[ESTABLISHING A BUSINESS ENTITY IN GERMANY]
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expenses. Inter alia interest and rental expenses are not fully deductible for trade tax purposes. Dividends: A shareholder who is a foreign tax resident is subject to limited tax liability with regard to dividends from the German entity. A dividend triggers withholding tax plus solidarity surcharge in the aggregate amount of currently 26.375 %. However, there are certain tax reliefs according to which the foreign shareholder may claim a refund of the withholding tax or an exemption from the withholding (the latter with the consequence that the German company does not have to withhold any tax on the dividend). This applies to dividends received by a foreign corporation which is a resident of a member state of the EU and holds at least a 10 % stake. If the shareholder is not a resident of the EU, but subject to a double taxation treaty, the tax reliefs provided for in the treaty apply. Most double taxation treaties limit withholding tax on dividends to 5 %, if the shareholder is a corporation and holds at least 25.0 % and to 15 % in all other cases. The foreign shareholder may apply for a refund or an exemption from the withholding to the extent that the German withholding tax exceeds the limit under the double taxation treaty. The German Income Tax Act provides for anti- treaty-shopping rules according to which the tax reliefs are subject to certain substance requirements to be met by the foreign shareholder. The requirements have been subject to frequent changes, in particular, due to decisions of the European Court of Justice. The legal situation is still in flux and is to be assessed in the light of the current wording of the legal provision, the announcements of the tax authorities and current case law. Of special importance is the escape clause of the current legal provision according to which the anti- treating-shopping rules shall, in particular, not
apply if the foreign shareholder proves that none of the main purposes of its involvement is to obtain a tax advantage. Capital gains: If the foreign shareholder holds at least one percent in the German entity, a capital gain is subject to German corporate income tax (if the shareholder is a corporation) or income tax (if the shareholder is an individual). The EU does not provide tax relief for capital gains. However, according to almost all double taxation treaties concluded by Germany, a capital gain realized by a foreign shareholder with regard to shares in a corporation having its tax residence in Germany is tax-exempt in Germany. If the foreign shareholder is not subject to a double taxation treaty, tax exemptions under German tax law may apply. Interest on shareholder loans: Interest income from shareholder loans paid by the German entity to its shareholder is generally not subject to taxation in Germany. Especially, no withholding tax accrues. According to the former thin-capitalization-rule, interest on shareholder loans had been subject to reclassification into a dividend with the consequence that such reclassified interest was not tax-deductible and subject to withholding tax. However, the thin-capitalization-rule has been abolished and replaced by the interest barrier (Zinsschranke)), which limits the deduction of interest expenses to 30 % of the taxable EBITDA. The interest barrier only applies if the aggregate net interest expenses of a fiscal year amount to at least EUR 3.0 m. Up to this threshold interest on loans (including loans from foreign shareholders) is fully deductible for tax purposes to the extent that they comply with arms’ length principles. Debt push down: If a foreign investor wants to acquire an already existing German enterprise, the interposition of a German acquisition
ILN Corporate Group – Establishing a Business Entity Series
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