Axiomatically, all individuals and companies from Europe, including Germany, are entitled to maintain their business from a registered business address in a more tax-favourable EU-country, thus benefiting from lower tax burdens on revenues. As a prerequisite for those advantages, the beneficial owners must be able to proof the presence of certain criteria, with the so-called criteria of “permanent establishment” being the most important one.
Regarding the criteria of permanent establishment, please read the related section below.

Germany tops all EU countries, when it comes to imaginativeness related to tax levy. Doing so, Germany does not shy away not to apply EU law knowingly and intentionally, though it is applicable in Germany as well. Instead, the Federal Ministry of Finances retreats in a quiet corner and waits until it’s forced by appropriate court, to give in at least in the court decision concerned points.

An important court decision of this kind for the application of the EU Parent-Subsidiary Directive was for example the ruling of the European Court of Justice regarding the Cadbury-Schweppes case (C-196/04, published on 12.09.2006). In that decision, the ECJ confirmed the EU-Freedom of establishment and recognized an CFC legislation, ruling the exisiting practice to tax dividends received from subsidiaries in another EU country as illegal. In its very detailed judgment the ECJ also noted that "the mere exploitation of existing tax gaps in tax levels within the EU, shall not be treated as such an abuse". More about the Cadbury-Schweppes decision in the appropriate section below.

The Federal Ministry of Finance has therefore modified in 2007 the Article 8, paragraph 2 of the Foreign Tax act (AStG). The Article 8 par. 2 AStG now excludes the “addition tax” (“Hinzurechnungssteuer” in German) for domestically controlled companies with a registered office or management in an EU Member State from where the company exercises a real economic activity, provided the taxpayer can prove it.

In order to eliminate any lack of clarity arising from other articles, the Federal Ministry of Finance also sent an instruction to its subordinate authorities, dated 08.01.2007, which confirms the impact of the Cadbury-Schweppes-decision and instructs lower tax authorities not to apply any “addition tax”, if the relevant conditions are met (> Criteria of “permanent establishments”).

 

Both the EU parent-subsidiary directive and the Foreign Tax Act, most double taxation treaties as well as relevant court rulings and by-laws require the existence of permanent establishments in the other EU State, in order to benefit from the lower taxes of the other EU State.

The recognition of a permanent establishment of the foreign company is subject to the existence of specific characteristics, which are designed by the German legislature, of course, as far as possible in its own favour.

However, if the following individual characteristics have been implemented, the characteristics of permanent establishemnts will be recognized as given, and the parties concerned will enjoy the tax incentives of the other country (source country) even in Germany.

A permanent establishment in the terms of the provisions of the Federal Ministry of Finance (Germany as well as other countries) is assumed if the following conditions are met:

1. The Company keeps an office in Cyprus with its own phone number, registered on its name, at which someone can be reached (answering machine is not enough). The head office should also be detectable by the accounts of the company’s running costs. We can provide this service.
2. The management of the Company will be recognizably undertaken from Cyprus. This could mean that you go to Cyprus and take over the management in person. Would you not do so, trust directors could be appointed. However, experience shows that German clients arise concerns in giving the management out of their hands. As a solution, we recommend three directors, thus an outward impression would’nt arise, that you lead the affairs as a dominant manager from the place of your residence. One of the directors would be the German investor, so this is you, the two other directors should be residents of Cyprus. We could also meet this condition for you.
   Another alternative would be two directors, the beneficial owner and a local director, provided that the beneficial owner travels to Cyprus twice a year and is able to proof that.
   Of course, the directors who are residents of Cyprus can also be appointed at the client’s option. It is also expected from the Federal Ministry for Finance, that the directors in Cyprus are competent persons (which excludes the previous usual nomination of not qualified persons), which generally have to be also reachable. We would also meet this condition for you. The Directors must be authorised to sign, in order to be able to perform verifiable their management task. However, one can make the statute so, that the exclusive authorisation to sign of the directors based in Cyprus is reduced to minimal issues and that important matters must be signed also by the German director. In addition, the Company may issue a full power of attorney to the German director for exclusive authorisation to sign.
   The local directors have to be employed directors (part-time possible). If necessary, contribution payment receipts from the Social Insurance have to be provided.
3. Depending on the volume of business, the company must employ a secretary (part-time possible), for general business and office tasks of the company. We would be able to provide adequate personnel. If necessary, contribution payment receipts from the Social Insurance have to be provided.
4. The company should send important offers etc. per email or letter from Cyprus, and should sign important agreements fully or partly in Cyprus and send such agreements to the other party from Cyprus.

As per the Federal Ministry of Finance and the relevant authorities of many other countries, the dividend-distributing company must actively generate income. The fact of actively generated income is deemed as given if the company runs its own permanent establishment (as above), because permanent establishments realize active income.
If a Cyprus Holding Company holds the shares of your “operative” Cyprus Company, perhaps for reasons of risk minimization, the holding company’s income from dividends paid by the “operative” company are always deemed to be active income (§8 section1 Nr.8 Foreign Transaction Tax Act, Germany), without the necessity of a permanent establishment of the holding company.
Would the holding company be a “stand-alone” company in Cyprus that holds shares of subsidiaries in other countries, for example in Germany, it would still generate active income, but not be fulfilling the criteria of a permanent establishment in the country of incorporation (Cyprus).

Please contact us for further details.

 

What are your alternatives, and what consequences would they cause?

Please read under "Examples" on the left about the applications offered through an EU company and about the structure most suitable for you.