Tax benefits abroad -
How to benefit from low tax rates
Foreign countries offer low tax rates and as a German company you naturally want to benefit from this. In addition to the tax advantages, foreign business offers numerous opportunities to open up new markets.
In addition to the tax burden abroad, the choice of location depends on many other factors: Availability of employees, salary levels, infrastructure, geographical location, currency and political stability, to name but a few.
When expanding abroad, many companies usually focus on foreign countries. Companies are particularly attracted by the low tax rates abroad. However, there are also tax challenges in Germany that need to be considered.
In this article, you will learn how you can take advantage of the low tax rates abroad for your company.
Overview
Tax rates in comparison
In order to benefit from the low tax rates abroad, your corporate structure and the chosen legal form in the corporate group are important factors. The choice of foreign legal form is also decisive.
The total tax burden in Germany is approximately 48%* if the profits are distributed to the shareholder. This applies both if the German company is managed in the legal form of a partnership and in the legal form of a corporation.
*The tax burden of 48% is based on certain assumptions that are not discussed in detail here. In individual cases, the tax burden in your company may be different.
In contrast, foreign countries offer significantly lower tax rates, which can certainly arouse desires. Less tax means more profit for everyone involved.
Low corporate taxation can be found in Bulgaria (10%), Hungary (10.8%), Ireland (12.5%) and Cyprus (12.5%), for example. An overview can be found in chart 3 of the summary of the Federal Ministry of Finance.
However, it should be noted that the tax burden abroad may be based on a different assessment basis or may be achieved through special tax relief.
How you can take advantage of low tax rates abroad!
Establishment of a foreign subsidiary
If a German owner-managed corporation establishes a foreign subsidiary that is subject to foreign taxation of 10%, the total tax burden can be reduced to approx. 34%**. This applies both if the foreign company is established in the legal form of a corporation and a partnership.
This means that the German tax burden can be reduced by 14 percentage points by establishing a subsidiary in a low-taxed foreign country.
**Certain assumptions have also been made for these calculations, which may differ from your tax burden in individual cases. It is therefore always advisable to check your situation carefully.
The so-called SME model as a tax structure
Although the partnership as a legal form for foreign investments can be a fiscally attractive alternative to the corporation, a direct investment can become complex for the German corporate group under international tax law.
The SME model has established itself in practice, particularly for (family-run) medium-sized groups of companies, which are generally also set up as partnerships in Germany. The model is used for the optimal structuring of foreign activities.
The model in brief:
A German partnership holds an interest in a foreign partnership or permanent establishment via a German corporation.
There is an intercompany relationship between the two companies. The foreign partnership is subject to taxation abroad at a rate of 10%.
Under certain conditions, the profits of foreign partnerships are tax-exempt at the level of the German corporation.
As only the taxable income of the corporation is attributable to the German partnership due to the tax group relationship, the tax exemption of the foreign income is effectively passed on upwards.
Result:
The total tax burden for the foreign income in this model is 10%, whereas the tax burden for a direct participation in the foreign partnership can be 34%.
This structure naturally requires a certain amount of restructuring at German company level. It is also necessary to examine how foreign countries view this structure.
Key requirements for a lower tax burden
In my consulting practice, there is often an attitude that the low foreign tax rates can be easily achieved. This is a fallacy.
In order to benefit from the lower tax rates mentioned above, one important point must be observed: The foreign company must pursue an operational and active activity with a certain substance.
Otherwise, the foreign income is not exempt in Germany and is therefore taxed in Germany. There are several regulations that allow German taxation:
the so-called switch-over clauses in the respective double taxation agreement or § Section 20 (2) AStG or the so-called add-back taxation of § 7 AStG, § 8 AStG.
The SME model also requires that the German partnership originally generates commercial income.
PRACTICAL TIP
- Expansion abroad should be carefully considered. Many entrepreneurs are enthusiastic about the low tax rates abroad and do not consider the German tax consequences.
- Remember: In an international context, you always need substance abroad in order to benefit from tax advantages!
- Business Before Tax: Certainly, some countries offer low tax rates, but does it make business sense to move to this country for economic reasons?
Are you planning to expand abroad with your company and need tax advice?
I will be happy to support you in planning and implementing a tax-optimized structure.
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
