International Tax Law
AStG, Tax Treaties and Cross-Border Structures
Cross-border corporate and asset structures raise questions of CFC taxation, permanent establishments, double taxation treaties and exit taxation that call for early clarification.
CFC taxation under §§ 7–14 AStG
German CFC taxation (Hinzurechnungsbesteuerung) prevents passive income — from financing, licensing or pure asset management, for example — from being shifted to low-taxed foreign companies and retained there without triggering German taxation. Where it applies, the income of the foreign company is attributed pro rata to the shareholder subject to unlimited German tax liability, irrespective of whether a distribution has actually been made.
Three conditions must coincide
- ControlPersons subject to unlimited German tax liability hold more than 50% of the foreign company (§ 7 AStG); for capital investment income, a shareholding of at least 1% already suffices.
- Passive incomeThe company generates income not listed in the exhaustive catalogue of active income in § 8(1) AStG — such as from financing, licensing of own rights without substantial in-house development, or pure asset management.
- Low taxationThe foreign company's effective income tax burden is below 15% (§ 8(5) AStG). The threshold was lowered from the previous 25% to 15% by the Minimum Taxation Directive Implementation Act (BGBl. 2023 I Nr. 397 of 21 December 2023), aligning it with the Pillar Two minimum rate — applicable for financial years of the intermediary company ending after 31 December 2023.
Low taxation threshold
Since the Minimum Taxation Directive Implementation Act (BGBl. 2023 I Nr. 397, previously 25%). What matters is the actual tax burden, not the nominal rate of the country of residence.
The legal consequence is full taxation of the CFC inclusion amount as investment income (§ 10(2) Sentence 1 AStG): the partial-income method, the flat-rate withholding tax and the participation exemption under § 8b(1) KStG are expressly not applicable to the inclusion amount under § 10(2) Sentence 4 AStG — unlike for a genuine profit distribution. Taxes actually paid abroad are credited under § 12 AStG. In practice, this primarily concerns holding structures, IP companies and intra-group financing vehicles in low-tax jurisdictions — an area in which the structure and substance of the foreign company should be set up to withstand documentation scrutiny from the outset.
Relief from foreign withholding taxes
Cross-border payments of interest, royalties and dividends are frequently subject to withholding tax in the paying state. Without relief, economic double taxation looms: tax in the source state and tax on the same income in the state of residence.
Foreign withholding tax on German investments
Relief is granted either directly at source (exemption under a DTT or the EU Parent-Subsidiary or Interest and Royalties Directive) or subsequently in a refund procedure with the foreign tax administration. The key requirement is regularly proof of residency in Germany (Certificate of Residence) and, where applicable, of beneficial ownership of the income.
German withholding tax on payments abroad
For recipients with limited tax liability, an exemption certificate under § 50a EStG reduces the German withholding already at the time of payment. The BEG IV extended the validity of this certificate from three to five years as of 1 January 2025 — an administrative relief for recurring intra-group payments.
In practice, refunds from the Federal Central Tax Office (BZSt) or the foreign tax administration often decide over liquidity tied up for several months. Structured preparation — complete residency certificates, substance documentation, timely filing — noticeably shortens this period.
Cross-border loss relief
Under the separation principle of German tax law, losses of a foreign subsidiary generally remain abroad — they are not automatically offset against the German parent company's domestic profits. With the concept of “final losses”, the ECJ has developed a limited exception since the Marks & Spencer decision (2005), which the courts have, however, gradually narrowed again ever since.
The practical consequence: anyone planning a foreign expansion with start-up losses should factor the loss question into the choice of structure from the start — for instance via a tax group (Organschaft) with actual loss absorption from the outset, rather than relying retrospectively on the narrowed concept of final losses.
Identifying permanent establishment risks
A permanent establishment can arise abroad without a separate company being founded — with the consequence that the state where the permanent establishment is located acquires its own right to tax the profit generated there. In practice, this risk is frequently underestimated because it does not depend on a deliberate business decision but on the actual circumstances on the ground.
- Fixed place of businessA fixed place at the company's own disposal, through which the activity is wholly or partly carried on (§ 12 AO, Art. 5(1) OECD-MC) — such as an office, a workshop or a permanently assigned workplace.
