artax logo white
online trade
Table of Contents

International trade – and therefore also online trade – is a business like any other and is taxed accordingly. In each case there are very strong enforcement deficits, especially with regard to sales tax. Many traders based abroad do not fulfill their tax obligations and thus distort honest competition. The EU will counteract this with the VAT system directive from July 1, 2021. Anyone who does not behave according to the rules will sooner or later no longer be represented in the EU market.

Table of Contents

Value added tax

In order to comply with the rules, every retailer - this also applies to online trading - must register for sales tax. It is not necessary, but may make sense, to set up a company in the EU. It may well be in the trader's interest to improve his current tax situation and also to leave the money he earns legally in the EU and invest it from here instead of transferring it to his home country. Please read the separate article: “Sales tax for online trading"

Profit tax

The question of where the profits generated in online trading are taxed is completely separate from sales tax. The current taxation practice focuses on the classic business model. The first point of reference for taxation law is the residence of the entrepreneur. This means that the country in which the company is registered or where the owners are based has first access. Only if there is a tax permanent establishment in the other country will the taxation right be transferred to this country proportionately. What is considered a permanent establishment and what is not is determined by local legislation, which is usually overshadowed by regulations in the relevant double taxation agreement.

An online trading company based abroad has the power to actively create or even avoid the creation of a tax permanent establishment. However, founding and registering in a state does not necessarily mean that the company is resident there for tax purposes. The statutory seat as the place of residence is regularly displaced in international tax law and replaced by the place of actual business management.

It would therefore be of no use to an online retailer living in Germany to set up a shell company in Dubai if he actually runs the online trading business from Germany. The company registered in Dubai would then be subject to tax in Germany as a whole. But if the corresponding substance is available in Dubai and the day-to-day business decisions are made there, Germany will come away empty-handed. At least so far.

Online trading and foreseeable legal changes in the EU

This shows that the current tax systems are reaching their limits when it comes to online trading. The EU states have therefore taken action together with the OECD and have decided on an action plan to tax the digital economy as a whole, including online trade. The future taxation system has two pillars:

 

Pillar 1, material foundations

  • Defines the central point in such a way that profits can be taxed even without a physical presence in the market state, i.e. in the country of destination of the goods.
  • The profit of the entire group of companies is determined
  • The participating states exchange information with each other.
  • The participating states are assigned proportional taxation rights based on defined formulas.

 

Pillar 2, implementation

  • The project is under the direction of the OECD
  • Their perspective and redefinition of the permanent establishment in the so-called BEPS project is mandatory
  • The new regulation of the taxation of the digital economy, in conjunction with BEPS, leads to a minimum taxation in every market state
  • The OECD issues recommendations, which must be implemented promptly by the member states

 

The first problem is that there are states that are not very cooperative. Naturally, these are states that expect to benefit from exempting profits from the digital economy and online trading from taxation in the market states. The Council of the European Union therefore adopted a list of non-cooperative countries and territories for tax purposes on February 22, 2021. In Germany, this list became law within four days. The list adopted by the Council includes the following countries and territories:

  • American Samoa
  • Anguilla
  • Dominica (new)
  • Fiji
  • Guam
  • palau
  • Panama
  • Samoa
  • Trinidad and Tobago
  • U.S. Virgin Islands
  • Vanuatu
  • Seychelles

 

The aim is not to pillory individual countries, but rather to bring about positive changes in their tax laws and procedures through cooperation. Business relationships with these countries, and especially the establishment of companies in these countries, are therefore only recommended with extreme caution from a tax perspective until further notice.

However, there are still remaining difficulties in implementation. The USA is skeptical. After all, the global giants in online trading such as Amazon & Co are often based in the USA. Of course, these companies are fighting back. Experience shows that in the end reason wins and either an amicable solution is found. The OECD wants to present its final report with concrete recommendations in summer 2021. These will then be implemented in national tax laws.

We'll see what that means in detail. In the future, however, it will be even more worthwhile to examine international tax law to determine where and how you can best implement your digital business model and online trading with complete transparency and compliance.

Proprietary business or involvement of intermediaries

It is a business decision to know and serve your customers yourself or to open up the market through intermediaries. There are often hurdles in the way of doing your own business, but they can be overcome. If a European company wants to sell goods in China, it requires registration and import authorization. The administrative effort required to set up and maintain a foreign company must be in reasonable proportion to the benefits of higher margins and direct customer relationships. This usually depends on the volume of the business. As a rule, setting up a business in the local sales market is worthwhile even if you involve intermediaries there. In many places it is already a question of the supplier rating under which conditions one is actually considered as a supplier. Without your own service in the target market, you will not be able to make a difference, especially when it comes to technical products.

