Content
- Accidental unlimited tax liability in Germany of a foreign corporation
- Emigration can be expensive: New tax liability for investment fund holders when moving abroad
- Interest on capital gains tax when refund takes long
- Tax treatment of wages under Double Taxation Treaties
- Transfer Pricing Court decisions
- Changes in 2026
- Proper Invoices – What You Need to Know in VAT
- Verification of VAT IDs for Intra-Community Supplies
Accidental unlimited tax liability in Germany of a foreign corporation
German investor M is the sole shareholder of German company M-GmbH, which holds 100% of a Luxembourg corporation. In addition to M, who is based in Germany, Lux Sarl has a local managing director, i.e., one based in Luxembourg. During a tax audit of M-GmbH, the tax auditors become aware of M’s managing director activities for Lux Sarl and therefore wish to tax the worldwide income of Lux Sarl under unlimited corporate income tax liability due to the management in Germany (cf. Section 1 (1) KStG).
Question 1: Does M as managing director (also) establish unlimited tax liability for Lux Sarl in Germany?
Question 2– if the answer to question 1 is yes: Which of the following German tax consequences are relevant in this specific case due to dual residence?
Tax consequences
- A) Basic consequences
- Tax return obligation for corporate income tax and trade tax purposes in Germany
- Possible allocation of permanent establishment profits for the purpose of determining the German management permanent establishment result
- B) Special features
- Possible examination of taxation rights for other income (Art. 10 ff. OECD Model Tax Convention)
- Possible obligation to withhold and pay German withholding tax on dividends pursuant to § 121 (1) No. 1 EStG (German Income Tax Act)
- Possible loss of treaty protection due to dual residency (e.g., DTA USA)
From an advisor’s perspective, the question arises as to whether the place of management is really located in Germany. According to Section 10 of the German Fiscal Code (AO), this requires that the centre of business management be located in Germany. According to established BFH case law, this depends on the ongoing management of the day-to-day business relevant to the company. With the amendment to the Application Decree for the German Fiscal Code (AEAO) of February 5, 2024, the Federal Ministry of Finance (BMF) articulated its understanding of Section 10 AO for the first time, also addressing practical issues such as “weighting in the case of multiple managing directors“ and the ”separation of management into commercial and technical tasks.”
Below you will find a general checklist for practical use (based on the FGS webcast by Engelen/Tcherveniachki dated April 25, 2024) that can be used to check and document that foreign corporations (with their registered office abroad) do not unintentionally establish their place of management in Germany if a shielding effect from German taxation is to be maintained:
- Appointment of a locally resident person as managing director (or granting of power of attorney)
- Professional qualifications: Ensure that the managing director has the necessary professional qualifications and experience to effectively manage the company’s business.
- Signing of contracts abroad by local managing director: The local managing director should be authorized to sign contracts on behalf of the company. Furthermore, contracts should not be signed in Germany.
- Proof of operational decisions being made by local managing director: Document that the local managing director makes operational decisions that are significant for the day-to-day running of the company.
- Proof of supervisory/control function in the case of any domestic managing directors: Ensure that domestic managing directors only perform supervisory or control functions and do not make any operational decisions.
Please note: In structuring advice, even “critical” cases of equivalent managing director tasks among several managing directors can be regulated in a legally secure manner by giving the foreign managing director the right to make the final decision within the framework of rules of procedure. This should ensure that the centre of senior management within the meaning of § 10 AO is located at the foreign place of business – office or home office – of the local managing director, so that there are no German tax consequences (cf. Ungemach/Stefaner, PIStB 22, 87 ff.).
- Recording management actions
- Meetings and phone calls: Keep records of important meetings and phone calls made by the managing director.
- Emails and other correspondence: Keep copies of important emails and other correspondence sent or received by the managing director.
- Documentation of physical presence
- Travel expenses: Document the managing director’s travel expenses to prove his physical presence on site.
- Bookings: Keep booking receipts that prove the managing director’s presence at various locations.
- Calendar entries: Keep detailed calendar entries that document the activities and presence of the managing director.
