Foreign post box firm evades domestic taxation
In the ever-evolving global business landscape, companies with foreign operations often face complex tax implications under German international tax law. To avoid double taxation and ensure compliance, it is essential to understand the key requirements for a foreign business operation.
Firstly, a foreign business operation must not be considered a permanent establishment (PE) in Germany. This means that there should be no fixed business establishment in Germany, and no employees permanently based there. All essential management and decisive business activities should be conducted abroad [1].
Secondly, the foreign management company should serve only in a service capacity without decision-making powers in day-to-day business. Powers of attorney should be limited to operational activities to avoid creating a PE [1].
Thirdly, clear evidence that essential management decisions are made outside Germany is crucial. A proper division of roles between the foreign entity and any German-related company is necessary [1].
Substance abroad, such as offices and employees, supports the no-PE status but is not strictly mandatory [1].
Companies should also consider double taxation treaties that Germany has with other countries. These treaties allocate taxing rights and provide relief mechanisms such as tax credits, exemptions, or reduced withholding tax rates to prevent double taxation on the same income [2][5].
Compliance with German corporate tax and trade tax rules is necessary, including filing German tax returns if the company has taxable presence or income in Germany [1][3].
In summary, avoiding double taxation requires establishing that the foreign business has no PE in Germany and that its management and business decisions occur outside Germany, supported by proper documentation and organizational structures. Leveraging applicable double taxation treaties for additional relief is also advisable [1][5].
If a PE is deemed to exist (for example, by having an office or employees in Germany making essential management decisions), the foreign company might be subject to tax in Germany on the income attributable to that PE, risking double taxation without treaty relief [1].
It is crucial for companies establishing business operations abroad to examine and comply with these legal requirements. The judgments of the Federal Finance Court from December 2024 (Case No. I R 47/21 and I R 39/21) confirm these requirements [4].
For a comprehensive understanding of these complex tax implications, companies should have their foreign structures reviewed by a tax professional such as Holger Schindler, an attorney and tax advisor [6].
[1] German Federal Ministry of Finance [2] German Double Taxation Treaties [3] German Corporation Tax Act (AO) [4] Federal Finance Court (Bundesfinanzhof) [5] OECD Model Tax Convention on Income and Capital [6] Holger Schindler, Attorney and Tax Advisor, Stuttgart, Germany
- To adhere to the economic and social policy of minimizing double taxation, it is essential for foreign business operations to ensure they do not constitute a permanent establishment (PE) in Germany, mainly by keeping no fixed business establishment in Germany, no employees with permanent residency, and conducting all essential management and decisive business activities abroad.
- In the process of finance management, companies with foreign business operations should consider the double taxation treaties between Germany and other countries, as these treaties help allocate taxing rights, provide relief mechanisms, and prevent double taxation on the same income.
