date | theme

25. February 2021 | Tax assessment & tax collection at the German tax easing

09. February 2021 | Tax de-engagement & deferral: period and time of payment

04. January 2021 | Tax easing: Taxes on the departure of business assets abroad

06. June 2020 | European law-compliant interpretation and European law inconsistencies in cases of departure and tax easing

05. June 2020 | Anti-Tax Avoidance Directive (ATAD): Critical analysis of early taxation in cases of departure and tax easing

03. June 2020 | Exit taxation & tax easing: Critical analysis of (early) immediate taxation

27. May 2020 | Actual tax easing in cross-border conversions in light of the changed understanding of the agreement by the BFH (task of the final extraction theory)

26. May 2020 | Legal tax easing in light of the changed understanding of the agreement by the BFH (task of the final extraction theory) (this contribution)

25. May 2020 | Tax easing in light of the amended understanding of the agreement by the BFH

Due to the task of the final extraction theory for BFH control untanglements, control untanglements have also changed in a legal framework. The German Treasury does not want the previously unrestricted German right to tax assets to be restricted or completely eliminated in the event of a transfer or conversion. It is therefore necessary to examine whether and to what extent there is or could be a restriction on German taxation law and what consequences this would have. At the same time, however, DBA law must also be examined, since international law takes precedence over national regulations.

From the point of view of the German Treasury, the taxation right existing in domestic and, where applicable, in the context of the crediting procedure, also in foreign assets should not be lost in the course of the conversion. Accordingly, § 20 Abs. 2 S. 2 No. 3 UmwStG provides for the continuation of the book value only in those cases in which the German taxation law with regard to the profit from the sale of the transferred assets is not excluded and is not restricted. For this purpose, the scope of German taxation law must be examined before the transfer at the level of the transferor and after the transfer at the level of the acquiring limited liability company. With regard to domestic taxation law, the cross-border transfer can thus lead to three different results:

It is possible that the domestic tax law is not changed by the submission. In such cases, the cross-border transfer is possible in a manner similar to a purely national transfer – if the other conditions are met – in a performance-neutral manner. If the assets are located in an exemption permanent establishment and the domestic taxation right on the transferred business assets is established for the first time in the course of the transfer, there is a tax entanglement.[237] According to the justification of the legislature, this should be independent of the concrete exercise of the right of recognition according to §§ 4 para. 1 p. 8, 6 par. 1 no. 5a EStG lead to the recognition of the common value of tax-related assets.[238] As far as this leads to the discovery of hidden reserves abroad from the German point of view, taxation cannot occur in the Federal Republic of Germany – in the absence of local tax law. The contribution would be tax neutral from the German point of view.

The situation is different with tax unbundling. According to § 20 para 2 p. 2 no. 3 UmwStG, the acquiring corporation cannot recognise the transferred assets at book value insofar as a German taxation right exists before the transfer and this is excluded or limited in the course of the transfer. An exclusion of the domestic taxation law is given insofar as the Federal Republic of Germany can tax the profit from the sale of the assets before the transfer - unrestricted or limited by way of tax credit - and this taxation right is lost by way of the transfer. A restriction of the German taxation law exists insofar as the Federal Republic of Germany was able to tax the profit from the sale of the assets without restriction before the transfer and after the transfer can only effect taxation under the offsetting procedure. The refusal of the continuation of the book value at the level of the acquiring corporation shall be remedied by the transferor in accordance with § 20 para. 3 S. 1 UmwStG a contribution profit.

A legal tax exemption according to § 20 para. 2 S. 2 No. 3 UmwStG exists if the German taxation law is lost or restricted by the submission process itself – without an action by the taxpayer. The de-involvement must be the legal consequence of the implementation of the transfer contract and must not be the result of an actual operation – such as the physical transfer of assets.240] Only if the civil transfer operation as such triggers the de-involvement can this legal nature be. Decisive for the assessment of the tax loss – even in the case of retroactive contributions – is the time of the transfer.[241] If the tax derailment takes place at a later time and thus on the basis of an actual action of the taxpayer (actual derailment), however, the general derailment regulations are to be used.