- Equipment and staffing on site
- Lease agreement/premises: Ideally, ensure that the company has leased premises that can be used as an office.
- Office equipment/workstations: Provide adequate office equipment and workstations for the managing director and any employees.
- Telephone/internet connection: Ensure that the premises have telephone and internet connections.
- Business card: The managing director should have a business card that states their position and the address of the office.
- On-site employees with appropriate professional qualifications: Ensure that employees with the necessary qualifications are employed on site and have appropriate employment contracts.
- Accounting
- On-site bookkeeping: The company’s bookkeeping should be carried out on site.
- On-site preparation of annual financial statements: The company’s annual financial statements should be prepared on site.
- On-site tax returns: The company’s tax returns should be prepared and filed on site.
- Storage/archiving: Keep all relevant documents and records on site and archive them properly.
Emigration can be expensive: New tax liability for investment fund holders when moving abroad
Relatively unnoticed by many, the Annual Tax Act 2024 introduced a new threshold for exit taxation, effective from January 2025. Anyone who in the last 5 years privately held at least a 1% stake in a public investment fund or had acquisition costs of €500,000 or more in the same fund when he left the country, is subject to a deemed disposal upon departure of potential capital gains in accordance with Section 19 (3) of the Investment Tax Act (InvStG). For special investment funds the requirement of a minimum stake does not apply. The same consequences arise when shares are transferred free of charge to a person who is not subject to unlimited tax liability (gift/inheritance) or in the case of other restrictions on German taxation rights with regard to the capital gains on the fund shares (such as a change from unlimited to limited taxation).
Please note that investment funds are not obliged to make a deduction for capital gains tax. Therefore, it is the obligation of the taxpayer to include this in his tax return.
The following example shows that the €500,000 limit is exceeded more quickly than many people think:
“Natural person A was subject to unlimited tax liability in Germany throughout his life. A recently turned 66 and retired from his long-term employment. For the purposes of private pension provision, A has been saving €1,000 per month in a public investment fund for the last 20 years of his working life. The fund invests primarily in domestic real estate and, with surplus liquidity, in fixed-income securities. A’s small holding is well below 1% of the fund’s total assets. The calculated and actual acquisition costs amount to €240,000 (20 years x 12 months x €1,000). As a result of the fictitious sale and purchase of the shares following the reform of the Investment Tax Act in 2018, their acquisition costs as of January 1, 2018, amount to €550,000 due to good performance. Upon retirement, A moves his residence to Thailand.”
Solution:
By moving to Thailand, A triggers exit taxation pursuant to Section 19 (3) sentence 1 no. 1 in conjunction with (3) sentence 2 nos. 1 and 2 letter b InvStG, as he is ending his unlimited tax liability, which existed for seven of the last twelve years. Secondly, his acquisition costs for the investment fund exceed €500,000.
(Source: Quilitzsch/Rötting/Hörnicke, IWB No. 1 of January 17, 2025 – NWB QAAAJ-82678).
Incidentally, the German government is considering extending this provision to cryptocurrencies.
Interest on capital gains tax when refund takes long
In a recent court decision dated 25th February 2025 the German superior fiscal court BFH ruled in favor of the taxpayer. The background was that the Federal Central Tax Office (BZSt) took years to refund capital gains tax amounts due for reimbursement pursuant to § 50d (1) sentence 2 in conjunction with § 43b EStG and Art. 5 of the Parent-Subsidiary Directive. Moreover, they refused to pay an interest on such amounts for the time the taxpayer had to wait for his refund.
The BFH now ruled that this is a violation of EU law (according to ECJ decision Deister Holding and Juhler Holding payment). The BZSt cannot reject interest rate applications by EU subsidiary companies.
The start of the interest period in cases without exemption certificate procedures shall be 3 months after submission of an initial application. The end of interest accrual shall be on the date of payment of the initial compensation amount. The calculation must be made to the exact day for the respective interest periods. The interest rate is the normal interest rate for late payments, i.e. 1.8% p.a. since 2019 and 6% p.a. for interest periods prior to 2019.
