Frequently Asked Questions on International Tax Advisory

No. Whether Section 6 of the German Foreign Tax Act (AStG) applies depends on factors including the shareholding, the period of prior German tax liability, the specific structure and the target state. The tax consequences should be reviewed before the change of residence and before any related distributions, restructurings or disposals. Among other things, Section 6 AStG requires that the taxpayer was subject to unlimited German tax liability for at least seven of the last twelve years and holds at least 1 % in a corporation. Since 2022, even a move within the EU no longer qualifies for an interest-free, open-ended deferral: on application, the tax can be paid in seven annual instalments, usually against security. If the taxpayer returns to Germany within seven years (twelve on application), the tax claim may lapse under certain conditions.

The tax authorities will examine where the GmbH's place of effective management is located (Section 10 AO). If day-to-day management is carried out from abroad, a permanent establishment may arise there. In more pronounced cases, the entire place of management shifts abroad: the new country of residence may then tax the GmbH's profits, and to the extent Germany loses its taxing rights under the tax treaty, an exit charge may arise (Section 12(1) KStG). As Germany usually continues to tax in practice, there is a risk of double taxation if the foreign authority picks up the matter later – even after the German assessments have become final. In addition, German exit taxation must be reviewed for you personally: if you hold at least 1 % in a corporation and move your residence abroad, Section 6 AStG may tax the increase in value of your shares even though they are not sold. To limit the risks, management should be organised carefully – for example through regular stays in Germany and taking key management decisions there – and documented accordingly. Both questions should be resolved before the move.

No. Contracts must be consistent with the functions actually performed, risks assumed, decision-making processes and value creation. A defensible position combines business model, contracts, pricing methodology, accounting and documentation.

When companies within the same group — for example a German parent and a foreign subsidiary — provide services, sell goods or licence intellectual property to each other, they must agree on a price for these transactions. These internally agreed prices are called transfer prices. Tax authorities in Germany and abroad require that these prices correspond to what unrelated third parties would have agreed under comparable conditions — the so-called arm's length principle (Section 1 of the German Foreign Tax Act, AStG). If transfer prices are set too low or too high, profits are shifted between countries. For example: if a German parent company provides management services to its Polish subsidiary at a price that is below market rate, profits effectively remain in Poland — where they may be taxed at a lower rate. The German tax authority will in such cases adjust the transfer price upwards and assess additional tax in Germany. German law requires transfer-pricing documentation for cross-border transactions with related parties (Section 90(3) AO, GAufzV); smaller companies benefit from simplifications. Since 2025, the documentation – including a transaction matrix – must be submitted within 30 days of a request. If it is missing or largely unusable, the tax authority may estimate the income (Section 162(3) AO) and impose a surcharge of 5 to 10 % of the additional income, at least EUR 5,000 (Section 162(4) AO). Transfer pricing is one of the most common and consequential topics in German tax audits of internationally operating groups.

Transfer-pricing rules apply not only where companies are linked by shareholdings (25 % or more, common shareholders). Under Section 1(2) no. 3 AStG, a related-party relationship can also exist without a shareholding – where one party can exert influence over the other that originates outside the business relationship, or has its own interest in the other's income. A single customer alone does not establish this. In practice, however, the tax authorities scrutinise such dependencies closely, especially where the foreign partner effectively dictates the key terms. Commission arrangements are a typical case: a German entity acts as agent for a foreign principal, receives a commission, and bears the costs of its operations. From a transfer-pricing perspective, an agent that takes on no significant risk and holds no assets should not suffer a loss — it must at minimum recover its costs plus an appropriate profit margin. The correct pricing method in such cases is typically not a price comparison (comparable uncontrolled price method) but the cost-plus method: the agent's full costs are reimbursed, plus a mark-up that reflects the functions performed and the risks borne. Practical consequence: if a German commission agent consistently earns margins that are too thin — or even makes losses — the tax authority will question whether the arrangement is arm's length and may adjust the taxable profit upward. It is therefore advisable to structure the commission agreement in advance so that the German entity is contractually entitled to a cost-reimbursement-plus arrangement: if the commission actually received falls short of full costs plus the required margin, the foreign principal makes up the difference. Such a clause should be embedded in the contract from the outset — not added retrospectively when an audit is already under way. The adequacy of the margin should also be reviewed each year.

