Knowledge
23 Minute
“As long as the profit remains in the foreign company, there is no tax in Germany.” I check this shortened statement in the third part of the series foreign companies. It ignores the CFC taxation. Just as wrong, however, would be the opposite claim: Every profit retained abroad is automatically taxed in Germany.
The CFC taxation according to §§ 7 and 8 AStG requires several conditions. As a rule, it concerns a taxpayer who is unlimited in Germany, a foreign company controlled by him and certain low-tax income. Which activity is behind the income and which exceptions apply, is mandatory to the examination. A lack of distribution alone decides nothing.
Foreign Company Series, Part 3. By Norbert Péter. Legal status of the linked legal text: 21. September 2026.
What is a controlled foreign company?
German law uses the term domination. § 7 AStGZZZ covers certain entities, groups of persons and assets which have neither their place of management nor their registered office in Germany. A foreign register address therefore does not yet answer whether this condition is fulfilled. The tax classification of the legal form also belongs at the beginning.
Control shall be exercised in accordance with paragraph 2 where more than half of the voting rights or capital shares are attributable to the taxable person alone or together with related parties. Alternatively, a claim for more than half of the profit or liquidation proceeds is sufficient. direct and indirect positions; The final date shall be the end of the company’s marketing year concerned.
So the view of the own participation rate is not enough. Proximity and coordinated behaviour shall also be checked. The control test shall also be distinguished from the subsequent calculation of the individually added portion. Anyone who crosses the threshold together with others therefore does not automatically receive their entire profit share.
§ 7 contains further special rules, among other things for participations of a domestic permanent establishment limited taxpayer and for the relationship to the Investment Tax Act. I limit the following test path to the basic system. The upstream question of location of management Part 1 on the actual place of management.
What income makes company an intermediary company?
‘Intermediate company’ is not a foreign legal form. The classification refers to income: A company may be an intermediary company for certain earnings, while other earnings are treated differently.
Section 8(1) AStGZZ Identifies activities and types of income that, under the respective conditions, are outside the recorded intermediate income. These include production, trade and services. However, the catalogue contains restrictions and exemptions. Especially in the case of services between connected parties, the term “operational business” is not sufficient.
Interest, transfers of rights, investment income and capital gains also require an exact allocation. The common short form “passive income” helps with orientation, but does not replace the legal catalogue. A company with employees is not already out of the audit with regard to all income.
I would therefore first record the actual sources of income separately: What is sold, provided, left or held? Who delivers the service? Who pays? Which connected persons are involved? Only then can it be technically assessed which income falls under which event.
What does a low taxation below 15 percent mean?
According to § 8 (5) AStG, there is a low taxation if the relevant income with income taxes of Less than 15 percent be burdened. Exactly 15 percent do not fall below this limit. However, this is not a statement about the entire tax liability of the company or its shareholder.
The decisive factor is not simply the country’s published corporate tax rate. The income is to be determined in accordance with German tax law; It refers to Section 10(3) AStGZZ. Foreign annual accounts and German calculation basis may differ from one another.
In addition, the burden comparison shall not be based on offsetting with income from other sources. Certain government claims in a profit distribution are included. Even legally owed income taxes of at least 15 percent do not help if they are not actually collected. A country overview with tax rates therefore does not reflect this examination.
For older years, the temporal application is important: The current border applies Section 21(6) AStGZZ for the first time in respect of recorded income from marketing years after 31 December End of December 2023. Earlier periods need the version applicable at that time.
What additional exceptions and limits should be considered?
Section 8(2) enables proof of essential economic activity for the income concerned. It requires appropriate material equipment and qualified staff who work independently and independently. Essential activity carried out primarily by third parties is not sufficient for this. The allocation of income and the arm’s length comparison must also be correct.
For this proof within the framework of § 8, paragraphs 3 and 4 limit the scope: the registered office or place of management must be located in the European Union or the European Economic Area; the necessary exchange of information must be possible. Details explained Part 2 on economic activity and substance. An office alone does not replace these requirements.
In addition, it contains § 9 AStGZZZ an exemption for mixed income. The current version connects a maximum of one third of the total income with a limit of a total of 100,000 euros at the intermediate company. Both conditions must be met. According to § 21 paragraph 9, this version applies to marketing years after 31. Starting December 2025. An exemption is not a flat-rate allowance, which is always deducted.
Conversely, a lack of control according to § 7 does not always mean all-clear: Section 13 AStGZZ contains its own rules for low-tax income with an investment character. Their requirements and means of proof shall be examined separately.
My test method before a tax decision
For preparation, I would combine six questions with existing documents. The result is a comprehensible audit file, not a self-granted tax release.
- Who is affected? Clarify the tax liability of the party involved, legal form, seat and actual place of management.
- Who controls company? compile chains of participation, voting rights, rights of profit and agreements as of the relevant date.
- What income is generated? Assign revenue streams, contracts, actual benefits and individuals involved individually.
- What is the burden? German income assessment, foreign decisions, actual collection and relevant reimbursement claims to vote.
- What are the exceptions? Evidence of economic activity, exchange of information, exemption limits and timely legislative formulation.
- What consequences remain? technically calculate the amount added, declarations, offsets and subsequent distributions.
What follows for retained profits?
If the legal requirements are met, an additional charge without actual distribution can arise. Tax access then does not wait for a transfer to the shareholder. This can also be relevant for liquidity planning.
The further calculation is in particular in § 10. For later distributions looks § 11 AStGZZZ under its conditions, an amount to be reduced; rules for the offsetting of certain taxes actually collected Section 12 AStGZZ. This results in neither a flat-rate double taxation nor a guaranteed full relief.
My practical consequence: Before a distribution decision, participation rights, income and tax documents should be put together on the table. I am neither a lawyer nor a tax consultant. The legal classification and tax calculation belong to licensed professionals. Neither “foreign” nor “profit remains in the company” replaces their examination.
