GERMANY Law and Practice Contributed by: Michael Best, Gerald Herrmann and Jannis Lührs, POELLATH
is at least 10% (for corporate income tax) or 15% (for trade tax). For controlled foreign corporation (CFC) taxation, see 6.6 The Substance of Non-Local Affiliates . 6.2 Non-Deductible Local Expenses If foreign income is tax exempt in Germany, the cor - responding expenses that are economically directly connected to such income are not deductible in Ger - many. Expenses related to dividends and capital gains are tax deductible. 6.3 Dividends From Foreign Subsidiaries Under German tax law, for income to qualify as divi - dend income, the same rules apply regardless of whether the dividends originate from foreign or local sources. Thus, under income tax aspects, 95% of dividend income is tax exempt, unless it is dividend income deriving from a free float below 10%. For trade tax, the tax exemption for proceeds resulting from foreign subsidiaries is granted if the local corpo - ration holds at least 15% of the subsidiary. 6.4 Taxation of Intangibles Developed by Local Corporations Intangibles may be transferred or let (royalties) at arm’s length conditions, resulting in taxable income (transfer price or royalties) at regular rates. 6.5 Controlled Foreign Corporation-Type Rules Under the German CFC rules, certain low-taxed pas - sive income of a foreign corporation could be sub - ject to German CFC taxation. Such passive income is referred to as low-taxed if the tax burden is lower than 15% (respectively 25% for passive income of fiscal years ending before 1 January 2024). Low-taxed passive income is only subject to German CFC taxation if a (single) taxpayer controls the respec - tive CFC. A (single) taxpayer controls a CFC if such taxpayer (alone or together with a “related person”) is entitled to more than half of the shares, voting rights, capital or profit entitlement. A related person is a per - son who has a controlling interest and/or can exer - cise a controlling influence or acts through concerted
behaviour with such taxpayer (in relation to partners in a partnership, this is deemed to mean that even one German tax resident minority partner in a part - nership implies control over the whole partnership; this, however, can generally be disproved if a share - holding of 5% in the partnership is not exceeded and there are no special circumstances). For each foreign corporation realising low-taxed passive income, the (indirect) German shareholders have to file a CFC/ PFIC tax return. The control requirement does not apply with regard to certain passive income referred to as passive invest - ment income ( Einkünfte mit Kapitalanlagecharakter – PFIC) – ie, CFC taxation applies even below 50%. The CFC taxation for PFIC income was fundamen - tally revised by the German legislature in July 2025. The main reasons for the revision were constitutional and EU law concerns raised by practitioners, aca - demic literature, and the tax authorities. A key revised requirement now is that a single taxpayer (alone or together with related persons) must be entitled to at least 10% of the capital or voting rights. As a rule, the revision applies to all assessment periods from 2022 (ie, for fiscal years beginning after 31 December 2021) onwards. The term “related persons” is to be interpreted broadly. Dividend payments will be determined – considering the above minimum participation threshold of 10% – as passive (investment) income if: • the dividend payment is tax deductible at the level of the payor; or • the foreign corporate recipient of the dividend does not own at least 10% of the shares in the payor. With respect to the CFC taxation of PFIC income, it remains questionable whether these rules – despite the amendments introduced in July 2025 – will with - stand future constitutional and EU law challenges. Another aspect supporting the concerns is that ATAD I and ATAD II set only minimum standards, whereas the rules of the German CFC taxation go far beyond these minimum requirements.
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