CMS Expert Guide on substance issues across Europe in Germany

While German tax law does not impose substance requirements on a company resident in Germany, specific rules exist for foreign companies. In recent years these rules have been revised to comply with EU law, implement ATAD and reflect BEPS Action 6 (prevention of tax treaty abuse). The upcoming implementation of ATAD 3 is expected to lead to a more formal approach and increased reporting obligations.

A company will be considered as tax resident in Germany if it has its registered office (as designated in the company’s articles of incorporation), or ‘place of central administration’ in Germany.

Registered office / seat means the statutory seat as determined in the statutes of the entity or by law. The place of central administration is the place where the company is managed and controlled. A fixed place of business is not necessarily required. The place of central administration is determined based on an overall assessment taking into account the structure and characteristics of the company.

German tax law provides for substance requirements in several provisions. The substance requirements are not aligned and there is no universal set of substance criteria under German tax law.

General substance criteria apply in outbound situations. More specific rules exist in relation to inbound structures (please see under ‘General requirements’).

In relation to inbound structures German tax law provides for a domestic anti-treaty shopping rule under which Germany denies treaty benefits to companies without sufficient substance solely established for the purpose of obtaining such treaty benefits.

Sufficient substance is deemed to exist if the company is listed on a recognised stock exchange (i.e., a regulated market under MiFID) and its main type of shares are significantly and regularly traded.

The substance of non-listed companies is determined on a case-by-case basis based on the following criteria:

• The company conducts an own economic activity to which the relevant source of income is linked
• It has appropriately organised business operations; and
• It does not merely pass-through income to its shareholders or beneficiaries

As a rule, a holding company needs to perform active management functions in order to comply with the requirements under the anti-treaty shopping rule.

A mere pass-through entity does not meet the substance test.

Human resources are considered as part of the overall substance assessment. No clear guidance exists, but sufficient personnel can be considered the strongest indicator of substance.

Like human resources, premises and equipment are considered as part of the overall substance assessment.

Bank accounts are of lesser importance in the German substance analysis.

There are no specific substance reporting obligations under German tax law.

Please see above under ‘General requirements’.

ATAD 3 contains more specific substance criteria and hopefully its implementation will make substance requirements more manageable in Germany. On the other hand, it has to be expected that documentation and reporting obligations will increase as well.