External Tax Act (Germany)

Basic data
Title:	Law on Taxation for Foreign Relations
Short title:	External Tax Act
Abbreviation:	AStG
Type:	Federal law
Scope:	Federal Republic of Germany
Legal matter:	Tax law
References :	610-6-8
Issued on:	September 8, 1972 ( BGBl. I p. 1713 )
Entry into force on:	September 13, 1972
Last change by:	Art. 4 G of March 25, 2019 ( Federal Law Gazette I pp. 357, 358 )
Effective date of the last change:	March 29, 2019 (Art. 15 G of March 25, 2019)
GESTA :	D021
Weblink:	Text of the law
Please note the note on the applicable legal version.

The German Foreign Tax Act (AStG) aims to ensure that taxation in Germany takes place for at least a certain period of time, even if income or assets are relocated abroad.

The AStG was introduced in 1973 and has been changed many times since then. It is a special law with regulations that affect several individual tax laws , namely the Income Tax Act , the Corporation Tax Act , the Trade Tax Act , the Inheritance Tax and Gift Tax Act as well as the wealth tax , which, however, has not been levied since 1997.

The tax authorities have issued extensive instructions on the application of the AStG.

introduction

The background to the reorganization of German foreign tax law in 1972 was a debate about tax evasion initiated by the German department store entrepreneur Helmut Horten . Horten moved to Switzerland with his wife Heidi in 1968 and in the same year converted his department store group Horten from a GmbH to an AG. In the following years he gradually sold all of his shares for 1.13 billion Deutschmarks . According to Swiss law, no tax was due on this and hoarding was no longer taxable in Germany. A double taxation agreement with Switzerland did not exist at the time, but would not have changed the legal consequences, since Art. 13 Para. 5 DBA DE-CH (corresponds to the OECD model convention) assigns the right to tax to the country of residence. Therefore, the AStG (or in particular the exit taxation of § 6 AStG) is still called " lex hoarding".

The following problem arose: A natural person with domicile or habitual abode in Germany and a legal person (e.g. a GmbH or AG ) with the seat or the location of the management in Germany are subject to unlimited taxation under German tax law , i . In other words, they are generally subject to German income tax or corporation tax on their worldwide income .

These persons can reduce their German taxation by

• relocate their place of residence or their seat / place of management abroad in order to avoid unlimited tax liability. This is often referred to as tax evasion .
• Establish or acquire legal entities (e.g. companies , foundations ) abroad and transfer income and assets to these legal entities in order to shield them from domestic taxation.

This tax avoidance is legal, so it is to be distinguished in particular from tax evasion (criminal offense, § 370 Tax Code ), the characteristic feature of which is deception or concealment with regard to tax-relevant facts towards the tax authorities and which has nothing to do with the AStG.

Nevertheless, this tax avoidance is undesirable from a fiscal point of view, which is why the AStG is intended to prevent or make it more difficult.

Structure of the AStG

The AStG consists of seven parts:

• First part: International interrelations
• Second part: change of residence to low tax areas
• Third part: Treatment of a participation [...] when changing residence abroad
• Fourth part: Participation in foreign intermediate companies
• Part five: family foundations
• Part six: investigation and procedure
• Seventh part: final provisions

The sixth ( Sections 16 to 18 AStG) and seventh parts ( Sections 19 to 22 AStG) are not discussed in more detail below, as they essentially contain provisions on the procedure and the initial application of the provisions of the first five parts.

First part: International interrelations

§ 1 AStG

This part of the AStG contains the general principle is taxable that the definition of terms in business relationships with related parties on the orient have what would have been agreed between third parties (so-called arm's length ), otherwise the taxable income can be obtained by the financial management corrected accordingly be .

The term related person is defined in Section 1 (2) AStG. Companies that belong to the same group are particularly affected .

This regulation aims at B. on "inappropriate" pricing for goods and services between group companies, with the aim of exploiting the international tax differential (the prices are chosen in such a way that the profit is incurred in the country with the lower tax rates ).

