Substance and shell entities

Companies that establish themselves in places with effectively low trade tax rates are increasingly coming into the focus of the public and the German tax authorities. The pressure is thus growing on the so-called "shell entities". These have registered their company headquarters in cities and municipalities with effectively low trade tax rates, but the actual business activities are conducted in other locations.

Recently, there have been increased efforts by the authorities, especially at the international level, to tackle these issues for internationally active groups. For example, on 22 December 2021, the EU Commission published online a proposed directive to combat the misuse of “shell entities” for tax purposes with the title ATAD III (Proposal for a COUNCIL DIRECTIVE laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU).

Regardless of domestic and international legislation, it is a sign of "good corporate citizenship" not to disregard the company's social role model function in addition to its own economic success. Against the backdrop of sustainable management, instruments such as interposition of shell entities should therefore be avoided. At the same time, it remains a challenge to initially set up structures in a lean and efficient manner - for example, when opening up new markets or attracting corporate capital.

What can happen in the event of non-compliance? In the case of "insufficient" substance, the existence of the companies is denied in terms of tax law and the result is directly attributed to the shareholder, or the possibility of exculpation is rejected by the tax authorities.

What will ultimately be explicitly understood by a "sufficient" substance is currently not clarified by law and always depends on the individual case. However, the German tax authorities have provided corresponding guidance with regard to adequate substance (e. g., Letter of the Federal Ministry of Finance dated 17 March 2021).

Relevance for your compliance

The German legislator implemented the topic of "substance and shell entities" in various provisions of the tax law, among others:

Domestic tax law

1. Permanent establishment (Sec. 12 G-GFC)

2. Place of management and control (Sec. 10 G-GFC)

3. Abuse of legal structuring possibilities/establishment of letterbox companies (Sec. 42 G-GFC)

Treaty law

1. Application of the double tax treaties (Art. 1 OECD-MC)

2. Permanent establishment (Art. 5 OECD-MC)

International tax law

1. Treaty/directive shopping regulation(Sec. 50d para. 3 G-ITA), in particular the principle purpose test

2. Motive test (Sec. 8 para. 2 G-FTA)

This is how Forvis Mazars supports

The team for international tax law and M&A tax around Marcus von Goldacker and Florian Mengele has many years of experience around the topic of "substance".

This is based on Marcus von Goldacker's many years of work experience in this area, including his long-standing position as Global Head of Corporate Tax. In addition, Florian Mengele brings together many years of tax advisory expertise and additional experience to the table as the former head of a tax audit office in south-eastern Bavaria with a supervisory function for more than 40 tax auditors, as well as detailed knowledge of the view and approach of the German tax authorities.

Forvis Mazars advises our clients comprehensively in these areas:

1. Substance check

Standard version: Tax comments on the existing substance of the respective company from a tax point of view - based on the documents submitted, without own plausibility checks
Premium version: Tax comments on the existing substance of the respective company from a tax point of view - based on the submitted documents as well as a plausibility check of the submitted documents by means of an on-site visit including the corresponding documentation

2. Tax advice

Tax advice in the area of substance