- Pure representative officeIf the activity carried on locally remains limited to preparatory or auxiliary functions (market observation, advertising, mere relationship management without authority to conclude contracts), there is regularly no permanent establishment under Art. 5(4) OECD-MC — since the BEPS reform, however, this exception has been construed more narrowly than before.
- Dependent agent / commercial agentWhere a person habitually acts abroad in the name of the enterprise and concludes contracts or plays the principal role in bringing them about, an agency permanent establishment can arise — irrespective of whether a formal office of its own exists.
- Subsidiary (inbound/outbound)A legally independent subsidiary does not in itself constitute a permanent establishment of its parent company. Caution is warranted with dual roles — for instance where the same managing director simultaneously acts as representative of the parent company and concludes contracts on its behalf.
For construction and assembly activities abroad, a separate permanent establishment time threshold applies (regularly twelve months under a DTT), with its own practical questions on calculating the period across several sub-projects. We cover these constellations in depth on our specialist page on construction and assembly activities.
Double taxation treaties and exit taxation
Double taxation treaties (DTTs) allocate taxing rights between two states and prevent the same income from being fully taxed twice. According to the current BMF circular on the status of double taxation treaties (7 January 2026), Germany maintains treaties with more than 90 states. The specific treaty text is always decisive — the allocation rules differ considerably by type of income and partner state.
Residency in dual-residence cases
If a person is treated as resident under the domestic law of both contracting states, the tie-breaker rule of Art. 4 of the OECD Model Convention determines treaty residence — tested in a fixed sequence: permanent home, centre of vital interests, habitual abode, nationality.
No DTT with the destination country
If there is no treaty with the state concerned, § 34c EStG offers unilateral relief: the tax paid abroad is credited against German income tax, provided German tax liability continues and the foreign tax is evidenced. This mitigates full double taxation, but does not always eliminate it completely.
Exit taxation under § 6 AStG
If a person subject to unlimited German tax liability who holds at least 1% in a corporation gives up their unlimited tax liability in Germany, § 6 AStG deems a disposal of those shares at fair market value — the hidden reserves are taxed although no actual sale takes place. The 2024 Annual Tax Act extended the scope to investment fund units as of 1 January 2025: for ordinary investment funds, the extension applies from a holding of at least 1% or acquisition costs of at least EUR 500,000 per fund (§ 19(3) InvStG). For special investment funds, by contrast, no threshold applies — any holding by a private individual is deemed covered (§ 49(5) InvStG).
Foreign foundations, trusts and international succession
If a family foundation or trust has its seat or place of management abroad, § 15 AStG attributes its income pro rata to the founder or the beneficiaries subject to unlimited German tax liability — irrespective of whether a distribution has actually been made. Since the 2009 Annual Tax Act, an escape clause applies: attribution does not occur if the founder and beneficiaries demonstrably have neither legal nor de facto power of disposal over the assets and sufficient exchange of information exists with the state of residence (§ 15(6) AStG). By its wording, the clause applies only to foundations with their seat or place of management in the EU or the EEA.
In four essentially identical judgments of 3 December 2024 (including IX R 32/22), the BFH declared this restriction contrary to EU law: the free movement of capital (Art. 63 TFEU) also applies vis-à-vis third countries, so founders and beneficiaries can since then invoke the escape clause for foundations and trusts outside the EU/EEA as well — in Switzerland, for example — provided the remaining conditions are met.
Anyone considering instead structuring international succession via a German family foundation — with its own questions around substitute inheritance tax, the participation exemption and compulsory share protection — will find the in-depth discussion on our dedicated specialist page.
Frequently asked questions
Questions to our tax advisors
Direct answers to the most frequent questions on international tax law — from the perspective of company management.
It applies when three conditions are met at the same time: control of the foreign company by persons subject to unlimited German tax liability of more than 50%, passive income outside the catalogue of active income under § 8(1) AStG, and an effective income tax burden of the company below 15% (§ 8(5) AStG, since the Minimum Taxation Directive Implementation Act, BGBl. 2023 I Nr. 397).
Relief is granted either directly at source on the basis of the applicable DTT or an EU directive, or subsequently in a refund procedure with the foreign tax administration. What is regularly required is a certificate of residence and proof of beneficial ownership of the income.