Second part: change of residence to low tax areas

§§ 2 to 5 AStG

As already explained in the introduction, a natural person can withdraw from the domestic unrestricted tax liability (i.e. the tax liability on their worldwide income) by relocating their place of residence abroad . It is then only subject to the so-called limited tax liability , i.e. In other words, only income with a special domestic connection (e.g. profits from a business in Germany, rents from domestic real estate ) is included in German taxation.

In order to reduce the incentive for this, § 2 AStG postulates an extended limited tax liability when the unrestricted tax liability is terminated by relocation of residence abroad , if the following conditions (shown here somewhat simplified) are cumulatively met:

• Relocation to a low-tax area ( low-tax country )
• In the ten years prior to the departure, the taxpayer was subject to unlimited tax liability as a German citizen for at least five years (note: it is noteworthy that this is linked to nationality, which is practically never the case in German tax law)
• The taxpayer still has significant domestic economic interests.

If these conditions of the extended limited tax liability are met, additional income is subject to German income tax for a period of ten years in addition to the limited tax liability , unless this is excluded by a double taxation agreement .

This includes e.g. B. Interest on credit balances at domestic banks that would otherwise not be subject to German income tax for persons with limited tax liability.

Section 4 contains a comparable regulation for inheritance and gift tax , which is aimed at cases in which the donor / testator relocated abroadprior to the donation / inheritance . Section 3 of the AStG old version, which has now been repealed, contained a similar provision for the wealth tax that has not been levied since 1997.

The AStG does not contain any regulations for legal persons to withdraw from unrestricted tax liability by relocating their registered office and place of management. These cases are regulated in Section 12 of the Corporate Income Tax Act.

Third part: treatment of a participation within the meaning of § 17 EStG when changing residence abroad

→ Main article : Exit taxation

Section 6 AStG

Sold a resident within the country their (up to and including 2006 assessment period domestic ) participation in a GmbH , or their shares in a AG , the profit from this transaction is subject, under certain conditions (participation of at least 1% of the share capital) of the German income tax ( § 17 Abs . 1 EStG). Before the introduction of the AStG, this taxation could be avoided by the shareholder relocating his domicile abroad before the sale of the participation and thus withdrew from the unlimited tax liability.

§ 6 therefore AStG determined that the shareholders of at least ten years has been fully taxable, is taxed at a change of residence to a foreign country as if he shares in the (up to and including the tax period 2006 domestic ) GmbH or the shares at market value would have sold. A fictitious capital gain is therefore subject to income tax (so-called exit taxation ), whereby the tax can be paid in up to five equal annual installments upon request. In addition to the purely emigration offense, Section 6 AStG alsoknowsseveral substitute offenses.

If the taxpayer moves to another EU / EEA country, the tax will be deferred ex officio without interest until the units are actually sold or the person moves outside the EU / EEA. However, a notification obligation is linked to this deferral. The background to this regulation is the judgment of March 11, 2004 (C-9/02, Hughes de Lasteyrie du Saillant vs. Ministère de l'Économie, des Finances et de l'Industrie) of the European Court of Justice . The ECJ had ruled that the French exit tax contradicts the requirement of freedom of establishment in the EC Treaty if the residence is relocated to another EU member state . Since the French exit taxation was similar to the previous German one, it was highly likely that Section 6 AStG would no longer apply when changing residence within the EU.

The EU Commission had therefore initiated proceedings against Germany for violating the EC Treaty. For this reason, the German legislator has changed § 6 AStG with the "Law on Tax Accompanying Measures for the Introduction of the European Company and for the Amendment of Other Tax Regulations (SEStEG)" passed on December 7, 2006 and, if moving within the EU or the EEA, a Interest-free deferral of the tax due until the participation is actually sold or the place of residence is relocated to a country outside the EU or the EEA.

