The German Corporate Tax Landscape
Before delving into tax-optimized repatriation strategies, it’s essential to understand Germany’s corporate tax framework. The country has a two-tier tax system comprising corporate income tax (approximately 15%) and a municipal trade tax (averaging between 14% to 17%, depending on the municipality).
One of the most common methods for repatriating cash is through dividends. However, Germany levies a withholding tax on dividends, which stands at 25% plus a solidarity surcharge. Thankfully, double taxation treaties (DTTs) between Germany and many countries often reduce this rate. Ensuring that dividend repatriation is done in accordance with a DTT can be a primary tax optimization strategy.
Utilizing the EU Parent-Subsidiary Directive
For companies based in the EU, the Parent-Subsidiary Directive can be a boon. It aims to eliminate double taxation on profit distributions between associated companies in different Member States. If a parent company in another EU state holds at least 10% of a German subsidiary for a minimum of 12 months, withholding tax on dividends might be eliminated.
Dividend relief claim based on the Parent-Subsidiary Directive or a DTT? Mind the German Anti-treaty Shopping rule!
Even if a company has a withholding tax relief claim, such a claim can be lost on the basis of the German infamous Anti-Treaty Shopping rule. A certain enomic substance is required to not pay German withholding tax permanently.
Intercompany Loan Repayments
Instead of distributing profits as dividends, another tax-efficient method can be the repayment of intercompany loans. This strategy reduces the subsidiary’s taxable profits, and since loan repayments aren’t subject to withholding tax, it can offer a more tax-efficient repatriation route. But, be carful that your loans are at arm’s length.
Capital Reduction and Share Repurchase
Companies can also return money to shareholders by reducing their share capital or repurchasing shares. While this strategy is more complex and involves legal processes, it can be tax-efficient since it might not be subject to the usual withholding taxes applicable to dividends.
Considerations for Royalties and Service Fees
Another avenue for repatriation is through royalties or service fees. Germany’s vast network of DTTs often includes provisions that can reduce withholding tax rates on royalties. Similarly, charging a foreign parent or affiliate for management or other services can serve as a repatriation strategy, though it’s vital to ensure that the fees are in line with the arm’s length principle to avoid transfer pricing issues.
Reinvestment Instead of Immediate Repatriation
If there isn’t an immediate need for the cash, reinvesting profits in Germany can be tax-efficient. Not only does this strategy delay repatriation taxes, but it also allows the capital to grow, potentially providing more significant returns when eventually repatriated.
Liquidation or Exit
While a more drastic measure, liquidating the subsidiary or selling the shares of the German company can be another means to repatriate cash without triggering German WHT. A sale of German shares is often tax-exempt.
Use of the tax deposit account
Payments from the tax deposit account are tax-free. There is a statutory order of use and, as a rule, taxable profits are distributed first. However, depending on the individual structure, there may also be arrangements to access the tax deposit account directly.
Staying Updated and ask for professional advice
Germany’s tax laws and regulations, much like its international commitments, are constantly evolving. The OECD’s Base Erosion and Profit Shifting (BEPS) project, for instance, has brought about significant changes in international tax strategies. Staying updated with these changes can ensure that repatriation strategies remain efficient and compliant.
Given the intricate nature of tax laws and the high stakes involved, consulting with tax and legal experts familiar with both German and international tax landscapes can be invaluable. They can provide tailored strategies, ensure compliance, and help navigate the complexities of cash repatriation.
Tax-optimized way of cash repatriation in Germany is a multifaceted topic that requires a deep understanding of both domestic and international tax environments. While there are multiple avenues to efficiently repatriate cash, each has its nuances, benefits, and challenges.
Companies and investors looking to move their profits out of Germany must take a holistic view, considering not only the tax implications but also business needs, growth strategies, and long-term objectives. With the right approach and expertise, cash repatriation can be both tax-efficient and conducive to a business’s overarching goals.
Feel free to contact GHS for professional advice!