If a German company relocates a business function to a foreign entity — for example, by closing a domestic call centre and opening a lower-cost one in another country — this may constitute a deemed disposal under German transfer-pricing rules (Section 1(3b) of the German Foreign Tax Act, AStG). In such a case, the German tax authorities can treat the function, together with all associated assets, contracts, risks and personnel, as having been notionally sold by the German company to the foreign company. The assessed value is not the book value of individual assets but the anticipated future profit contribution of the entire function — the so-called transfer package. This imputed sale is subject to German corporate income tax and trade tax, even though no cash payment is actually received. Practical example: a German company terminates its domestic call centre and transfers those activities to a newly incorporated Czech subsidiary where labour costs are significantly lower. If this restructuring was not adequately planned, documented and priced at arm's length, the German tax authority may assess a taxable gain on the transfer of the call-centre function — potentially running to several million euros. The earlier and more thoroughly such a restructuring is planned from a tax perspective, the more effectively the resulting burden can be managed. Appropriate transfer-pricing documentation and arm's-length pricing of the transfer package are essential.

There is no universal answer. The relevant factors include the planned operational activities, management location, employees, business premises, financing, liability, profit distribution and the scope of German reporting obligations. The realistic alternatives should be compared before contracts are signed and before operations begin.

Under Section 12 of the German Fiscal Code (AO), a fixed place of business or installation used in the enterprise's operations may already constitute a permanent establishment. In addition, the applicable double tax treaty must be reviewed. What matters are the actual activities and structures – not the contractual designation alone.

Yes. Under Section 10 of the German Fiscal Code (AO), the determining factor is the place of effective management. Where the key business decisions are actually taken can therefore be more significant for tax purposes than the formal registered seat of the company.

No. It must be examined which treaty applies, how income is allocated, whether a permanent establishment exists and which withholding tax, relief and documentation requirements are in place.

Local tax and legal questions should be assessed by appropriately qualified advisers in the relevant country. Dallman handles the German tax analysis and can coordinate the input of the specialists involved in each jurisdiction.

Ideally not after the audit notice has already been received. Contracts, calculations, accounting processes, transfer prices and audit-relevant data should be built up consistently and transparently during ongoing operations.

A German tax audit is a formal procedure with significant legal and financial consequences. It is strongly advisable not to communicate directly with the auditor without the involvement of a tax adviser — and this recommendation applies from the very first day of the audit, not only when difficult questions arise. Auditors routinely gather information and assess it. The risk is rarely that the information itself is wrong. The risk is that information given without context, or phrased imprecisely, is understood differently from what was intended — and that the auditor draws conclusions from it that are then very difficult to correct. Explanations given later, however thorough, rarely fully undo an impression already formed. Statements that seemed straightforward can open lines of inquiry that would not have arisen at all if the question had been answered in a targeted, considered way. A tax adviser understands what the auditor is actually looking for. Rather than giving broad answers that may touch on areas outside the question, the adviser responds specifically to what was asked — and nothing more. This keeps the conversation focused, avoids creating unnecessary topics that would require further explanation, and prevents positions from hardening in a way that becomes costly to resolve later. The recommended approach: all communication with the auditor runs through the tax adviser. Documents and information are disclosed in a structured and controlled manner. Requests from the auditor are reviewed before being responded to. Where questions touch on legally uncertain territory, positions are prepared and substantiated before any response is given. This is not about withholding information from the tax authorities — it is about ensuring that the company is represented in an organised and professionally grounded way throughout the process.

As a general rule, no. Before commencing investments – such as purchasing production equipment, hiring staff, or beginning research activities in the case of research funding – the company should first identify the relevant German federal state in which the project will be carried out, approach the competent investment or development bank, and have the funding eligibility assessed. Most programmes require approval for early project commencement (vorzeitiger Maßnahmenbeginn) before the final funding decision. Investments started without this approval are typically no longer eligible for funding. The reason is the so-called incentive effect: under EU state aid law (Art. 6 GBER), aid may generally only be granted if the application was submitted before work on the project starts.