The legal regulations often compete with the double taxation treaty and are applied extremely rarely in practice - which should comfort the taxpayer. Moreover, it is possible to find an arrangement in this case also which takes account of the interests of the taxpayer and avoids special tax liability even with tax havens. 

While a transfer of assets that does not affect tax acquires particular importance when relocating functions to industrial areas in foreign countries, the problem with pure offshore companies does not arise in this form. But here too the transfer of intangible assets in particular (trademarks, licenses, know-how) can affect matters of fiscal profit realization. It makes sense to choose an arrangement by which value is added to the intangible assets mainly in the foreign country. 

Duties of Information and Set-off

The possibilities offered by foreign company law for the anonymity and confidentiality of the shareholders and the company's internal affairs can be exploited in many ways to benefit the shareholder. However, this does not extend to the tax savings resulting from concealment of shareholding relations and the covering up of financial flows back into Germany. Instead, the fiscal authorities have various areas of control available to regulate the taxpayer's duties to provide and procure information.

The starting point for this is Sect. 160 Tax Code according to which expenses of the taxpayer are not taken into account for tax purposes if the taxpayer cannot or will not name the payee on demand. The background to this rule is the fear that "payments without receipts" are withdrawn from fiscal control, i.e. tax is not paid on them in Germany in spite of the existing tax liability. 

This also applies especially if payments were made for services difficult to comprehend or value objectively. These include license fees, payments for consultancy services and similar. The taxpayer is not able to comply with the duty to name the payee by simply giving the name and address of the offshore company. If an offshore company without any business activities of its own is used as an intermediary for payments, legal precedence states that the recipient of the payment is the third party behind it, i.e. normally its shareholder.

In practice, it is of little benefit to the taxpayer that the German tax authorities are unable to investigate in the foreign country themselves. If a matter requiring investigation and assessment for tax law purposes concerns activities in a foreign country, then, under Sect. 90 para. 2 Tax Code, the taxpayer must clarify the matter himself and procure the necessary evidence for the fiscal authorities, not merely make a statement to that effect. He must take care to ensure, already at the time of entering into the transaction with the foreign company, that he later disposes of the relevant information and evidence e.g. required for any subsequent government tax audit. The name of the recipient suffices only if the tax authorities are able, without major effort and without having to undertake their own supplementary investigations into the matter, to document the amounts received by the payee. 

For offshore companies, Sect. 17 Außensteuergesetz defines additional information duties. Legal precedence requires duties frequently almost incapable of fulfillment. The main duty in practice involves that of naming the "actual payee". This primarily involves refuting the suspicion that a payment to an offshore company would later return in concealed form to the payer. Analysis of the extensive legal precedence nevertheless shows that the existing fine boundaries between the duty to give a name and legitimate lack of knowledge allow scope for successful countering of excessive research and general interrogative activities.

Even in the case of complete transparency of the business relations with the offshore company and disclosure of all payees, there is still a final hurdle to overcome for recognition for tax purposes: the assessment of current business relations by means of comparison with a third party. 

The structuring of fiscally acceptable rules must be based on Sect. 1 Außensteuergesetz according to which terms and conditions must be agreed in a manner similar to those agreed under the same or similar conditions between independent third parties. An extensive interpretation of this dealing-at-arm's-length principle is to be found in the regulatory manual of the tax authorities and is known under the concept of "administrative principles". This (undoubtedly outdated) statement from the year 1983 is supplemented by international and national regulations and a very extensive body of case law.

Proper Procedure for Establishment of an Offshore Company 

In spite of the fiscal requirements outlined above in simplified manner, the principle of freedom of business disposition as part of the market economy requirements and fiscal scope continues to apply. To this extent, the businessperson is free to relocate and export part-areas and functions in order to maintain competitiveness nationally and internationally. In view of the potential financial relief, it is worthwhile not only for a large corporation to make the requisite investment in internal and external advice for such a measure. 

Alongside fiscal aspects and the need for the divestment of part-areas that makes sense from a business management point of view, the legal requirements in the foreign country must also be taken into account for the incorporation of an offshore company. Added to this is the early inclusion of funding considerations in order to establish a sound basis for the future. The work of an external consultant can be subdivided logically into the following stages:

1. Identification of a suitable foreign jurisdiction for incorporation of the company by comparing the legal, fiscal and economic framework. Able to be considered in this respect are in particular Liechtenstein, Malta, Madeira, Channel Islands, USA and the Cayman Islands.

2. Examination of the fiscal effects after taking account of the double taxation treaty and the German law on external tax relations and advice with regard to the type and scope of the business area to be transferred.

3. Support in the establishment of the company, including creation of the infrastructure (bank accounts, personnel, possibly "straw" director).

4. Support in the structuring of the business relations within the corporation taking account of the regulations of German tax law as well as international laws.

5. Constant checks to ensure that management measures have no detrimental effects on tax and assurance of necessary documentation for tax purposes.

6. Later additional support during government tax audits etc.

The internationalization of the German economy has not progressed very far compared to the rest of Europe. So far as this situation is deplored in politics and economics, consideration must be given to the fact that, during the course of politically desirable globalization, Germany will need to lose its reservations regarding offshore companies. A conservative use of fiscal structuring opportunities can enhance competitiveness and strengthen the position of the German company - a desirable economic aim.

Dr. Ulrich Eder is lawyer, tax advisor and managing director of DUE FINANCE Wirtschaftsberatung GmbH Steuerberatungsgesellschaft in Duesseldorf, Germany. DUE FINANCE advises international corporations and persons on a wide spectrum of tax and business issues, in particular with regard to financing, taxation and internationally structured transactions. DUE FINANCE reserves the right to monitor all e-mail communications through the firm's network. We will treat a request via e-mail as authority to reply by e-mail. PGP key available. DUE FINANCE - Tomorrow’s financing today.
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