CFC (controlled foreign corporation) regulations: German Federal Court of Finance expresses doubts as to the 25 % low-tax threshold’s constitutionality
Income from non-functional foreign controlled foreign corporations can be added to the profits of German shareholders and thus become taxable in Germany if such income is subject to low taxation abroad.
Art. 8 (5) AStG (German Foreign Transaction Tax Act) defines an income tax burden of less than 25 % as threshold for low taxation. In a recently published decision of September 13, 2023 (I B 11/22), the German Federal Tax Court (“BFH”) stated that, following a summary examination, there were doubts as to the CFC regulations’ (Art. 7 et seq. AStG) compliance with constitutional and EU law, at least to the extent the 25 % low-tax threshold is higher than the lowest total national tax burden for taxpayers subject to unlimited tax liability. Taking into account corporate income and trade tax, such total tax burden currently amounts to ca. 22.8 %.
In the decided case, the BFH had to reject the applicants’ complaint because the controlled foreign corporation’s income was not subject to any taxation abroad. Nevertheless, the decision should encourage all demands to reduce the low-tax threshold from 25 % to 15 % as part of the currently discussed Growth Opportunities Act.
The BFH considers the doubt expressed in literature to be important, as a low-tax threshold which is higher than the lowest total tax burden for taxpayers subject to unlimited tax liability in Germany can obviously no longer be objectively justified by achieving unjustified tax advantages due to a lack of compensatory foreign taxation.