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Germany: CFC rules, passive income of an investment character

Germany: CFC rules, passive income investment character

The Federal Tax Court (BFH) held that for the years at issue (2005-2007), the controlled foreign company (CFC) rules for passive income requiring an add-back of passive income with an investment character did not violate the free movement of capital under the EU treaty.


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The German CFC rules apply if a foreign company (owned by shareholders who are subject to unlimited tax liability) generates passive income and is subject to a lower rate of tax in the country or state where it is registered. By applying the CFC rules, the company’s income is allocated to the shareholder (that is, this income is subject to domestic taxation).

In the case before the court:

  • A domestic limited liability company (GmbH) owned 30% of a Swiss-resident stock corporation (AG).
  • The AG generated income from assigned cash receivables.
  • The German tax officials regarded the AG as a CFC within the meaning of German tax law. Consequently, the income from the assigned cash receivables was subject to CFC rules at the expense of the domestic GmbH as passive income with an investment character.
  • If the GmbH had owned a domestic corporation (that was comparable to the Swiss AG), there would have been no addition of the passive income with an investment character—which the taxpayer asserted would have been a restriction on the free movement of capital.

The court held that the standstill clause (that a rule does not violate EU law if it were already in existence on 31 December 1993 and had continued in existence since that date, essentially unchanged and uninterrupted) was not applicable because the CFC rules had been fundamentally changed by a German tax law in 2001.

Read a December 2019 report [PDF 355 KB] prepared by the KPMG member firm in Germany

The KPMG report also includes brief discussions of the following tax developments:

  • The Federal Tax Court (BFH) held that fees paid by a tour operator to hotel operators for providing hotel rooms are not subject to add-back for trade tax purposes.
  • The Frankfurt regional tax office addressed its position on abusive tax arrangements with regard to the repayment of shareholder loans that are made after the shareholder makes a capital contribution so that the loan can be repaid.

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