Investors from other EU countries: Avoidance of permanent establishment taxation in Germany - the "trust model" as an alternative to the income tax group structure

published on 16th May 2022

Investors residing abroad ("third country") who make use of operationally active energy-generating project companies in the legal form of a GmbH & Co. KG in Germany are regularly subject to permanent establishment taxation in Germany at the level of these project companies. This often leads to complex discussions with the tax authorities, especially with regard to the "appropriate" endowment capital within the meaning of German foreign tax rules and, for example, the interest on shareholder loans to these project companies.

If a German (intermediate) holding company is operated in Germany in the legal form of a corporation (GmbH), profits and losses from the various limited partnership interests of the German holding company can be offset for corporation tax purposes at its tax level. However, this does not apply for the purposes of trade taxation; to this extent, each project limited partnership is a separate trade. The losses of one of these commercial enterprises cannot be offset against the other enterprises for trade tax purposes.

If the project companies held by the German holding company are organized in Germany as limited liability companies (GmbH), potential purchasers of the shares in these companies have the disadvantage that they cannot effectively write off the resulting acquisition costs for tax purposes. This point is, however, a not insignificant argument when selling the shares. Although the conclusion of profit and loss transfer agreements and thus the establishment of "tax groups" is a means of at least making it possible to offset profits and losses at the level of the German holding company for tax purposes, these constructions must in principle be designed for at least five years. The problem of the tax "non-depreciability" of acquisition costs at the level of an investor remains.

These disadvantages can be avoided if the German holding company manages the project companies as limited partnerships, in which, however, it is a fully liable partner (general partner), and takes on a very predominant substantial shareholding, for example 99.9 per cent. This should not be a disadvantage, since even in the "classic" "tax group structure" the holding company must compensate for all losses of the subsidiary companies, and this over a period of five years. In contrast to the tax group structure, the trust model can be terminated at any time at short notice, there is no need to maintain a five-year term, and the tax profit/loss offsetting opportunities generated until termination are not lost.

The remaining "dwarf share" of 0.1 percent is held by a Treuhand GmbH founded for this purpose, which is to participate in the limited partnership as a limited partner. It holds this limited partner's share in trust for the account of the holding company:

Holding

In this model, even assets of the holding company could be transferred to the ownership of Project GmbH & Co. KG in a tax-neutral manner, if this should appear sensible, e.g. for reasons of civil law. If the assets in question are real estate, no real estate transfer tax is payable.

The reverse transfer path from the project company to the holding company is generally just as tax-neutral.

On the other hand, there is the disadvantage that capital gains on the sale of shares in Project GmbH & Co.KG are subject to regular tax at the level of the (intermediate) holding company. With long-term planning and appropriate observance of the tax holding obligations, tax optimizations can be achieved by way of conversion transactions.