For German withholding tax on payments abroad, an exemption certificate under § 50a EStG reduces the withholding already at the time of payment. Its validity was extended from three to five years by the BEG IV as of 1 January 2025.
Only to a very limited extent. Under the separation principle, foreign losses generally remain abroad. The BFH has recently construed the exception narrowly: where a DTT provides for exemption, losses of an EU permanent establishment are not deductible even if they have become final abroad (BFH, 22 February 2023, I R 35/22). For subsidiary corporations, the BFH additionally requires a tax group already lived on an ongoing basis under §§ 14 et seq. KStG (BFH, 9 August 2023, I R 26/19).
Usually already through a fixed place of business at the company's own disposal (§ 12 AO, Art. 5 OECD-MC) or through a dependent agent who habitually concludes contracts for the enterprise — a separate office is not required for this. Purely representative and auxiliary activities remain exempt, but have been construed more narrowly since the BEPS reform. A legally independent subsidiary does not in itself constitute a permanent establishment of its parent company.
Without a DTT, there is in principle a risk of genuine double taxation if both states fully tax the same income. § 34c EStG offers unilateral relief: the tax actually paid abroad is credited against German income tax, provided German tax liability continues and the tax is evidenced. This credit does not always achieve complete elimination of the double burden.
When a person subject to unlimited German tax liability holding at least 1% in a corporation gives up their unlimited tax liability in Germany. § 6 AStG then deems a disposal of the shares at fair market value; the hidden reserves are taxed. Since 1 January 2025, as a result of the 2024 Annual Tax Act, the rule also covers certain (special) investment fund units.
§ 15 AStG attributes the income of a family foundation or trust with its seat or place of management abroad pro rata to the founder or the beneficiaries subject to unlimited German tax liability — irrespective of any actual distribution. Since the 2009 Annual Tax Act there has been an escape clause (§ 15(6) AStG) where founder and beneficiaries demonstrably have neither legal nor de facto power of disposal over the assets. Intended by its wording only for EU/EEA foundations, the BFH opened it to third countries by judgments of 3 December 2024 (including IX R 32/22) on grounds of the free movement of capital.
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International tax law is not a side topic of our firm — it is its core business. KWS supports your foreign structure from risk analysis through to the tax audit.
CFC taxation: review & structuring
Control, activity and low-taxation tests under §§ 7–14 AStG, exemption threshold review under § 9 AStG, structural design of foreign holdings and IP companies.
Withholding tax refund applications
Exemption certificates under § 50a EStG, refund procedures with the BZSt and foreign tax administrations, substance documentation against treaty shopping objections.
Cross-border loss relief
Case-by-case review of the current BFH line on final losses, structuring of tax groups with actual loss absorption from the very first year.
Permanent establishment risk analysis
Review of representative offices, agency situations and foreign projects for permanent establishment creation, profit attribution under the AOA (§ 1(5) AStG, BsGaV).
DTT interpretation, residency & exit
Tie-breaker review in dual-residence cases, advice on exit taxation under § 6 AStG including returnee cases and applications for suspension of enforcement.
Attribution taxation of foreign foundations
Review of attribution under § 15 AStG and the EU/EEA escape clause for family foundations and trusts with foreign elements.
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Advice backed by proven expertise
International tax law · AStG · Transfer pricing
Martin Blesgen
Graduate Economist (Dipl.-Volkswirt) · LL.M. (International Tax Law, WU Vienna) · Tax Advisor (Steuerberater) Managing Partner, KWS International Steuerberatungsgesellschaft mbH
Publications- Editor: “Transfer Pricing in Germany”, Verlag Otto Schmidt, Cologne
- Author: German VAT chapter, EU VAT Compass, IBFD Amsterdam
- Contribution in European Taxation, IBFD Amsterdam
- “Permanent Establishments of Insurance Companies”, in: “Permanent Establishments in International Tax Law”, Linde Publisher, Vienna
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This article provides a general overview of selected areas of international tax law and does not constitute tax advice in any individual case. In particular, the case law on cross-border loss relief, the constitutional assessment of the retroactive tightening of exit taxation for returnee cases and the ongoing legislative procedure to revise § 15 AStG continue to evolve. For an engagement-specific assessment, please contact us directly. → Contact