According to general opinion, the allocation of previously domestic assets to an accounting permanent establishment of the acquiring limited liability company should lead to a restriction of the taxation right. The assignment to an exemption permanent establishment of the acquiring corporation is intended to justify the exclusion of the domestic taxation law.[242] If the transferred domestic asset is assigned to the acquiring company after the transfer of a foreign permanent establishment, this legal conception would mean the restriction or exclusion of the German taxation law and thus lead to the discovery of the hidden reserves (§ 20 para 2 p. 2 no. 3 UmwStG). According to this legal concept, the following example was the classic application case of conversion-related tax easing:

An unlimited corporation tax liable corporation company (DE1-KapG) also contributes its domestically taxable machine (economic good) to another German corporation (DE2-KapG) in connection with a branch of business. Even before the transfer, the machine was mainly used by the foreign permanent establishment of the acquiring company in the context of a transfer of use and, due to the functional approach following the transfer process, is to be assigned to this same permanent establishment.[243] [244]

For example, the transferred machine should have a book value of EUR 200, a common value of EUR 400 at the time of transfer and a later sale price of EUR 500. The capital gain thus amounts to EUR 300 and results from the hidden reserves created in Germany (EUR 200) and abroad (EUR 100). It should first be noted that there was a taxation right of EUR 200 at the time of the transfer and thus a corporate tax of EUR 30 (15 percent according to § 23 KStG) is at disposal.

The machine introduced must be assigned according to functional criteria to the site to which it is intended to serve.[245] Due to the permanent transfer of use of the machine from the German establishment to the foreign establishment of the assuming legal entity, the change of legal entity in the present case leads to a change in the functional context and thus to an assignment of the machine to the foreign establishment. According to previous opinion, the changed allocation of the machine would lead to a control untaking at the time of introduction.[246] For the hidden reserves (EUR 100) still arising after the untangled date, the exclusion of German taxation law is undisputed. However, for the hidden reserves already created in Germany (EUR 200), the de-entangling has to be seriously questioned against the background of the jurisprudence issued in 2008 and 2009[247] on the final extraction theory and correctly assessed as follows:

If the permanent establishment of the acquiring company is located in a DTA state, the double taxation of income there is regularly avoided by the exemption of permanent establishment income in Germany. For movable assets, the tax exemption results from art. 7 par. 2 in V. m. Art. 23 OECD-MA or Art. 13 para 2 i.v. m. 23 OECD-MA, both articles being in competition with each other in terms of their application.[248] Art. 7 OECD-MA (Company profits) determines the distribution of the current profits of the company. This affects in particular the sale of working capital and thus primarily the production and commercial goods. As you know, the distribution of profits from the sale of fixed assets is determined by type. 13 OECD‐MA (profits on the sale of assets)[249]:

The profit resulting from the sale of the movable fixed assets becomes by type. 13 para 2 OECD-MA is distributed between the two States Parties. According to that provision, the right of taxation is vested in the State Party whose permanent establishment the asset was sold. It is often held that both the assets and the associated hidden reserves are attributable to only one permanent establishment.[250] This is also true for the allocation of assets. According to current knowledge, the allocation of the hidden reserves bound therein is based on the context of origin. The taxation rights are to be distributed among the contracting states participating in the added value of the economic asset to the extent in which the realized profits were also generated by their permanent establishments.[251] If the economic good of a Contracting State is transferred to the permanent establishment of another Contracting State, by whatever action, the first Contracting State shall continue to have the right to tax the hidden reserves created in its territory at the time of the sale of the economic good.

