With a corporation in a country that does not impose corporation tax or where the corporation tax rate is at or close to 0%, you can save considerable taxes. To do this, you set up a capital company in such a country and transfer considerable capital to it. Then we set up another foreign company, which receives a large loan from the first corporation. Since interest rates are currently relatively high, this can lead to the interest on the loan completely exhausting the tax-relevant profit of the operating company. If we now tax the profit abroad, there is no tax. The foreign corporation also remains tax-free. However, we must ensure that no additional taxation arises in Germany. This is the only way we can tax profits abroad and at the same time remain tax-free in Germany.

Tax profits abroad – Introduction

Many entrepreneurs in Germany find the tax rates in this country too high. No wonder, because depending on the region and the corresponding local business tax levy, a total tax of 32% can be incurred on corporations. In addition, there is a capital gains tax of flat-rate 25%, so that you quickly have to transfer about half of the gross profit to the Treasury. And with a top tax rate of up to 45%, individual entrepreneurs and partnerships are in a similar situation.

Completely different abroad. The range of corporate taxes is considerable here, but you can imagine what it would be like if you could choose the right tax haven. Sure, then you would certainly pay 0% tax.

So we ask you: what prevents you from taxing your profits abroad at 0%? Look forward to some exciting facts about international tax arrangements as well as a surprising answer to this question.

Tax on profits: Germany in international comparison

Before we come to the elaboration of the answer that is certainly interesting for you, we will first look at German taxes in an international comparison.

As already mentioned, in Germany we have to reckon with a quite high share of taxes that come from profit. In the following, let’s simplify the assumption of a GmbH that has to pay moderate 15% in trade tax. Overall, therefore, 30% of taxes are expected at company level.

If we look beyond our southern borders, comparable corporate profits are 25% in Austria and between 20% and 30% in Switzerland. Things are even better in Malta, Romania or Cyprus. Although Malta allows itself to raise a share of 35% of profits, it allows a rebate of 80% in foreign ownership, so that only 7% of taxes are actually incurred. Cyprus is at about the same level at 12.5%. In Romania it is also only 16%. And in the Special Economic Zone on Madeira, you even marvel at a measly 5% in corporate taxes. Even in Sweden, which is also known as a classic high-tax country, corporations pay only 20.6%. This makes it clear that even within the EU or the EEA more tax-advantageous conditions can be found.

But it is even better. If you want to tax profits abroad so that there is no tax, the classic tax havens of Bahamas, Bermuda or Cayman Islands are happy to invite you. And the list could be extended by a few more, more exotic fiscal options such as Belize, Gibraltar, the Channel Islands and the Isle of Man.

3. How we tax profits cheaply abroad

3.1. Two Options to Start a Business Abroad

The concept is basically quite simple. In addition to our GmbH in Germany, we also have to establish a capital company abroad. Of course, this is then in a tax regime that does not impose corporate tax. In principle, we have two options. Either we set up the company as a subsidiary or it is an independent company.

3.2. Tax on profits abroad: Building our design model

In our case, we make use of option 2. This is important for our purposes, because we want to invest equity first. In fact, capital should be as high as possible, because we still need it. So let’s say we set up a Limited (Ltd.) in the Bahamas with a lot of equity.

In the second step, we now use the equity to invest it as debt capital. As an entrepreneur, we derive the greatest benefit from investing in our own operating company. For this purpose, our German GmbH establishes an operating company abroad. With this loan, we ensure that this company has to pay high interest rates. As a further prerequisite for our tax design model, this company must be able to deduct the interest costs from its profits. So the higher the interest rate, and thus the interest rates, the more advantageous our model. Since interest rates have generally risen recently, it should even be possible for interest costs to completely eliminate the operating company’s profit. Because that's what we're actually putting it on. At least in this indirect way we will tax profits at 0% abroad.

What sounds like a monstrosity in business terms is a blessing for us, however. Because the high interest rates collected by our Ltd. remain tax-free in the Bahamas. The question now, however, is how we transfer it to the German holding company tax-free.

Simply by distribution of profits. Dividends from subsidiaries, such as Ltd. in the Bahamas in our case, are subject to only 1.5% corporate tax in Germany according to § 8b KStG.

Tax profits abroad: hurdles in Germany

As you can surely already think, our tax design model does not create a collective delight in German tax offices. For example, the legislature in Germany has taken countermeasures in order to be able to carry out taxation in Germany in such tax situations. Not surprisingly, the tax object is transferred from the foreign capital company to the German shareholders in a fiction. The legal basis for this is § 7 AStG, which establishes the so-called additional taxation.

Additional taxation applies if a natural or legal person who is taxable without restriction in Germany receives profits from it as a controlling partner of a foreign corporation which has its registered office in a low-tax foreign country. This only applies if the foreign corporation does not generate active income. § 8 AStG clarifies in a catalogue what one has to understand by active income. This includes, in particular, the production of goods or the provision of services.

In terms of our tax design model, however, this detail means that our Ltd. only generates passive income in the Bahamas. In Germany, we thus come into contact with additional taxation. But also for this, clever designs can be found ways to ultimately tax the profits as active income only abroad.

Tax profits abroad – Conclusion

Anyone who wants to make a profit abroad with our tax design model and tax it as low as possible should consult us in advance. Because we know how to legally secure these arrangements. What is more, we also know how to convince the tax authorities of the implementation. Because to be right is meaningless if the tax office shows itself uncooperative. For this purpose, we recommend in our consulting practice to submit a request for binding information to the financial authorities in advance. In this way, we want to ensure that the competent officials commit themselves to additional taxation. If there are already uncertainties during the examination of the application, we will have the opportunity to clarify them before the tax actually arises and becomes due.

Interesting in this context is that the additional taxation is to be mitigated in parts from 2024. On the one hand, the low tax rate is to fall from the current 25 % to 15 % as an essential criterion for additional taxation. This has been a reasonable requirement for many years. In fact, the law in this regard was already wanted to be revised in previous legislative periods, but this has not yet been the case. On the other hand, many experts and those affected complained that the trade tax is linked to the additional taxation. This should finally be eliminated from 2024.

In the meantime, the Federal Government has adopted the bill. Now the Bundestag and Bundesrat have to agree on the new standards. So it is quite possible that you will soon learn new things from us on this topic.