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Added taxation
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In general, the additional taxation is intended to prevent the profits from not being taxed in Germany if a company is founded in a low-taxed foreign country.

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Bilateral agreements between the EU and Switzerland

Switzerland is not a member of the European Union. However, so-called bilateral agreements have been concluded between the EU and Switzerland, which in many areas treat citizens of the EU and Switzerland as if Switzerland were a member. The main advantages for citizens are the right to the four basic freedoms, which are:

 

  • the free movement of goods.
  • the free movement of people
  • the freedom to provide services
  • the free movement of capital

 

With regard to tax law, the right to free movement of capital is of particular importance. This fundamental freedom means that no citizen of the EU or Switzerland may be prevented from investing their money in one or another EU member state or in Switzerland. Investments not only mean deposits in banks, but also participation in capital companies. This includes not only listed companies, but also shares in a GmbH.

Shares in a Swiss AG or GmbH

In Germany, the Foreign Tax Act (AStG) gives the tax office the basis for fictitious, i.e. not actually paid, dividends from participation in Swiss corporations despite an existing double taxation agreement (DTA).

 

Whenever more than 50% of the shares in the Swiss AG or GmbH are held by people who are resident in Germany, it must be checked whether the company generates so-called passive income. To everyone's surprise, this includes all income from the provision of services. If the shareholders are then also involved in the provision of these services, the German tax office de facto assumes abuse and treats the Swiss citizen's entire previous year's profit as a fictitious distribution. If a distribution is actually made within the following five years, this can be offset. Distributions made after more than five years are effectively taxed twice.

 

Additional taxation - free movement of capital

We have pointed out in several objection proceedings, which have not yet been finally decided, that the fundamental right to free movement of capital is not protected if the income of a Swiss corporation is assessed as interim income ISd § 7 AStG without further examination and is included in the tax base of the domestic taxpayer. The BFH has referred the associated legal questions to the ECJ because the additional taxation may constitute a violation of the free movement of capital. This applies at least if there is no purely artificial arrangement to avoid the tax. The ECJ ruled the case under case number C‑135/17. The judgment was issued on February 26, 2019, the questions posed by the BFH were answered in such a way that there can be exceptions to the free movement of capital, but only in cases of purely artificial design to obtain tax advantages.

Company in Switzerland

A number of IT experts and other self-employed people based in Germany have founded a company in Switzerland in order to receive orders there. These are not artificial designs, but understandable reasons for successful entrepreneurial activity. In the meantime, the tax authorities seem to be following our argument and have suspended the assessed taxes without providing security. In any case, it is worthwhile to keep outstanding notices that are not yet legally binding and to state the participation in future tax returns regarding additional taxation, but to enter the additional amount as zero euros.

Jürgen Bächle
Jurgen Bachle

has been working as an independent tax consultant and expert in international tax law since 1989 and has been a member of the board of the German Association of Tax Consultants Baden-Württemberg, DSTVBW, for over 20 years.

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