Fourth part: Participation in foreign intermediate companies

§§ 7 to 14 AStG

The fourth part of the AStG is the most important (and the most complicated) in practice. It regulates the so-called additional taxation , d. This means under what conditions the income of a foreign subsidiary can be added to its domestic shareholders for taxation purposes.

The ECJ has in the Cadbury Schweppes decision an add-back for only the freedom to be compatible, though objectively abuse has occurred to utilize different levels of taxation. Whether the fourth part of the AStG corresponds to this is currently disputed.

Problem

As already explained in the introduction, a resident (natural or legal) person can reduce their income tax or corporation tax by shifting their income and assets to a subsidiary abroad (typically in a low-tax country). Due to the legal independence of the foreign company, its income and assets are shielded from German taxation.

So could z. B. a taxpayer deposit his bonds and shares in a foreign subsidiary . The interest and dividends incurred by the company would not be subject to German taxation as long as this income is not distributed to the shareholders in Germany.

Requirements for additional taxation

The requirements for additional taxation are the following:

• Unlimited taxpayers hold more than half of the shares in a foreign company . Note: If there is certain “particularly bad” income (so-called interim income with capital investment character ), a participation of one percent or less is sufficient if the foreign. Intermediate company only generates gross investment-like income.
• The foreign company generates “passive” income .

What passive income is (in the wording of the law: "Income for which the foreign company is an intermediate company") is defined in § 8 AStG using a negative catalog, i. This means that active (“good”) income is defined, all income not to be subsumed there is passive (“bad”) income.

Without exception, active income is only income from agriculture and forestry , the production, processing, processing and assembly of things , the generation of energy , the search for or extraction of mineral resources and dividends from other companies (to avoid double taxation).

For all other income, activity or passivity is to be determined using the complex, deeply nested rule / exception criteria of the negative catalog.

Example:

• Trading (in goods) is generally active (as a rule)

• unless the trade takes place with the unrestricted taxable partners of the foreign company or with their related parties (exception to the rule: passive)

• unless “the taxpayer proves that the foreign company maintains a business operation set up for such commercial transactions in a commercial manner […] and that the activities involved in preparing, concluding and executing the transactions without the participation of a [shareholder with unlimited tax liability] or a […] closely related person. ” Section 8 (1) No. 4, second half-sentence AStG (exception to the exception: active).

• Passive income is subject to low taxation . According to the current version of the AStG, this is given if the foreign tax is less than 25%. The legislature has based itself on the previous tax rate (tax law) of German corporation tax , which has now been reduced to 15%.

Consequences of additional taxation

If the prerequisites for additional taxation are met, the passive income of the foreign company minus the foreign taxes due on it is added to the taxable income of the shareholder with unlimited tax liability in proportion to his participation in the nominal capital of the company and is subject to German taxation.

The additional amount is treated like a fictitious dividend from the foreign company to the unrestricted taxpayer, whereby tax benefits that are normally granted for dividends (e.g. the half-income method ) do not apply.

Part five: family foundations

Section 15 AStG

A domestic resident natural person can reduce their income tax by transferring their assets to a foreign foundation . Foundations are generally regarded as independent tax subjects, so the income and assets of a foreign foundation are shielded from German taxation.

This shielding effect of foreign foundations in the case of a family foundation is broken by § 15 AStG ; Such is the case if more than half of the founder and certain family members are entitled to accruals or receive benefits. The income and assets of a family foundation are allocated proportionally to the beneficiaries or those entitled to benefits.

Web links

• Text of the external tax law

Individual evidence

1. ↑ Principles for the application of the External Tax Act of May 14, 2004 , Federal Tax Gazette. I special number 1/2004 p. 3
2. ↑ https://www.iww.de/pistb/archiv/aussensteuergesetz-die-wegzugsbesteuer-von-horten-bis-de-lasteyrie-du-saillant-f42713
3. ↑ Martin Walser: Always up to date: On the occasion

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