as well as in the case of distribution or purchasing companies, is to be regarded as passive income.

Low-tax foreign countries refer to all countries that apply a corporate tax rate of less than 25%. It is certainly no coincidence that this includes all countries that apply a lower tax rate than Germany. Although the corporate tax rate in Germany is only 15 %, this comparison must also take into account the comparable amount of business tax.

In fact, additional taxation has also been created as an instrument to prevent the transfer abroad of tax revenues that would normally arise in Germany. However, if an entrepreneur wants to set up a company abroad and also wants to give up all tax ties with Germany, the additional taxation basically misses the actual motive behind its introduction. What is more, there is the question of whether this should be regarded as a restriction on the principle of freedom of establishment.

5th license barrier

Another special feature that an entrepreneur in Germany should expect if he wants to start a company abroad is the license barrier. This results in the addition of operating expenses based on the payment of royalties to foreign licensors. Again, the licensor is taxed in a country which applies a tax rate of less than 25 % when collecting income taxes. A further requirement for the application of the licensing barrier is that the licensor and the licensee are close to each other. This is the case, for example, if a licensing company abroad is at least 25% in the assets of a licensee in Germany.

It should be noted that the licensing barrier also applies if there is a double taxation agreement. However, by setting up suitable structures, an application of the license barrier can be avoided.

Setting up a company abroad: Duration, data and other information

In this section we go into the accompanying circumstances that you should expect as an entrepreneur if you want to start a company abroad. Of course, only a general overview of this complex topic is possible here. After all, this is very different from country to country and even from country to country. However, some examples should round off the picture.

More information on how easy it is for a country to start a business is available through the World Bank’s annual analysis. In fact, one of the factors examined for this ranking refers specifically to the duration and effort involved in setting up companies.

6.1. Documents and particulars required for establishment

In some countries, the presentation of certain documents is required when starting a company. Similar to the notarized or certified authentication by identity card or passport, which is customary in Germany, this is also provided in many other countries. In other countries, however, even this minimum requirement is irrelevant. Especially in many classic tax havens such as the Seychelles or in the USA, a corporation can be completely anonymous and online. In contrast, in Sweden, for example, the filing of the deed of incorporation and the articles of association of the limited liability company, a bank account statement as proof of the required minimum deposit and a list of shareholders are required.

6.2 Duration until establishment

As variable as the regulations of each country regarding the amount of data and documents you have to submit are, if you want to start a company, so different is the duration until the company is actually founded. In the EU, for example, the principle applies that a foundation should take place within three days. For this purpose, processing via the Internet is also provided as an offer. However, even in Germany, a period above this limit is often set for the establishment of a company. In other countries – and here again especially in some tax havens – this can often be done immediately. Another example regarding the duration of a company formation can be found in Paraguay. Here the establishment of an S.A. takes about a quarter of a year. In neighboring Uruguay, it also takes a few weeks for a local LLC to be founded. On the other hand, an LLC is founded in Dubai in about three to four weeks.

6.3. National Trade Registers as a source of information

In this context, it is also necessary to briefly discuss the importance of national trade registers. The following principle applies: the more anonymously you can set up a company abroad, the less data is also available in the national commercial register about the company. Admittedly, this sounds like a truism, but it also has possible implications when claiming claims from other local business partners. Because when it comes to suing an open claim, then even a court order can hardly contribute to the implementation of the law, if the necessary data, for example on the liable shareholders of a defaulting company, is missing in the commercial register. Thus, the question of legal certainty is also urgently included in the considerations if you want to set up a company abroad.

6.4 Legal certainty, a high good

This paragraph also aims in the same direction. What good is it for an entrepreneur to be certain that national or even international law is on his side if the courts in the country where the company was founded decide according to the law of the strongest? In addition to the simple cases of corruption, the possibility must be considered that certain governments – to avoid the word regime – influence the judiciary for nationalist or other ideological-religious reasons. In such a situation, the tax incentive that may have existed originally when the company was founded is certainly quickly forgotten.

6.5 Requirement for accounting of a foreign company

In some countries, an accounting or even the preparation of a balance sheet is only necessary if taxable income is generated in the country. This is the case, for example, in the US state of Wyoming or in Canada. This can also be an advantage, which is quite often accompanied by a tax exemption on foreign income. In fact, in countries that are not aware of income taxes, there is also generally no accounting obligation or a comparable obligation to draw up a balance sheet. Nor is it necessary to examine commercial documents.

7th company abroad: the question of bank account

The last item on our agenda may surprise many. Because it is usually assumed that it is bureaucracy (or a question of corruption) that defines the effort with which a company is founded abroad. However, the revelations about offshore havens in recent years have led to a change in the practice of issuing commercial bank accounts. While it is still possible to set up a company completely anonymously in certain countries, opening a bank account on behalf of the company is now often only possible with disclosure of the company's circumstances. If there is even an indication that a company is a pure letterbox company, then it can lead to banks responding negatively. It can be assumed that banks can close a letterbox company based on the specified address of a company seeking an account.

Thus, the efforts to reduce international tax evasion by the OECD have produced a very strange consequence. In fact, this is also logically understandable for another reason. This has also significantly restricted money laundering at international level.

8. Good advice for starting a company abroad

Of course you can contact special providers who support you if you want to start a company abroad. But you should be aware that usually no tax advice is included in the service. But it is just as important as a good service, also a sound tax analysis of such a project.

So if you want to be sure that no surprising tax arises or even the fact of tax evasion or money laundering is associated with your company formation abroad, you are well advised with the assessment of a tax consultancy firm specialized in international tax law. Only this expertise can give you the confidence to make an informed decision in accordance with the law.