Germany: Trade Tax Versus German Foreign Tax Act

In the case of dispute, the plaintive Corporation (GmbH) was the sole shareholder of a Singapore Ltd.. The achieved revenues of the German GmbH was qualified as passive income (interest and exchange differences) as defined in § 8 of the AStG. The additional amount of the Gmb was based on §10 AStG but was only subjected to corporation tax instead of trade tax too. In the course of the trade tax return the GmbH reduced the additional amount under application of § 9 no. 3 GewStG. This procedure followed neither the tax authorities nor the finance court of the first instance. But in consequence the German Federal Fiscal Court has canceled the previous decision because the refusal of the trade tax reduction was not legally justified. 

The German Federal Fiscal Court argued that the additional amount under paragraph 10 section 1 sentence 1 AStG is part of the trade income of a domestic enterprise, not situated within a domestic permanent establishment deleted. Therefore the profit of a domestic company has to be reduced by this amount which does not apply to the domestic permanent establishment. 

The Foreign Tax Act explicit qualifies the additional amount for corporate income tax purposes (e.g. dividends) as capital income by legal fiction. 

Any other interpretation would produce improper results. In consequence the inclusion of the additional amount would lead to an unsystematic double taxation. Therefore foreign taxes that are levied on intermediate company’s attribution of profit would be taken into account only for income tax or corporation tax but would not diminish the trade tax. 

The judgement of the German Federal Court is to be welcomed and for the practice of high relevance. In particular the decision leads to legal certainly. The elimination of unequal taxation treatment considering domestic taxpayers with or without a foreign subsidiary company regarding the possibility of tax imputation (corporate income tax or trade tax) was removed.

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