Setting up companies abroad can offer tax advantages. However, this only applies if this is designed accordingly. Because if you simply set up a sole proprietorship, partnership or corporation abroad from Germany, this can be tax neutral at best. Under certain circumstances, i.e. if there is no double taxation agreement (DTA) with Germany, there may even be double taxation. By contrast, with a double-storey holding company, which is linked in one organization, you can regularly reduce taxes to the level provided for corporate taxation abroad. So you look for a country with which Germany has concluded a double taxation agreement and in which the tax rate for corporate taxation is significantly lower than the personal tax rate in Germany, and set up a company there.

Setting up a company abroad – Introduction

The German economy of 2024 cannot celebrate great successes. This is why more and more German entrepreneurs who want to continue growing despite the difficult economic situation in our country are looking beyond national borders. They wonder if it might be a smart idea to expand abroad instead of in Germany. And more and more of them answer this question with a resounding yes.

But apart from that, setting up companies abroad always involves certain risks. In addition to the tax hurdles that international taxation entails, many more can be added. Often this also depends on local conditions. Safety is a particularly relevant topic, with which even we come into contact again and again on behalf of our clients. But also everyday challenges that you have to master when moving abroad in a foreign environment are often of greater importance than you might initially think.

But this time we want to focus solely on tax aspects. Therefore, we now consider which tax law framework applies if you want to start a company abroad from Germany. In particular, we intend to answer the question of tax optimization with a widely accepted tax optimization model.

2. companies abroad: basis of comparison German taxation

To understand why it can also be worthwhile from a tax point of view to set up a company abroad, we first have to analyze the German situation. In doing so, we distinguish between the taxation of partnerships and corporations.

2.1. Taxation of partnerships in Germany

Partner companies, i.e. both sole proprietorships and partnerships, are generally subject to transparent taxation at the level of their entrepreneurs or shareholders. Instead of the company, these groups of people are therefore taxable behind it. If these are natural persons, the company income tax and, to a certain extent (keyword trade tax overhang), trade tax apply. In addition, other taxes may be added (solidarity surcharge and church tax). The only exception is the consolidation benefit, which can only use partnerships on request as an alternative. In this case, taxation under the principle of transparency is eliminated and instead taxation takes place as a fictitious limited liability company.

2.2 Taxation of limited liability companies in Germany

Which brings us to the second variant on corporate taxation. Because corporations are considered legal entities with their own rights and obligations – and this also includes tax liability. This means that a corporation or other corporations (such as cooperatives) have to pay their own tax on their profits, namely corporation tax. Since in most cases corporations are also automatically regarded as traders, trade tax is also added to their tax obligations.

2.3. Comparison of tax effects

Let’s now compare the tax framework. For the income tax of natural persons who are behind a partnership, a progressive income tax rate applies. This ranges up to 42 % at the top tax rate, but can finally end at the rich tax rate of 45 %. Although part of the income is taxed significantly lower, other taxes are added. Especially with high incomes, the solidarity surcharge is to be expected. In addition, a part of the trade tax is often disregarded when applying it to income tax (the trade tax overhang). Finally, the church tax may also be due. This brings us into the area of a taxation of almost 50% overall.

In the case of corporations and their shareholders behind it, the situation looks quite different at first glance, but we come to a comparable result. First of all, a limited company pays 15 % corporation tax and about the same amount of business tax, depending on the amount of the respective municipality. If there is a subsequent distribution of profits (or a comparable discovery of hidden reserves), tax law qualifies this as generating capital income. Thus, such profit distributions are subject to capital gains tax, which amounts to a flat rate of 25 % (the allowance provided for this purpose is practically meaningless in our considerations, but advertising costs are flat rate paid for it). If you add up how much tax shareholders of corporations have to pay in the final, you have to pay another 25 % on the company’s return after tax (75 %), so that the net result is also around 50 %. And this is hardly surprising, because otherwise the legislature would have created a tax unequal treatment of partnerships and corporations.

Setting up companies abroad – Example Austria

Now that we have refreshed our knowledge about the German taxation of corporate profits, we can look beyond the box. But since many goals are possible here, we should choose a country as an example. If we want to continue assuming that entrepreneurs want to take as few risks as possible when starting up abroad, but at the same time also take advantage of conditions known from Germany, then Austria is probably the best example for comparison. Of course, many other countries are also eligible for a founding abroad. But more on that later.

In Austria, there is also a distinction between the taxation of partnerships and corporations. In fact, there is only a serious difference in their taxation compared to Germany. Austria has now abolished its trade tax. The corporate tax rate is 25 % instead of 15 %. If one calculates the difference to the tax of German corporations, the tax of Austrian corporations is about 5% lower than in Germany. In Austria, on the other hand, the income tax rate rises to up to 55%.

Setting up companies abroad: how to take advantage of your opportunity

4.1. Structure of the company

Now we come to our design model. First of all, we establish a partnership in Germany, which in most cases amounts to a GmbH & Co. KG. This next founds a GmbH. This means that we have a holding structure in which, however, all corporate units should only perform a holding function. As a third step, the GmbH is setting up a partnership in Austria. As a rule, this should also be a GmbH & Co. KG. It is the only operating unit in our model, but can be expanded by other sister companies abroad. Around the same time, our two German holding companies sign a profit and loss transfer agreement (commonly known as a profit and loss transfer agreement). In doing so, they establish an organization that is treated as a uniform tax subject in Germany when it comes to taxation.

4.2. Taxation of profits in Austria

If there is now a taxation of the profits of the Austrian partnership, the local tax authorities also proceed according to the transparency principle and tax their shareholders. Partner of the Austrian GmbH & Co. KG is in our case our German GmbH. So it pays corporate tax under Austrian tax regulations on the profits of its subsidiary. And, as I said, this is only 25%.

4.3. No taxation in Germany

How does the remaining profit – after all, a proud 75% – reach the private level of the German shareholders who are behind this company construct? To do this, we must first examine the German taxation of the organization or, even better, examine it. As an organisation with a German partnership as an organ carrier, which has already borne corporate tax in Austria, it is exempt from further taxation in Germany under the provisions of Article 7 of the Austrian DTA. And since it is tax transparent as a partnership, this applies practically also to its shareholders behind it. In any case, the withdrawal of the profits arriving in it is not a taxable process in Germany, so that the shareholders in this country do not have to pay any further taxes. This applies both to a possible capital gains tax (there is no capital company as organ carrier) and to an income tax.

Founding companies abroad – Conclusion

The classic double holding structure in Germany, which we have integrated into an organization, is the standard in our design model for all tax-optimized company start-ups abroad – no matter where we want to establish an operating subsidiary. Since we have to set up a partnership abroad in order to achieve the tax advantages presented here, this condition should of course also be met. Countries where this condition can only be met conditionally are therefore excluded from our design. The same applies to the transparent taxation that we want to achieve with the foreign partnership. As an alternative, however, a company abroad could be considered.

But then there is also the level of the tax rate with which the taxation of profits abroad is to take place. Ideally, it is as low as possible, but in any case significantly lower than the personal income tax rate of the shareholders behind the company construct in Germany. In fact, this aspect is certainly present in many countries because many of them try to attract foreign investors into the country via low tax rates.

And the third condition should also be relatively easy to meet, namely the existence of an effective double taxation agreement. Since Germany has concluded such agreements with the vast majority of countries in the world, the right of taxation in cases similar to those described here with Austria should always belong solely to the more favourable foreign country for tax purposes.

Another important advantage of this design is that it is tax-approved in Germany. So there is no need to fear complications in relation to the local tax offices.