In a BFH press release it was stated that this will have considerable financial implications for the tax authorities. This may also have implications for other excessively long proceedings.
Recommendation:
Don’t forget to prepare a separate application for interest on refund claims necessary according to BFH case law.
Tax treatment of wages under Double Taxation Treaties
As there is often uncertainty about the interpretation of the tax treatment of wages under Double Taxation Treaties we think it’s a good idea to summarize the view of the German tax authorities and have therefor summarized an ordinance of the Federal Ministry of Finance (BMF). . Here are some important take-aways:
- In order to have a residence under a DTT it is sufficient to have the possibility to use an apartment or house (key). You do not actually have to use it. It does not matter how long you use a residence, if you have several residences, if you own or rent a property or if you have registered or de-registered with the authorities.
- If you own a property and have rented it out to others you do not have a residence of your own there for tax purposes. If a property is empty and you intend to rent it out, you must be able to prove serious efforts to try to rent it out and there must be no private belongings of yourself in that property.
- If you have 2 residences in two different countries and one country may grant a favorable tax regime, then the DTT may not be applicable as you do not fulfil the criteria for “residency” within the meaning of the double taxation agreement. This is true e.g. in Spain for those profiting from the “Lex Beckham” and pay 10 years Spanish taxes only on income from Spanish sources. They cannot profit from the reliefs of the DTT as they lack a fiscal residence in Spain.
- Employees that are seconded abroad by their employers for up to one year remain their status of residency in their home country if they keep a German residence. This is also true if they are married and the family joins them going abroad.
- The center of vital interests usually shifts to the foreign country of employment at the point in time when objective reasons suggest that there is an intention to extend the stay abroad for a certain period of time. This is usually the date of the written extension of the foreign assignment (e.g. the employee was supposed to stay for 2 years and then signs a contract to stay 4 more years abroad).
- In order to avoid so-called white income (i.e. income that is not taxed by any country involved) Germany has several fallback clauses that allows Germany to tax income that is tax exempt under a DTT, if the other country does not tax such income.
- Example: A works abroad for the entire year 01. He returns to Germany on January 1, 02. At the end of year 01, he receives a special bonus of €100,000 for his particularly good performance during that year. In year 01, Germany had a right of taxation on 50% of his salary.
Under the functional approach the special allowance is paid in part for work abroad. Accordingly, 50% of the wages and of the bonus are tax-exempt in Germany. If the foreign country (here China) does not tax the special allowance in 02, Sec. 50d (8) EStG (German Income tax Act) codifies a fallback of the full taxation right to Germany, unless the taxpayer can prove that the other country has waived the right of taxation or the taxes assessed on the income in that country have been paid. Details must be checked in the respective DTT, e.g. China did not accept a subject to tax clause in the DTT Germany-China. However, Sec. 50d (8) EStG nevertheless leads to taxation in Germany, as the only requirement is unlimited tax liability and not residence under a double taxation agreement.
How to calculate if someone has stayed 183 days in a country:
- Only days spent in the country of employment are relevant.
- Even a short stay of one day counts as a day.
- The same applies to non-working days, Saturdays, Sundays, etc.
- Vacation days closely related to work
- Working from home is considered work in the country of residence
- Exceptions in individual DTAs, e.g., DTA Denmark or Belgium
- 183 days in the calendar year (Belgium, Denmark, Iceland, Austria, Portugal, Sweden, Switzerland, USA)
- Many newer DTAs require 183 days in any 12-month period.
Foreign employer: If payment is made by an employer resident in the country of employment, the conditions for taxation in the country of residence pursuant to Art. 15(2) (b) OECD-MA are not met, because a permanent establishment is not an employer.
If the employees of a German permanent establishment work in the county of the Headquarters of the permanent establishment their proportional income for that time span becomes taxable abroad. E.g. Manager A working for the Frankfurt branch of a French bank was asked to work in the French Headquarters 10% of his total working days in 2025. As a consequence 10% of his income must be taxed in France.