In relation to the above case, the taxation right for the hidden reserves created in Germany (EUR 200) is not affected by the assignment of the machine to a foreign exemption establishment. In the absence of restriction and exclusion of the domestic taxation right on the hidden reserves created in Germany, a transfer to a domestic corporation is thus even then at book values according to § 20 para. 2 S. 2 UmwStG if the asset is attributable to the receiving capital company after the transfer of a foreign crediting permanent establishment. The fact that the Federal Republic of Germany will no longer have the right to tax on future hidden reserves, which will probably still be created abroad, does not constitute a loss of taxation. The question of whether German taxation law is limited or excluded is to be assessed exclusively on the taxation time and thus on the transfer time; At this time, no further hidden reserves have finally emerged.[252]

What was long discussed for Art. 13 OECD-MA[253] and only finally clarified by the BFH judiciary[254] was for Art. 7 OECD-MA has always been uncontroversial: Current corporate profits – and this includes profits from the sale of assets – are not rigidly attributable to a permanent establishment state, but are to be distributed among the contracting states involved in the asset formation.[255]

For analysis of the distribution scale by type. 7 par. 2 OECD-MA, the example shown on page 61 (2nd restricted field of application) is to be used with the proviso that the machine introduced is an economic asset of the stock assets previously produced in Germany. According to Art. 7 para. 2 OECD-MA allocates to each permanent establishment the share of the capital gains that it could have obtained, in particular in dealings with other parts of the undertaking of which it is permanent establishment, if it had carried out the same or similar business under the same or similar conditions as a separate and independent undertaking.

For the machine produced in Germany (production cost: EUR 200), which at the time of the transfer is of a common value of EUR 400 and which is subsequently sold by the foreign establishment for EUR 500, this can only mean one thing: since the foreign establishment state would have achieved a profit of only EUR 100 as an independent entity, it is precisely this profit share that is attributable to it. Germany as a production location must be granted the right to tax the production profit in the amount of EUR 200, so that the German tax law is not lost in this respect and the contribution is tax-neutral.

It would be contrary to the arm's length principle to try to convert the production profit into a sales profit and then attribute it to the foreign sales location. This makes it clear that in the case of assets, their capital gain by type. 7 OECD-MA, no restriction and no exclusion of the German taxation right to the values arising up to that time can be given by the transfer.[257] Although the Federal Republic of Germany has no taxation right to the distribution profits generated by the foreign permanent establishment (here: EUR 100), it should be noted that such a distribution profit had not yet arisen at the time of the transfer and thus could not have been withdrawn from German taxation law. This profit is achieved only after the transfer by the foreign establishment.[258]

The judgments of 2008 and 2009 were based on a DTA fact. It is therefore questionable whether the de-integrating should be assessed differently if no DTA regulating the exemption has been concluded with the permanent establishment State and the permanent establishment of the acquiring limited liability company is therefore an accounting permanent establishment. Then, any profit from the sale of the now foreign asset in the amount of EUR 300 at the level of the acquiring corporation is still subject to the domestic corporate tax of 15 percent (world income principle).

In order to avoid double taxation, however, the resulting total tax of EUR 45 (15 percent on the total profit of EUR 300) is the tax levied in the foreign state according to § 34c para. 1 EStG in V. m. § 26 para. 1 KStG. And this one, disguised as tax relief, The scheme could lead to a restriction of the original German taxation law (EUR 30) if the German Treasury were to be granted an offsetting obligation that exceeded the amount of EUR 15 and thus attacked the original taxation law of EUR 30. This raises the question of (1) the extent to which the foreign state levies a tax on the capital gains at all and (2) the extent to which any foreign tax would be counted against the German income tax or corporation tax.

To (1): The transfer constitutes a sale process for the transferring entity and an acquisition process for the receiving entity.[260] In German tax law, the common value (EUR 400) is to be used in both cases. This applies irrespective of the question whether the contribution is within the scope of the UmwStG (§ 20 Abs). 1 UmwStG) or outside the conversion tax scope and thus in accordance with the general tax principles (§ 6 para 6 p.

It is not the responsibility of the German State, but of the permanent establishment State, to decide on the valuation of the transferred assets in the permanent establishment balance sheet of the acquiring limited liability company. In many cases, however, it can be assumed that the host state will make an assessment in accordance with German principles. The assets are then to be capitalised with the common value in the foreign permanent establishment balance sheet in the context of the acquisition process and are taxed abroad in the event of a later sale only to the extent that the hidden reserves arose after the transfer (EUR 100). The hidden reserves (EUR 200) created up to the transfer date are therefore not part of the capital gain abroad. Thus, the host state does not levy any tax on the hidden reserves created up to the time of transfer, so that the German taxation law for the hidden reserves created in Germany is not limited in principle.

