Knowledge
26 Minute
“One address and one job abroad is enough as substance.” I check this shortened statement in the second part of the series foreign companies. It is true that Even a small business can carry out a real economic activity. It would be wrong to derive the tax classification from a lease already.
Substance at a foreign company means within the framework of § 8 paragraph 2 AStG: The company must demonstrate a substantial economic activity in the relevant State for the income in question. Required equipment, qualified staff and self-responsible work belong together. Whether a coworking place fits for this depends on the activity and the relevant rule. A blanket rejection is just as unsustainable as a blanket commitment.
Foreign Company Series, Part 2. By Norbert Péter.
When § 8 paragraph 2 AStG is even relevant
The term substance is often used for different tax issues. I would therefore first mention the specific provision. This is about the German CFC taxation. The starting point describes § 7 AStGZZZ: Under the conditions laid down therein, income from a controlled foreign company can be taxed by the taxpayer involved.
§ 8 AStGZZZ determines for which income a company is an intermediate company. Paragraph 1 distinguishes types of income and is linked to low taxation. Paragraph 2 shall provide evidence of a substantial economic activity. It is not a general seal of approval for any foreign company and is not a prerequisite for its existence under company law.
The borders are directly part of this: According to paragraph 3, paragraph 2 shall apply only if the registered office or place of management is located in a Member State of the European Union or a Contracting State of the EEA. Paragraph 4 shall exclude this rule if the State concerned does not provide the necessary information in the exchange of information between States. An office in any state therefore does not automatically open this proof.
Even a successful proof does not answer other tax questions conclusively. Where the actual place of management lies, whether operating sites exist or which other obligations apply, remains to be assessed separately. Part 1 explains the Documentation of the actual place of management. Here, on the other hand, the focus is on operational performance for certain incomes.
Objective equipment: What does this activity really need?
Section 8(2) requires the use of the material and human resources necessary for the activity in the State in which the company has its registered office or place of management. What is crucial is the link between the task and the means actually used. A general minimum area or a certain type of office is not there.
I would start with a description of the workflow: What is the achievement? Which rooms, devices, programs, data accesses or other equipment are necessary for this? Are these funds actually available and will they be used for the activity in question? Responses should come from the organisation, not from a presentation for later testing.
A lease contract first establishes a right of use. Whether the agreed equipment fits the work requires a further look. As organizational documents, user agreements, access authorizations, existing equipment and verifiable work results come together. A collection of invoices alone does not declare a functioning operation.
Staffing: qualification and actual tasks
Personnel does not count for heads alone. The legal requirement is that sufficiently qualified personnel carry out the activity independently and independently. Qualification must therefore fit the task. A job title, an employment contract or a local contact person does not prove the necessary performance in itself.
For each task area, I would record who can do the work professionally, actually does it and is responsible. This includes comprehensible job descriptions, relevant qualifications, available work capacity and concrete work results. A universal minimum number of employees cannot be seen from this provision.
The examination must also remain at the real level. If a person is to assume numerous functions, it must be clarified whether his knowledge and time possibilities fit. Which forms of employment and personnel assignments are legally sufficient are part of the individual tax assessment.
Personal responsibility: More than signatures on site
Self-responsible work is evident in the process. Who assesses the technical task, chooses the procedure, processes queries and bears responsibility for the result? Anyone who only passes on finished specifications does not already answer these questions by a signature.
I would put formal powers side by side with real scope for action. What decisions does the staff make themselves? What releases are required? Which professional decisions are transferred to other bodies? Individual reservations of consent do not replace an overall examination. Similarly, belonging to a group of companies does not justify solely the claim of lack of independence.
Service providers: Where the legal limit runs
The limit is expressly stated in § 8 (2): If the company allows its essential economic activity to be carried out predominantly by third parties, sentences 1 to 3 do not apply. An existing office and local contacts cannot simply remove this restriction.
However, this does not result in a blanket ban on external support. The examination must take place on the essential economic activity. I would therefore separately identify core operational tasks and support services. What parts of the service does the company’s staff provide? Which are created by external contractors? Who possesses the knowledge and bears the professional responsibility?
The mere share of external invoices in the effort is not a reliable substitute for this audit without further classification. Which tasks are essential, who is to be classified as a third party and how the predominance in the specific case is assessed, should be clarified by a licensed tax consultant on the basis of the actual service chain.
Why coworking is neither exclusion nor carte blanche
A coworking place can provide real infrastructure. Whether this infrastructure is sufficient depends on what actually happens there and what the activity requires. The designation of the rental model does not decide on personnel, personal responsibility or the management by third parties.
I would therefore neither accept expensive rooms as proof nor automatically discard shared rooms. A pure address does not in itself demonstrate any operational activity. On the other hand, it does not prove that all the other conditions are missing. The decisive factor remains the fully clarified facts.
My test method: Connecting income with actual performance
The proof shall relate to the income concerned. Article 8(2) assigns the essential economic activity only the income generated thereby and requires compliance with the arm’s length principle. A workable activity therefore does not automatically make all the profits of the same company unproblematic.
- Limit rule: First, technically clarify whether CFC taxation and the proof under paragraph 2 are relevant for the concrete income.
- Describe the performance: Record for each affected area, which generates its income.
- Allocation of resources: Capture actual equipment, personnel, qualifications and place of work for this service.
- Checking responsibility: Compare own implementation, decision-making powers and external contributions in a comprehensible way.
- Provide gaps: Have unclear assignments, contradictory evidence and outsourced core tasks specifically technically examined.
This overview is my organizational decision support, not a legal point test. Requirements for international conduct Section 90(2) AO the investigation of facts and the acquisition of necessary evidence. Access to documents of external parties should therefore be clarified at an early stage.
The practical consequence
I would first disclose the actual service chain before additional leases or personnel decisions. The more general structural question is the contribution on foreign companies and business activities. The preparation of a new company describes the area form a company.
I am neither a lawyer nor a tax consultant. My role is organisational preparation; legal and tax assessment belongs to approved professionals. The consequence of this fact check is concrete: first determine the rule and income, then check actual equipment, personnel and personal responsibility. An isolated label such as office, coworking or service provider does not replace this work.
