The international orientation of medium-sized companies is more important than ever.
More and more companies are considering moving abroad in order to remain competitive on the global market. However, in order to be successful in the long term, precise planning and implementation are essential.
We are specialized in international tax law and support companies successfully on international expansion for over 20 years.
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We have compiled 9 important topics for you from our daily consulting practice. Know & avoid these tax pitfalls when expanding abroad.
In order to open up new markets, a long-standing, familiar employee is often entrusted with sales abroad. If this employee has powers of attorney that legally bind the "home" company, an agent's permanent establishment is created abroad, which assigns a right of taxation to the foreign state.
The tax authorities are happy to take a closer look at construction sites or assembly work abroad with a duration of approx. 6 or 12 months. Even if the contract has been operatively completed, acceptance records or key dates of registration / deregistration are clues for calculating the deadline to the exact day. Often the justification of an unwanted permanent establishment abroad depends on only a few days.
The special regulations on the so-called service permanent establishment can be found in the double taxation agreements (DTAs) between Germany and China, as well as between Germany and Turkey.
This special feature can lead to the establishment of a permanent establishment abroad if services are provided abroad without the need for a so-called "fixed place of business" (e.g. office).
The design of transfer prices is of decisive importance for associated companies.
Even the slightest adjustment/divergence leads to significant changes in the operating income or operating expense structure of the company and often results in considerable additional payments during tax audits.
In addition, it is usually NOT possible to create a corresponding offset abroad and this leads to a real double burden for the company. Transfer prices should be agreed in advance with the tax authorities.
In the case of service relationships between affiliated companies, the entrepreneur must fulfil corresponding documentation obligations; transfer pricing methods must be defined and justified. In addition, service relationships within the group must be disclosed and presented. The internal and external arm's length price must be determined, etc.
The documentation obligations should not be underestimated, represent a considerable administrative effort and should be created and maintained from the beginning. In the event of a tax audit, they must be submitted at relatively short notice.
The German managing director is often also the exclusive representative body of the foreign subsidiary. If the managing director now also conducts the business of the foreign company from Germany, the place of management shifts to Germany.
The consequence is that the foreign company is subject to unlimited tax liability with its worldwide income in Germany.
Often the shareholder-managing director takes the foreign expansion into his own hands and personally sets up the foreign branch. In the case of shares in a corporation and the move to a non-EU state, this leads to the fictitious disposal of the shares in the corporation and to the taxation of a fictitious capital gain in Germany.
The establishment of a foreign company is not the only way to save taxes. Rather, an established business operation with an office and staff is required, which is in any case indispensable for participation in economic transactions and which also operates on the market abroad.
Fictitious structures (letterbox companies) or trust constructions are not recognised from a tax point of view and lead to taxation of profits and income in the country of residence.
From an entrepreneurial point of view, it must often be weighed up whether Germany can still be maintained as a production location. If the decision is made to relocate production sites, however, the tax implications of this decision should also be considered.
Due to changes in the Foreign Tax Act, such relocations are assessed within the framework of the Relocation of Functions Ordinance and a so-called transfer package with the value of the relocated function (in this case production) is determined. This value serves as the basis for taxation for a "final taxation" due to the relocation. Not infrequently, the liquid funds to pay the resulting tax liability are not available.
International tax law may bring many unforeseen surprises.
Therefore, deal with the tax consequences of an expansion abroad at an early stage in order to avoid unwanted effects - usually resulting in de facto double taxation.
We are happy to advise you!
DELTAKAP International Tax Consulting
Managing Director, Tax Consultant LL.M. (International Tax Law), CPAA (United Arab Emirates)
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