Transfer of Corporate Management Abroad - Mazars - Germany

For various reasons it can be advantageous to transfer or to concentrate corporate management abroad. Through MoMiG (Law for the Modernisation of the German Limited Liability Company Law and the Prevention of Misuse) it has now become possible to transfer the site of effective management abroad without legally dissolving the domestic company at the same time.

From a tax point of view, the central point regarding a transfer of corporate management abroad is the question of whether a final taxation of all hidden reserves becomes due or whether only a limited taxation of those hidden reserves has to be effected which will be no longer subject to German taxation after the transfer (e.g. participations which are now administered abroad).

Transfer of Assets to an EU or EEC Member State

Through its decision dated 17 July 2008, the Federal Fiscal Court has made it clear that, considering the internal market freedoms, the transfer of assets to an EU member state has to be exempt from taxation (waiver of the so-called “finale Entnahmetheorie”). The hidden reserves created prior to the transfer of assets can be subject to subsequent taxation at the moment of the realization of the asset; the right of taxation qualifying for immediate taxation is not forfeited due to the transfer. However, the taxation of hidden reserves at the moment of their realization, which theoretically may take place decades after the transfer, will be very difficult in practice.

On the one hand, in most cases it is highly improbable that German tax authorities will ever come to know about the realization, on the other hand, the question arises of how the tax receivable can be enforced abroad. On these grounds, the financial administration has decreed not to apply this decision. A legal clarification of the financial administration’s point of view is to be expected in the Annual Tax Act 2010. The extent to which the decree on the application or a corresponding regulation will conform to European law still remains to be seen.

Transfer of Corporate Management to an EU or EEC Country

The transfer of corporate management usually goes along with the transfer of the head office. Currently, in the case of the transfer of corporate management to another EU or EEC member state, a taxation of hidden reserves has only already occurred if it actually came to a taxable disjunction (“Entstrickung”) of the assets. This applies in particular to those assets which can be allocated to the head office. In our opinion, due to the fact that it is legally possible to transfer corporate management, in compliance with the decision of the Federal Fiscal Court, the transfer of assets allocated to the head office may also principally be tax exempt.

Transfer to a Non-Member Country

In the case corporate management is transferred to a non-member country (non-EU or EEC member state), taxation depends on whether a Double Taxation Treaty exists with the non-member country according to which the company is to be treated as a tax resident in this country. If this is the case, the company is considered dissolved and all hidden reserves are subject to final taxation. In the case of the transfer of corporate management to a non-member country without a Double Taxation Treaty, hidden reserves are only taxed insofar as assets are actually transferred to the other country and the German right of taxation is restricted.