Taxation

Question 1

Difference between limited and unlimited liability

Answer 1

Limited: only specific income items with link to Germany subject to tax

Unlimited: worldwide income is subject to taxation in Germany

Question 2

Unlimited tax liability conditions (individuals)

Answer 2

• residence (available residence, not holiday home)
• habitual abode (stay in Germany >6 months per year)

Question 3

Limited tax liability conditions (individuals)

Answer 3

If residence or habitual abode conditions are not fulfilled –> limited liability might exist and apply to specific German income items

Question 4

Unlimited tax liability conditions (corporations)

Answer 4

• seat (where corporate seat is declared to be)
• place of management (where effective mgmt. decisions are taken)

Question 5

Double taxation issues for corporations

Answer 5

Corporations always have shareholders –> at least two levels of taxation (corporate and individual)
Can result in double taxation (corporate income + dividends)

Question 6

Withholding taxes

Answer 6

withheld and preliminary payment of taxes – e.g. salary taxes, capital income taxes

Question 7

Alternative to withholding taxes

Answer 7

• Regular concept: assessment of tax burden vs paid taxes at end of the tax year
• Issue with regular concept: taxpayer might not have funds / already spend money to pay for old due taxes

Question 8

Purpose of international tax rules

Answer 8

• Avoiding double taxations
• Avoiding white income / low laxation
• Verification of effective tax payments in respective country
• No profit shifting to low taxed countries / unreasonable reduction of tax base

Question 9

Inbound taxes - issues and obligations for DE

Answer 9

• no double taxation issue: limited liability in DE
• no white income issue: Potential white income cannot be handled in the country of limited tax liability
• main issue for DE is the verification of tax payments –> withholding taxes

Question 10

Outbound taxes - issues and obligations for DE

Answer 10

• Avoidance of double taxation: taxable income reduced by taxes paid in foreign country. Remaining taxed at DE rate
• Avoiding white income

Question 11

Controlled foreign company (CFC) taxation

Answer 11

German tax authorities can “look through” foreign corporation and tax German shareholders directly

Conditions:
- >50% shareholders unlimited tax liability in DE
- Corporation has passive income

Question 12

End of unlimited tax liability in DE

Answer 12

• Taxpayer moves abroad, DE loses taxation right in the future and to hidden reserves
• Special tax triggered –> business assets and corporate shares are taxed before profits / capital gains are realised (deemed disposal and final taxation in DE)

Question 13

Extended limited tax liability

Answer 13

DE citizen with substantial economic interest in Germany remains tax liable (limited) in Germany after moving abroad

Question 14

BEPS

Answer 14

• base erosion and profit shifting
• transfer agreements btw. persons/corporations in different countries can be (mis)used to shift profits to low-tax countries
• therefore, transfer agreements must comply with arm’s length principle

Question 15

Double taxation avoidance: exemption method

Answer 15

treaty allocates taxation right of specific income item to one country –> other country must exempt item from tax

Question 16

Double taxation avoidance: credit method

Answer 16

treaty allocates taxation right of specific income item to one country –> other country must deduct taxes paid i.e. taxpayer always ends up paying the higher tax rate

Question 17

Reasons for bilateral tax treaties

Answer 17

• Countries have different interests
• No legislator or tax imposed at international level (not considering EU)
• Focus of international tax law is allocation of taxation rights btw. different countries

Question 18

Purpose and conditions of tax treaties

Answer 18

• aim to avoid double taxation / white income / low taxation / profit shifting
• treaty always has “residence” or “seat country” and “other country” –> treaty must define primary country of residence for purpose of treaty application
• possible to have unlimited tax liability in two countries according to national law (e.g. residence in two countries), but not possible in double taxation treaty

Question 19

Issues with tax treaties

Answer 19

• If terms are not defined in treaty, each contracting state uses own definitions i.e. might not apply treaty the same way –> double taxation
• In most countries (also DE), national tax law is considered more important than tax treaties –> might apply special provisions that breach international tax treaties –> double taxation
• If not successful in applying for tax exemption in either country, taxpayer can request tax authorities to reach a mutual agreement to avoid double taxation