According to the BFH, the fact that a German shareholder is
not permitted to demonstrate that subsidiaries located outside
the EU/European Economic Area (EEA) carry out genuine
commercial activities could violate the free movement of
capital in Article 63 of the Treaty on the Functioning of the
European Union (TFEU).
Under the rules, certain profits that are considered passive
income of a CFC that is resident in a low tax jurisdiction and
controlled by German resident shareholders may be attributed
proportionally to those shareholders and included in their
taxable income. Based on legislation implementing CJEU case
law, where the foreign company is located in another EU/EEA
member state, the German shareholder has the right to
demonstrate that the CFC carries out genuine commercial
activities (motive test), and if the shareholder meets this
burden, no CFC income will be attributed to the German
taxpayer. However, the motive test is not applicable to CFCs
that are resident outside the EU/EEA, which potentially results
in a restriction on the movement of capital between member
states and third countries.
The case referred to the CJEU involves a German corporation
that held 30% of the shares in a Swiss resident company. The
Swiss company received passive income of an investment nature
from factoring activities, which was considered by the German
tax authorities to be passive income from financial
transactions and which was taxed at a low rate in Switzerland.
The profits were attributed proportionally to the German
shareholder and included in its taxable German income.
According to the German tax authorities, the German shareholder
was not entitled to invoke the motive test with respect to its
Swiss CFC because Switzerland is not part of the EU or the
The BFH argues that Article 63 of the TFEU and not the
freedom of establishment applies because the German CFC-rules
are applicable to a holding of 1% (or even less) if the foreign
company is engaged in the business of certain financial
transactions. Even for regular passive income, it is sufficient
if any number of German resident shareholders owns the majority
of the CFC. In a purely domestic situation, there would be no
attribution of passive income with an investment nature.
Therefore, the BFH has requested a preliminary ruling from
the CJEU on the following issues:
- Whether the restriction on the free
movement of capital is permissible under the "standstill"
clause in Article 64 of the TFEU, even though the scope of
Germany's CFC rules have been subsequently expanded and
technically amended after 1993; and
- If the German rule is not safeguarded by
the standstill clause, whether the CFC rules violate the free
movement of capital provisions because a German shareholder
with subsidiaries in a third country does not have the right
to demonstrate that the subsidiary carries out genuine
Taxpayers that previously have been assessed on CFC income
attributed from third-country CFCs should review and
potentially challenge their assessments in the event that the
CJEU issues a taxpayer-favourable decision.
Alexander Linn (firstname.lastname@example.org)
Tel: +49 89 29036 8558