Relocating production abroad -
BFH ruling with new prospects for entrepreneurs
In today’s global business world, companies are constantly looking for ways to increase their efficiency and competitiveness. One common practice is to relocate production processes abroad. But what are the tax implications of this?
A recent ruling by the Federal Fiscal Court (BFH) from August 9, 2023 (Ref. I R 54/19 ) provides important insights for production relocations. Specifically, the case concerned a medium-sized automotive supplier in Germany that outsourced part of its production to a sister company in Bosnia-Herzegovina.
The following summary relates to the relocation of production in the judgment case. However, the explanations are also relevant for other functions in the company. These cases are generally referred to as relocations of functions.
Overview
The case in detail
The relocation of production abroad in the case in question is as follows:
The German parent company sold materials such as parts, components and raw materials to its foreign sister company at cost price. The latter then took over the production of certain parts and delivered the finished products back to the German company.
By 2012, the German parent company had bought back all products manufactured by the foreign sister company.
From 2013, the situation changed: the foreign sister company was now able to generate its own sales by selling the products it manufactured to a former customer of the German parent company.
Disagreements arose with the financial administration regarding the pricing of these internal transactions.
The tax office considered this to be a hidden profit distribution (vGA) in accordance with § Section 8 (3) sentence 2 of the German Corporation Tax Act (KStG) and a correction according to § Section 1 (1) of the Foreign Tax Act (AStG) as necessary.
The plaintiff, i.e. the German parent company, disagreed with this assessment and went to court.
This ultimately led to a decision by the Federal Fiscal Court (BFH) on the correction of income when production is transferred to a sister company abroad.
The main points of the judgment
1. subordination of § 1 para. 1 AStG
The BFH ruled that § Section 1 (1) AStG takes precedence over other income correction rules. This means that this provision is only applied if other rules do not allow sufficient corrections.
In the case in dispute, this interpretation led to the sole application of the hidden profit distribution in accordance with § Section 8 (3) sentence 2 KStG .
2. causal relationship in case of relocation of production
The BFH doubted whether there must always be a causal relationship between the restriction of functions in Germany and the exercise of functions abroad. This relates in particular to the question of whether a relocation of production only exists if the restriction of functions in Germany has caused the outsourcing abroad.
In order to fulfill the definition of relocation of production, it is initially irrelevant whether the function could continue to be performed in Germany in the future without restriction. In the context of the arm’s length comparison, the only decisive factor is whether a third party would have been prepared to pay remuneration for the function.
3. transfer of the former customer does not trigger a transfer of functions on the merits
In this case, the BFH did not consider any function to be transferred, as the production for a specific customer was not considered an organic part of the company. The production for this customer was not regarded as independent production within the company, but as a special customer order.
4. transfer of a customer relationship as vGA
The BFH pointed out that the transfer of an existing customer relationship to a sister company can constitute a hidden profit distribution.
This means that if a company transfers an existing business relationship with a customer to a sister company and forgoes future profits from this business relationship, this could have tax consequences.
Outlook
The BFH ruling contains statements of practical relevance to several disputes relating to the tax treatment of production relocations abroad.
It makes it clear that companies must pay attention not only to business aspects but also to tax aspects when designing their international business models.
It is advisable to find out about the tax consequences of such measures at an early stage.
Do you need tax advice to check whether the relocation of production abroad will trigger taxes for your company?
Please feel free to contact me!
Disclaimer
The article uses simple language for better understanding and is also abbreviated with regard to the individual conditions required by law.
This article does not constitute legal or tax advice, but is for general information purposes only. Every situation is individual, so I always recommend professional advice to avoid tax disadvantages.
Last updated August 2, 2024