Distribution of wages:
- Step 1: Allocation of the specific parts of the wages that can be allocated such as travel expenses, provision of accommodation, orientation trip, etc.
- Step 2: Distribution of wages that cannot be specifically allocated according to actual working days within the earning period. Actual working days are all days within a calendar year on which the employee actually worked.
- Example: An employee is generally required to work 250 working days and is entitled to 30 days of vacation (= agreed working days: 220).
– The actual days change as follows: 220
– Carryover of 10 vacation days from the previous year – 10
– Carryover of 20 vacation days to the following year + 20
– 30 sick days with continued pay – 30
– 30 sick days without continued pay – 30
– Total actual working days 170.
Special cases of distribution of wages:
- Royalties and other performance-related remuneration: Functional allocation where possible, otherwise same treatment as general wages
- Signing bonus: For activities still to be performed, where the activity is performed, divide if necessary if several countries are involved
- Vacation and Christmas bonuses: To be included in general distribution
- Stock option programs: See BMF letter dated December 12, 2023 5.5.6 ff
Severance payments:
- Example: The member of the executive board B of A-AG is subject to unlimited tax liability and has been working for A-AG for 20 years. In 01, the employment relationship is terminated at the request of A-AG. Due to the termination, B receives a severance payment of €1,000,000. Before the severance payment is made, B moves his place of residence to a country with which Germany has a double taxation agreement.
- Solution: B can normally not escape German taxation by moving abroad. Severance payments made upon termination of employment are considered additional remuneration for previous work in a DTT. This does not apply if the agreement contains a separate provision expressly concerning such severance payments that stipulates otherwise.
– Entire employment relationship is decisive
– Distribution over the entire vesting period
– Section 50d (8) and (9) must be observed
– Special provisions through consultation agreements with Belgium, Luxembourg, Austria, Switzerland, and the UK.
Example on the taxation of severance payments:
Employee A, who is exclusively resident in Germany, has been employed by a German company since January 1, 2001 (five years). From January 1, 2006, to December 31, 2010, he is seconded to an affiliated company (economic employer) in Japan (five years). In December 2010, the employment relationship of A is terminated after ten years of service. He receives a severance payment of EUR 100,000. In the period from 2001 to 2005, he worked 220 days in Germany each year. In the period from 2006 to 2010, he worked 190 days in Japan, 20 days in third countries and 10 days in Germany each year.
Solution:
The entire vesting period must be taken into account when dividing the severance payment. Consequently, the working days of the entire employment relationship must be used. The actual working days of the entire employment relationship amount to 2,200 working days (10 x 220 days). Of these, A worked 950 working days (5 x 190 days) in Japan. The severance payment in Germany in the amount of €43,182 (€100,000 x 950/2,200) is tax-free, subject to progression, unless § 50d (8) or (9) EStG applies (Art. 14 (1) in conjunction with Art. 22 (2) (a) and (b) DBA-Japan).
The right to tax income earned in third countries remains with Germany as the country of residence under a provision comparable to Art. 15 (2) OECD-MA. A total of €56,818 (€100,000 minus €43,182) is therefore taxable in Germany. Section 34 EStG must be observed both for the taxable portion and for the progression clause.
Subject-to-tax Clauses in connection with foreign salary income
Example: A. Müller, who lives in Neuss, works for a Dutch employer in the Netherlands. He performs this work exclusively at the employer’s headquarters in the Netherlands. He receives a salary of €100,000 for his work in the Netherlands. Pursuant to Article 31a No. 2 e of the Dutch Income Tax Act, he is granted the so-called 30% deduction. According to this, 30% of the taxpayer’s income is paid out tax-free, regardless of proof. In the Netherlands, only €70,000 is therefore subject to taxation. How is this treated for tax purposes in Germany?
Solution:
Müller is subject to unlimited tax liability in Germany because of his German residence. Following the DTT Germany-The Netherlands (art. 14 (1) the Netherlands have the general right to tax his income from wages as carried out in the Netherlands. However, art. 22 (1) of the DTT Germany-The Netherlands states: “(1) For a person resident in the Federal Republic of Germany, the tax shall be assessed as follows:
a) Income from the Netherlands that is actually taxed in the Netherlands under this Agreement and does not fall under subparagraph b shall be excluded from the basis of assessment for German tax.”