Brand, liability, invoicing

Most online retailers start with a single product or a product family, which is then expanded later. In order to stay in the market and develop your position, you have to remain visible in online trading and develop recognition value. In the broadest sense, it is about creating a brand that will also be helpful in selling future products. Depending on the product and location of the online retail operator and also depending on the target market, different approaches will be pursued.

For technical products or those that play a role in approval or compliance with certain certifications, appropriate precautions will be taken in order to be approved as a supplier at all. In general, the customer perspective is a key success factor. If the customers are entrepreneurs and purchase the goods for their company, they will value an invoice that, in addition to the input tax deduction, entitles them to deduct it as a business expense. To do this, the entrepreneur must be registered in the respective country either as an independent company or with a permanent establishment.

If, on the other hand, customers buy online for private use, they are initially confronted with questions of local or European consumer law. This includes the possibility of cancellation, return of the purchased item, and the obligation to provide proof in the event of damage. Anyone who cannot prevent the goods from ending up in the USA or Canada should protect themselves from the immense claims for damages by using protective design. But the English Ltd. is no longer suitable for this. Since January 1.1.2021, XNUMX, this has been treated as a sole proprietorship or partnership if the administrative headquarters is in Germany. Please read the separate article under the heading BREXIT.

Other foreign corporations outside the EU must be examined according to the same criteria to determine whether they are considered a corporation under local law in terms of liability or whether the shareholders have unlimited liability with their private assets.

Which country offers the most advantages for online trading?

In the short term, the taxation of the digital economy is moving towards a system in which each market state participates proportionately in the total tax revenue. There are countries like that that don't levy taxes on profits at all. These include the United Arab Emirates (UAE). Depending on the industry and emirate, it is possible to set up a business there. However, according to local law, this cannot be done without substance, which means that at least an office must be rented. Substance can also be created through a warehouse, a sales organization and much more.

Hong Kong does levy taxes on profits. However, due to a provision in national tax law, offshore profits are not taxed. If a Hong Kong-based company (with an office and staff) buys goods in China and the goods are shipped from the supplier directly to Europe, i.e. the goods do not physically touch Hong Kong, and the change of ownership takes place outside the three-mile zone, then Hong Kong does not tax the trading profit at all . It is currently possible to collect trading profits tax-free.

In the future, however, market profits would be taxed locally where the goods go. According to the OECD's plans, the entire company profit is determined. The question is, however, which standard is used to determine profits. Different standards lead to very different results for the same company. The standard of the country in which the company is registered is likely to be decisive. This country retains, subject to substance, a residual profit which may or may not be taxed according to local law. The remaining profit is distributed among the target countries according to a key and is therefore taxed differently according to their local law.

Operate strategically online trading

A sustainable tax strategy is therefore only partially influenced by the markets in which you operate. There is already a design framework today and will continue to be in the future. An online trading company can use this in such a way that the digital business model is viewed broken down into its functions and substantial components such as the selection of products, monitoring of suppliers, the warehouse and logistics, but also web design and market observation or monitoring, IT and administration, are placed in countries where the network speed and data security are high, the required resources are available and the tax rates are low. 

A sustainable tax strategy in an international context is therefore always accompanied by an analysis of the opportunities, risks and functions in the company (risk & function). This approach is also reflected in the internationally recognized rules for the design and documentation of transfer prices for deliveries and services in affiliated companies. A sensible allocation of opportunities, risks and functions to individual countries helps to sustainably and, above all, safely reduce the tax rate of the online trading company.

Examination of the DBA

Every arrangement must also be checked to see whether there are bilateral agreements to avoid double taxation (DTA) between the countries involved or not. Germany and Hong Kong do not have such an agreement, while Switzerland and Hong Kong have concluded both a DTA and a free trade agreement. If the operator of the business lives in Germany and operates through a Swiss intermediate company, German tax law and the DTA Germany-Switzerland cannot be ignored. The first recommendation would be not to establish the Swiss company according to local law, but rather in Lichtenstein and then move the company to Switzerland.