To (2): However, the collection of the German corporate tax of EUR 30 and thus the German tax law could be jeopardised if the foreign state levies a tax of more than EUR 15. Two case constellations are conceivable for this purpose:

Although the host country has only taxed the hidden reserves created in its country (EUR 100), the foreign tax attributable to them is above the German corporate tax rate of 15 percent. The host state activates the transferred asset with its book value (EUR 100) and, if it is sold, also taxes the hidden reserves created in the Federal Republic of Germany (EUR 300).

In both cases, however, it is seriously questionable to what extent § 34c para 1 EStG i. 1 KStG allows the crediting of foreign taxes to the domestic corporate tax. Because according to § 34c para 1 S. 1 EStG, an offset is only possible insofar as the foreign tax is attributable to foreign income. Foreign income is according to § 34d no. 2 lit. (a) EStG, however, only if they are obtained by a permanent establishment located in the foreign state or by a permanent representative working in a foreign state. The hidden reserves created up to the date of the de-entangling have not yet been realised by the domestic establishment, but have indeed been achieved. [262]

It would be difficult to assess these domestically accumulated profits (EUR 200) later as foreign income simply because the asset was transferred to a foreign permanent establishment before its disposal. In its decision on the final withdrawal theory, the BFH[264] also considers the correct “delimitation between domestic and foreign income (§ 34d no. 2 a EStG)” as the basis for the international distribution of profits. If the foreign state levies a foreign tax on the domestic profit shares, this would therefore not be counted against the German tax.[265] This means that foreign taxes can only be charged to German corporate tax to the extent that the foreign tax is due to the hidden reserves created abroad (EUR 100).

In addition, § 26 para. 2 S. 1 KStG or § 34c para. 2 EStG a special regulation, according to which the foreign tax is to be counted only against the German tax, which is attributable to the foreign income (EUR 15). If the host Member State taxes the total capital gain (EUR 300), this special scheme only allows an offset of EUR 15.

As a result, the Federal Republic of Germany initially levies a tax of EUR 45 and charges a maximum foreign tax of EUR 15. The right to tax a profit of EUR 200 with 15 percent corporation tax (EUR 30) existing up to the time of the transfer is therefore not subject to any restriction. Consequently, the transfer of the domestic machinery to an unrestrictedly taxable limited company is also possible at book values if the asset is subsequently attributable to the transferee’s foreign establishment.

Some of the literature argues that the principles developed by the BFH for the preservation of German taxation law are not applicable in the event of a change of legal entity. This view is justified by the fact that a change of legal entity in principle always leads to the realisation of profits and is only tax-neutral in exceptional cases – as is the case here with the favourable norms of the UmwStG. Since the legal de-entanglement is triggered solely by the civil conversion process and not by an actual act of the taxpayers, the new principles of de-entanglement should not be transferable to the special de-entanglement standards.[267]

In doing so, however, the authors fail to recognise that the acquiring company is in compliance with §§ 23 para. 1 p. 1, 12 par. 3 Hs. 1 UmwStG enters into the tax status of the transferring legal entity (footsteps theory).[268] The footsteps theory is based on the idea of the legislator to almost completely neutralize, virtually ignore, the legal entity change that exists under civil law from a tax point of view. For tax purposes, the assuming entity therefore continues the tax obligations and privileges of the transferring entity. This includes, on the one hand, that he may continue the book values of the acquired assets, but on the other hand also has to pay the tax resulting from a sale to the German state. From a tax point of view, there is therefore no reason to treat the change in the allocation of permanent establishments in the course of a change of legal entity differently from a tax point of view than in cases of mere transfers.