Following decisions of the German superior fiscal court “taxation means that the income must in principle be subject to foreign taxation, as exempt income also falls under Art. 14. Reason: The income from the type of income covered by the agreement has been taxed; the fact that parts are tax-exempt is irrelevant.” As the German tax legislator did not like that interpretation he came up with a subject-to-tax rule in Sec. 50d (9) EStG, which reads:
“(9) 1 If, under a treaty for the avoidance of double taxation, the income of a person subject to unlimited tax liability is to be excluded from the basis of assessment for German tax, the exemption of the income shall not be granted, notwithstanding the treaty, if
- the other state applies the provisions of the agreement in such a way that
the income is exempt from taxation in that state or can only be taxed at a rate limited by the agreement, …”
In the Footnotes it is added: “4 Provisions of an agreement to avoid double taxation, according to which income is not excluded from the German tax base due to its treatment in the other contracting state, shall also apply to parts of income, provided that the requirements of the respective provision of the agreement with regard to these parts of income are met.
Following the German tax authorities this should ensure taxation of 30% of such income that is exempt from Dutch taxation. However, the German superior Fiscal court BFH ruled on April 10, 2025 that such income remains tax-free in Germany. Actual taxation occurs if the foreign country includes the income in the tax base. This does not apply in the case of factual or personal exemptions. Germany is therefore not allowed to tax the 30% that remain tax free under Dutch tax law.
Transfer Pricing Court decisions
There are two important court decisions of the German superior Fiscal court regarding transfer prices, affected companies doing business in Germany should be aware of.
The first one deals with benefits based on saved expenses (BFH I R 2/21). In the case a German group company (E-GmbH) maintains business relations with a third party customer in Venezuela. The German parent company of E-GmbH is T-GmbH, which itself is 100% owned by the US M-Inc company. M-Inc. instructs E-GmbH to immediately terminate the business relations with the Venezuelan customer due to US embargo announced by President Trump. E-GmbH bears the costs of the proceedings and creates a provision for damages. M-Inc. refuses to pay the damages.
The court ruled that this is a prevented asset increase in E-GmbH due to lack of recourse by the shareholder due to breach of contract. It was caused by corporate relationship, as an ordinary managing director of a German company would have insisted to be compensated for the loss by the parent company. As the US parent company saved its own expenses this is a constructive dividend with the legal consequence that the parent company T GmbH needs to pay withholding taxes.
This is one of the consequences of Trump’s tariff policy.
The second court decision deals with transfer pricing for parallel imports (BFH I R 41/21 of December 11, 2024). The case is again that a US parent company M-Inc. holds 100% of a German T-GmbH, which in turn holds 100% of the German E-sales GmbH. E-GmbH distributes pharmaceutical goods of the foreign parent company. By law, a part of such goods must be sold as generics by parallel importers that belong to independent wholesalers. The sales employees of E-GmbH also receive commissions for sales made by those parallel importers, because the marketing expenses of the original products have an impact also on the parallel imports. E-GmbH only receives margins on original products from the parent company.
The court ruled that this creates a constructive distribution of profits from T-GmbH to M-Inc. The prevention of an asset increase at E-GmbH cannot be ruled out on the grounds that parallel imports are not in the actual interest of M-Inc. Cost savings for M-Inc. are a benefit for M-Inc.
Those court decisions show that related parties in groups of companies need to be very careful to reflect all benefits in the transfer prices.
