Traps When Optimizing the Tax Structure of a German Unit

FRANKFURT, GERMANY--(Marketwire - Dec 8, 2011) - Benefitax German chartered accountants in Frankfurt am Main, advises investors to examine the German tax system intensively and in a timely manner. Otherwise unpleasant surprises await. The tax rates on corporate profits are approximately 30% in major centers and somewhat less in rural areas. Since the tax rates are lower in many countries, the German tax authorities verify that the profit of the German subsidiary has not been reduced through measures internal to the company.

Losses can be carried forward for an unlimited time and loss set-offs with other group companies are sometimes possible. Withholding tax of 26.4% is usually deducted from distributions to shareholders. For EU parent companies or via double taxation treaties, withholding tax can be reduced to as low as zero percent. An application for exemption should be submitted several months before the distribution.

International tax planning can drastically reduce the group's corporate tax rate. According to Benefitax partner Oliver Biernat, the most common models are the substitution of dividends with loan interest, royalties or fees, or the use of foreign holding companies. For the latter, using a holding company without substance which merely consists of a mailbox in a tax haven must be avoided since those are not recognized by the German tax authorities.

An alternative is the definition of transfer prices for intragroup deliveries and services. The larger the German company is, the stricter the requirements for documentation of transfer prices and proof that they correspond to what would have been negotiated with third parties (dealing at arms' length). If adequate transfer price documentation is not provided within 30 or 60 days from the date the fiscal authorities make a request, they can make (high) estimates. Then the taxpayer is forced to pay unless proof of a different transfer price can be provided. Tax expert Biernat therefore has this advice: "Prepare transfer price documentation that meets the German regulations. In this case, the fiscal authorities have to prove that the chosen transfer price is incorrect. This is an effort the fiscal authorities will hesitate to make and only undertake when large sums are involved."

VAT, unknown in many countries, is accounting for an ever-growing proportion of tax revenues in Germany. The regular VAT rate is 19%. Errors, e.g. when issuing invoices, can get very costly. While German VAT law is largely harmonized with European law, it is very nontransparent and error-prone due to amendments, numerous exceptions and complicated, detailed rules.

For more information and to order our "Law and Tax Guide", visit: www.benefitax.com.

Benefitax is a tax consulting and public audit company in Frankfurt, Germany, focussing on financial administration of foreign owned German entities and international taxation.