On closer examination of the facts underlying the BFH judgment of 2008[269], it becomes clear that the principles he established also apply to changes in the allocation of permanent establishments in the course of a change of legal entity. The facts on which BFH had to decide concerned the unbundling of an asset in the course of the transfer to a subsidiary. BFH made it clear that the principles it established “also apply to the contribution in kind by a partnership to a subsidiary partnership”[270].

The legislature also seemed to have assumed that the decisions of the BFH leave the conversion law unwrapped standards empty. It was therefore a concern to him that the regulatory example for rescuing the untaking standards applies equally to the untaking under conversion law.[271] Why a literal adoption or a reference to the regulatory example then failed, is unknown.

The aforementioned principles are based on the assumption that the acquiring company is subject to unlimited tax liability in Germany. It is therefore questionable whether the findings are applicable mutatis mutandis if the acquiring limited liability company does not have its registered office, management or permanent establishment in Germany and thus no tax link to Germany exists.

Wassermeyer[272] regarded German taxation law as excluded in 2006 if a limited taxpayer repatriates his assets located in the Federal Republic of Germany to the foreign parent company and then abandons the German permanent establishment – and thus his only remaining tax connection point in Germany. He justified his view at the time by the fact that the abandonment of the last tax connecting point in Germany already eliminated German taxation law under national law.[273] Irrespective of this, there should also be no possibility from the point of view of agreement law to grant a taxation right to a former permanent establishment state, since the existence of an “enterprise of a contracting state” according to Art. 3 para 1 lit. d OECD-MA and a “premises” according to art. 5 par. 1 OECD-MA requires a contemporary view. If at the time of realisation no company or permanent establishment was present in Germany, the Federal Republic of Germany could not make a (proportionate) corporate profit according to art. 7 OECD-MA are assigned.[274]

However, this view is obsolete, because Wassermeyer bases his argument on the assumption that there is no preparatory and subsequent income within the framework of the limited tax liability. Expenditure is given.[275] However, in a manner similar to the way in which anticipated operating expenses, futile operating expenses and subsequent operating income and expenses are possible in purely national cases[276], there are also, in the international context, subsequent operating income and expenses of an establishment which no longer exists at that time. According to H.L. and now also established case law, income and expenses that are not economically attributable to the parent company must be taken into account primarily in the future or former permanent establishment state, irrespective of whether the permanent establishment has not yet been or is still in operation. No longer exists.[277] With the profit arising from the sale of the formerly domestic asset, the foreign corporation therefore remains even then according to § 49 para. 1 No. 2 lit. a EStG is subject to limited taxation if it no longer maintains a domestic establishment.[278]

Subsequent operating income according to art. 7 OECD-MA or subsequent capital gains by type. 13 OECD-MA remains imputable to the State whose (former) establishment generated the profit. Because the OECD-MA does not maintain an independent definition for "profits of a company", but refers in art. 3 para 2 OECD-MA on the national definition. And since national law no longer requires the existence of a permanent establishment at the time of realisation, such an existence cannot be demanded by the OECD-MA.[279] Consequently, the BFH has also decided that it does not preclude the allocation from the point of view of agreement law if “the fixed institution in which the hidden reserves were generated no longer exists at the time of realisation”[280]. For former domestic assets, the German taxation law therefore remains even if the acquiring corporation does not retain a permanent establishment in Germany after the transfer.[281]

The decision of the BFH is territorially limited to the German understanding of the agreement. It has no effect on the view of other DTA states. For example, it can be seen from the opinion of the Advocate General in the Rs. National Grid Indus that the Dutch Supreme Court in tax matters of the Hoge Raad does not share this understanding of the agreement and that National Grid Indus B.V. simply ceases to “make taxable profits from companies in the Netherlands” following its move to Great Britain. Wassermeyer also does not exclude "that the vast majority of the DTA states will not join the legal interpretation of the BFH"[283]. This interpretation of the DTA, which is not uniform in the international context, can therefore lead to no-time taxation and double taxation.[284]

Regardless of an assessment under agreement law in other DTA states, however, German taxation law will continue to exist as long as the German highest tax court continues to grant the taxation law to the Federal Republic, finally “each state decides for itself and autonomously which taxation rights it wishes to claim”[285]. Even if the influx state grants the Federal Republic of Germany no share in the subsequent capital gain, it will – in accordance with the BFH judiciary – subject its share of the profit to national taxation, which in case of doubt leads to double taxation. As a result, a different interpretation of the species leads. 13, par. 2 OECD-MA by the influx state does not lead to an exclusion of the taxation right in the Federal Republic of Germany.

