Foreign (holding) corporations are used by German investors to make investments and capital investments abroad (so-called "foreign investments"). Outbound investments), but also by foreign investors for the purpose of investing in German companies or assets (e.g. real estate) (so-called Inbound investments) are used. There are often strategic or administrative reasons for the interposition of a holding company; they are typically set up in traditional holding company jurisdictions (e.g. Luxembourg or the Netherlands), as the legal framework is favourable there and the necessary human and material resources are readily available.
Such a foreign holding company is usually not subject to tax in Germany unless its actual place of management (cf. section 1 (1) KStG) is in Germany. The latter would mean that the foreign holding company would have to pay tax on its global income in Germany (unlimited tax liability). However, this would require the centre of ultimate management (Section 10 AO) to be located in Germany. According to case law, this depends on the day-to-day management (day-to-day business). This is typically not an option for foreign holding companies, which are regularly provided with sufficient personnel and material substance in the country of residence.
However, the foreign holding company without its registered office and management in Germany may be subject to taxation in Germany on certain domestic source income (Limited corporation tax liabilitySection 2 no. 1 KStG). Such domestic source income may exist in accordance with Section 49 para. 1 no. 2a EStG, for example, if it is generated via a fixed place of business (permanent establishment, see Section 12 AO) located in Germany. Even without a fixed place of business in Germany, the foreign corporation may be subject to limited tax liability if there is a permanent establishment in Germany. permanent representative is ordered. It was previously disputed whether the Managing Director of a corporation can also qualify as a permanent representative within the meaning of § 13 AO. § 13 AO.
The Federal Fiscal Court (BFH) issued a ruling on 23 October 2018, published on 17 April 2019 (I R 54/16) ruled that the managing director of a corporation can be a permanent representative. This leads to limited corporation tax liability for the foreign company, even if it does not have a permanent establishment in Germany. The case decided by the BFH concerns a Luxembourg public limited company whose managing director regularly travelled to Germany to initiate, conclude and process gold transactions on its behalf. He maintained residences in Luxembourg and Germany. The BFH agreed with the opinion of the FA and assumed that the Luxembourg corporation was subject to limited corporation tax liability. According to Section 13 AO, a permanent representative is a person who manages the business of a company on a long-term basis and is subject to its instructions. According to the purpose of the law and its wording, persons who are to be regarded as organs of the corporation under civil law can, in principle, also be permanent representatives under tax law.
Practical noteForeign corporations with managing directors who regularly reside in Germany and conduct the company's business on a long-term basis should check whether this triggers a limited tax liability in Germany (with corresponding tax declaration obligations) for the foreign corporation. In group structures or when using foreign holding companies for outbound investments by German investors, it is often not advisable to involve managing directors resident in Germany in foreign companies.
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