Otherwise, you would lose the possibility of tax-free structuring when taking on shareholders or other restructuring measures. The DTA Germany-Switzerland results in further special features that you should be aware of. In principle, however, an online trading transaction in which Germany and China are involved can be designed to be legally secure and tax-efficient with a detour via Switzerland and Hong Kong. In other constellations too, good results can be achieved through careful analysis and transparent, legally secure designs.

Cross-border profit distributions

The profit after (preferably low corporate taxes) will sooner or later be distributed to the shareholders. A tax strategy must therefore be thought through to the end and profit distribution must be taken into account.

In order to achieve a low overall tax burden, the structures are often designed in multiple stages and, of course, across borders. This puts the problem of taxation of dividends under scrutiny. Many DTAs contain regulations according to which both states can tax the dividend. In the country of origin this is referred to as withholding taxes. These taxes are usually offset in the shareholder's country, although there are special circumstances in the relationship between Germany and Switzerland. because the withholding tax of 35% levied in Switzerland is only offset at 15% in Germany; For the remaining 20%, an application for reimbursement must be submitted in Switzerland within 3 months. Anyone who misses this deadline is out of luck and will pay too much tax.

Double taxation and other problems with the taxation of cross-border profit distributions between parent and subsidiaries in different countries are generally and generally avoidable in the EU.

 

Requirements:

  • Parent and subsidiaries are based in different EU countries for tax purposes
  • Parent and subsidiaries are subject to corporate income tax and cannot be exempted from it
  • Parent and subsidiaries are properly registered as a company or corporation (legal forms: Inc., SA, GmbH., LLC, etc.)
  • the parent company holds at least 10% of the capital shares (or voting rights) of the subsidiary based in another EU country

 

Provided that the countries of both companies are members of the EU, profits distributed between parent companies and subsidiaries can be exempt from withholding tax (in both directions):

Interposition of a pure holding company

A holding structure makes sense when not only are the operational functions distributed across several countries, but the business is also represented in separate, legally independent companies. The core function of the holding company is to pool the management of the investments. For this purpose, further functions can be transferred to the holding company. Typically, the profits of the subordinate companies are transferred to the holding company via dividends and reinvested from there. Under certain circumstances, a sale of individual or all subordinate investments may also be considered. Both when it comes to taxing dividends and taxing capital gains, it is important to keep taxes as low as possible at the holding company level.

When it comes to taxing holding companies, Germany offers an attractive model in which only 5% of dividends and capital gains are subject to the moderate tax rate of 15% corporation tax + solidarity surcharge, the other 95% remains tax-free. The effective taxation of dividends and capital gains is therefore less than 0,8%. The attribute of belonging to a German group is often also an image gain for the subordinate companies. If a holding structure is fundamentally an option, Germany is recommended as a location. This is especially true if their shareholders come from the EU, Switzerland, China and Russia.

Final taxation at the shareholder level

At the end of the chain is the distribution of dividends or the distribution of the capital gains or liquidation profits to the shareholder(s). If the country in which the company or the online trade is based and the countries in which the shareholders are based have concluded respective DTAs, the final taxation takes place in the country in which the shareholders are based. However, a withholding tax may be levied in the country of the company, which is credited in the other country. the factor remains at the higher of the two taxes. because the country of residence deducts a maximum of the amount of withholding tax that is determined for the proportional taxation of capital income.

Germany imposes a withholding tax of 25%, which is usually also considered a withholding tax for shareholders living in this country. If the shareholder living abroad had to pay less than 25% tax at home, he would still be stuck with an effective tax burden of 25% due to the limited deduction of withholding tax. The examination of a tax strategy must therefore take into account the taxation of capital income in the shareholder's country of residence.

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.

Start a conversation
Social
Facebook f Twitter Youtube Xing
Vimeo

By downloading the video you accept the privacy policy of Vimeo.
Read more

Load video

International tax advice

artax advises internationally active medium-sized companies and private individuals on an interdisciplinary basis in all matters of German and international tax law and related areas as well as in corporate strategy and location issues.

Start a conversation
Subject-specific expert knowledge

Convince yourself of our expertise in the area of ​​national and international tax law, find out more about current case law and cross-border commuter issues and benefit from our in-depth specialist knowledge in creating individual tax strategies. Your tax law knowledge database – artax

Get in touch!

Regardless of whether you are planning to move to a new country or want to take your company internationally, our team at artax is always available to provide you with knowledge and expertise.

Tax law firm for international tax law – national, international & remote
Locations
Contact
artax logo white
Your digital tax office
Facebook f Twitter Youtube Instagram