Incidentally, it should be noted that this discussion also applies only to the scale of division of the species. 13 para 2 OECD-MA. For the cases of Art. 7 para. 2 OECD-MA has already been shown that there is agreement on the division.[286] In the case of permanent establishments, an assessment in the host country is in any case irrelevant for the assessment of domestic taxation law.[287]

According to the amended case law of the BFH, the Federal Republic of Germany still has the right to tax the hidden reserves created in Germany after transfer abroad, so that the Federal Republic of Germany may only tax the hidden reserves created in Germany if they are actually realised.[288] If there is no act of realisation, for example because the economic asset has unexpectedly disappeared abroad, taxation may not be carried out either in the Federal Republic of Germany or in the new permanent establishment state.[289] The Federal Republic of Germany thus continues to bear the risk of subsequent impairments.

This may be perceived as improper to the German Treasury, but it must be stated at this point that the Treasury would also bear the risk of its accidental destruction if the economic asset remained in the Federal Republic of Germany. The transfer of economic goods abroad – compared to remaining in Germany – does not jeopardize the tax revenue of the federal government, so that there is no reason to take any (restrictive) measures solely on the basis of the transfer of economic goods.

According to the opinion held here, this also applies to the change of legal entity carried out in the course of the submission, if the assuming legal entity in accordance with §§ 23 para. 1 p. 1, 12 par. 3 Hs. 1 UmwStG follows in the footsteps of the introducer.

For non-usable assets (usually working capital, shareholdings and land, see § 6 para. 1 No. 2 EStG) focuses on the increase in value achieved during the holding period or the trading or production chain, which is ultimately achieved through a sale process.

The hidden reserves of the assets of the usable fixed assets (cf. § 6 para.) 1 No. 1 EStG, on the other hand, are not realised by means of a sale operation, but are generally converted into current proceeds, which are offset by the depreciation of the asset. After the consumption of such an asset, it is sold or scrapped at a price that is near zero.

If the proceeds resulting from the economic good were to be granted exclusively to the host state after a transfer, the German Treasury would be deprived of the right to tax the hidden reserves created on its territory. This is not convincing, especially under procedural and external comparison principles. Correctly, the German taxation law on the de-knitted asset must include both the profit from the sale and the pro rata income from the use.[291] For this purpose, the German Treasury must be granted a value-added contribution to the current revenue, insofar as the external turnover realised by the foreign establishment is the result of the hidden reserves that have grown in the Federal Republic of Germany.

In order to avoid complex mathematical calculations and elaborate documentation, Schönfeld[292] proposes to allocate to the Federal Republic of Germany a profit share of the foreign establishment based on the common value of the economic asset and the actual period of use. The participation of the German Treasury in the current profits of the foreign establishment would also be under the arm's length principle of art. 7 par. 2 OECD-MA can be justified, since the foreign establishment could not have achieved the external turnover independently to the same extent without the addition of the German part of the company.

The regulatory example was included in the general de-tricking standards with the Annual Tax Act 2010 (there § 4 para 1 p. 4 EStG and § 12 para 1 p. 2 KStG) and, according to the explanatory memorandum, should only have a clarifying effect.[294] A corresponding regulation in the conversion law untaking regulations – in particular in § 20 para. 2 S. 2 No. 3 UmwStG – is omitted, so it is questionable whether the regulatory example also applies in cases of submission.