Changes in 2026
At year end several changes will be implemented such as:
- The hourly minimum wages of now 12.82 € will rise to 13.90 € as of 1st. Jan 2026 and to 14.60 € as of 1st. January 2027
- The maximum amount for minijobs with a favorable tax and social security scheme which is 556 € in 2025 will be raised to 603 € as of 1st. Jan 2026 and to 633 € as of 1st. January 2027
- The thresholds for social security contributions will be adjusted as of 1st. January 2026 to the following amounts (amounts for 2025 in brackets):
- Contribution assessment ceiling in the general pension insurance scheme: EUR 8,450 (EUR 8,050) per month
- Contribution assessment ceiling in the miners’ pension insurance scheme: 10,400 € (9,900 €) per month
- Contribution assessment ceiling in statutory health insurance: EUR 5,812.50 (EUR 5,512.50) per month
- Insurance obligation threshold in statutory health insurance (annual income threshold): EUR 6,450 (EUR 6,150) per month.
- The following non-cash benefit values for the respective meals (values for 2025 in brackets) will apply from 1st. January 2026 onwards:
- Breakfast: per calendar day: EUR 2.37 (EUR 2.30)
- Lunch or dinner: per calendar day: EUR 4.57 (EUR 4.40)
- For rides by car between home and the primary place of work the tax-exempt distance allowance will be EUR 0.38 per kilometer and this will be granted from the first kilometer (now it is EUR 0,30 for the first 20 kilometers). (still tbc)
- The federal government wants to provide economic support to the restaurant industry. Therefore, the sales tax for food in restaurants is to be reduced from 19% to 7% from January 1, 2026. However, the sales tax for beverages will remain at 19%.
- With effect from 1st. January 2026 the tax offices will issue electronic tax assessment notices as a principle. If you wish to receive paper-based tax assessment notices in the future, you need to apply for that. No special format is necessary, and no reasons have to be given for that.
Proper Invoices – What You Need to Know in VAT
For companies doing business in Germany, having a proper invoice is essential to claim the input VAT deduction under Section 15(1) No. 1 of the German VAT Act (UStG).
The German VAT law (§ 14(4) UStG) specifies all mandatory elements that must be included. Missing elements may lead to denial of input VAT deduction.
Mandatory Elements of an Invoice:
- Name and address of both the service recipient and the supplier
- Tax number or VAT ID of the supplier and client
- Date of issue
- Consecutive invoice number
- Description of goods or services (commercially customary)
- Date of supply or service
- Remuneration / consideration
- Tax rate and amount, or reference to tax exemption
Special Rules for Small-Value Invoices:
Invoices up to EUR 250 (gross) are considered small-value invoices (§ 33 UStDV) and require at least:
- Full name and address of the supplier
- Date of issue
- Quantity and type of goods supplied, or scope and type of services rendered
- Total consideration including tax
- Applicable tax rate, or reference to tax exemption
Special Rules for Passenger Transport Tickets:
Tickets for passenger transport qualify as invoices (§ 34 UStDV) if they include:
- Full name and address of the supplier
- Date of issue
- Total consideration including tax
- Applicable tax rate (unless the reduced rate under § 12(10) UStG applies)
Key Takeaway:
Ensure that your invoices – whether standard, small-value, or transport-related – include all legally required elements. Proper documentation is essential to safeguard your right to deduct input VAT in Germany.
Verification of VAT IDs for Intra-Community Supplies
For a VAT-exempt intra-community supply, it is essential to meet certain documentation requirements. In particular, it must be documented that the recipient of the goods or services is a business.
The VAT on the intra-community acquisition is payable by the recipient.
Key Steps for VAT ID Verification
- When creating a new customer record, the foreign VAT ID of the recipient must be properly verified.
- It must be documented that the VAT ID is valid and corresponds to the recipient.
- Verification can be performed via the German Federal Central Tax Office (BZSt): bzst.de
- Many invoicing tools offer integrated VAT ID verification features, which can simplify the process.
Ongoing Verification Requirements:
- Verification must also be performed for every subsequent supply to the customer.
- This includes ensuring that the recorded VAT ID still belongs to the customer.
- Some of the tools mentioned above can automate this verification, which is especially helpful if you handle a high volume of intra-community transactions.
Key Takeaway:
Proper and documented verification of foreign VAT IDs is crucial for VAT-exempt intra-community supplies. Using automated tools can significantly reduce administrative effort while ensuring compliance.