Zero Income Procedure
The zero income method is a method of avoiding double taxation of dividends and profits from the sale of shares between a corporation with unlimited tax liability in Germany and a domestic or foreign corporation . It results from the parent-subsidiary directive of the European Community and applies to all states of the European Economic Area . Through an option in the guideline, it is used either in its pure form or as a so-called modified zero income method.
The Federal Republic of Germany , France and Belgium are the only states that have opted for the modified zero income method. In other countries, distributed profits are completely tax-exempt.
Directive
Flow of a parent company or its permanent establishment because of their involvement in a subsidiary profits, which shall, except when the subsidiary is liquidated, the State of the parent company and the State of the permanent establishment either do not tax these profits or leave in the case of taxation, that the parent company and the permanent establishment can offset the tax portion that the subsidiary and any sub-subsidiary pays for this profit up to the amount of the corresponding tax liability. For the dividends distributed by the subsidiary, zero income is to be recognized at the parent company (the tax exemption method is in fact applied).
For the administrative costs associated with the participation, however, according to Art. 4 para. 2 MT-RL a lump sum can be determined (modified zero income method). This amount may not exceed 5 percent of the profits distributed by the subsidiary. Nevertheless, business expenses that are economically related to tax-free dividend payments may be taken into account for tax purposes without restriction.
Legal situation in Germany
In Germany, the provisions of the directive were incorporated into the Corporation Tax Act (KStG). In the case of a corporation, association of persons or assets within the meaning of § 1 KStG that has unlimited tax liability in Germany and which holds shares in a domestic or foreign corporation, pursuant to § 8b KStG certain income from capital assets in the determination of income other than approach, in particular
- Dividends as well
- Profits from the sale of shares in corporations.
This does not apply to 5 percent of the remuneration, which according to Section 8b KStG may not be deducted as operating expenses (modified zero income method). So 95 percent of the earnings are materially exempt from taxation. Originally, the paragraph only applied to holdings in foreign corporations. The result was a systematic unequal treatment of domestic and foreign participations, which was exposed to constitutional concerns. Especially after the Bosal ruling by the European Court of Justice, critical voices increased in financial jurisprudence and in academic literature.
As a result, on December 23, 2003, the German legislature decided to extend the five percent rule to all holdings. The new legal situation came into force in 2004, since then capital gains have also been recorded (see above).