The legislative extension to the special deregulation standards has been omitted on the grounds that the regulatory example for the identical provisions of the conversion tax law would have to apply equally and a special legal regulation would thus be unnecessary.[295] The analogous applicability of the regulatory example to conversion law untaking is also represented by the tax administration.[296]

However, it should be noted that § 20 para. 2 S. 2 No. 3 UmwStG is a special provision in relation to the general de-tricking regulations, so that the regulatory example cannot be applied analogously.[297] In addition to the literal reproduction of the regulatory example in § 12 para. 1 S. 2 KStG, the legislature has the reference to § 4 para. 1 p. 4 EStG. Thus, the regulatory example is now about §§ 6 para. 5 p. 1 Hs. 2, 16 para 3 p. 2 Hs. 2 and para 3a Hs. 2 EStG applicable accordingly.

If the legislator is already unsure of the analogous applicability of the regulatory example in the EStG and therefore creates corresponding reference structures, there is already a lack of a planned regulatory gap in the opposite conclusion. There can thus be no room for the analogous applicability of the regulatory example to conversion-related untaking, so that the regulatory example does not apply in the area of the conversion tax law according to the view taken here.

As a result, the scope of § 20 para. 2 S. 2 No. 3 UmwStG severely restricted. The hitherto classic de-engagement case does not lead – as explained above – to the exclusion of German taxation law due to recent developments. In addition, the de-involvement often does not take place as a legal act (legal de-involvement) at the transfer date, but as a result of an actual action by the management following the transfer date (actual de-involvement) and is therefore not to be assessed according to the specific de-involvement standards. The scope of application is thus reduced to the following application cases, which can lead to the tax liability of the submission process due to the legal unencumberment:

Classic, remaining application of § 20 para. 2 S. 2 No. 3 UmwStG is the exclusion of the German taxation law in the course of the transfer of business assets of a foreign credit permanent establishment to a foreign corporation (Scenario 4 on S. 31). This is the case, for example, if a resident of the Federal Republic of Germany transfers his permanent establishment located in Brazil to a foreign EU/EEA capital company and the Federal Republic of Germany thereby loses the limited taxation right for the assets located in the Brazilian permanent establishment.[299]

Economic assets of an exemption establishment are already completely deprived of German taxation law, so that a further restriction of the – already non-existent – Taxation law is not possible. An exception are assets of a foreign low-taxed permanent establishment, with which passive income according to § 8 para. 1 AStG can be achieved. For passive income see § 20 Abs. 2 AStG[300] makes a change from the exemption method to the accounting method, so that – despite the exemption due to a DTA – there is a risk that this taxation right obtained by Treaty Override will be excluded by the transfer.[301]

An exclusion of the domestic taxation law would be given, for example, if the acquiring German limited company already maintains a foreign permanent establishment with active income and the passive income of the transferred permanent establishment is requalified by the contribution to active income (scenario 5 on p. 31).[302] An exclusion of the domestic taxation law also exists if the low-taxed foreign permanent establishment is transferred to a foreign EU/EEA capital company (scenario 4 on page 31) and then the profit from the sale of these assets can no longer be recognized via the additional taxation of §§ 7 to 14 AStG.

A further problem could arise from the switch-over clause of § 50d para 9 no. 1 EStG for foreign hybrid companies, in particular for companies that are qualified abroad as a corporate tax entity and from the German point of view as co-entrepreneurship in accordance with the type comparison. On the basis of the assessment as a corporation, the foreign state would become art. 13 para 5 OECD-MA grant the right of taxation of the Federal Republic of Germany as a residence state. From the German point of view, there would be a co-entrepreneurship whose capital gains would be in accordance with art. 13 para 2 OECD-MA is taxed in the permanent establishment country. In order to avoid white income, this is done in accordance with § 50d Abs. 9 No. 1 EStG a change from the exemption method to the accounting method. It is controversial whether § 50d Abs. 9 No. 1 EStG in this context can establish a taxation right for the capital gains.[304] If this is in the affirmative, the transfer of the hybrid company to a foreign capital company (scenario 4 on page 31) also leads to the exclusion of German taxation law.

A further field of application arises if the contributor only carries out an asset management activity, but this leads to commercial income due to a fiction enshrined in German tax law. This affects in particular the following regulations: