The German Federal Tax Court limits German CFC rules and anti-abuse provisions to wholly artificial arrangements

In a decision of the German Federal Tax Court (GFTC) from 13 June 2018 (Decision I R 94/15 published on 17 October 2018), the GFTC ruled, among other things, that the German rules on controlled foreign companies (CFC) are not applicable if a foreign CFC is performing a genuine economic activity. In this regard, the GFTC referred to the decision of the Court of Justice of the European Union (CJEU) in the Cadbury Schweppes case (C-196/04) in which it was ruled that UK CFC rules may only apply to wholly artificial arrangements which do not reflect economic reality and the purpose of which is to unduly obtain a tax advantage.


In the case at hand, a Cypriot company (CyprusCo), indirectly owned by a German corporation (GerCo) through a Dutch corporation (DutchCo), performed activities involving the obtaining and granting of sublicenses to other group companies with regard to the use of intellectual property rights. The license fees paid to CyprusCo exceeded the arm’s length standard. The group structure is depicted in the chart below: 

CyprusCo had a fully equipped office that it rented from a bank (monthly rent ca. EUR 220) and employed a Cypriot director with a business administration background for an annual remuneration of ca. EUR 20,000. The director’s responsibilities were of a rather administrative nature, in particular, the performance and monitoring of payment transactions, client correspondence, the administration of business records and bookkeeping. The German tax authorities considered CyprusCo’s income as passive and low-taxed income since the company did not carry out a genuine economic activity in Cyprus.

The German Federal Tax Court Decision

According to the GFTC, the license fees paid in excess of the arm’s length amount have to be considered as deemed distributions from the paying group companies to GerCo, followed by hidden capital contributions in CyprusCo (indirectly through DutchCo). The GFTC ruled that a potential CFC income has to be reduced by the amount of these hidden capital contributions in favour of CyprusCo.

Moreover, referring to the freedom of establishment and the Cadbury Schweppes case, the GFTC ruled that the remaining (arm’s length) income may not be subject to German CFC rules since, applying an objective test, CyprusCo undisputedly had an actual establishment in Cyprus with premises, staff and equipment to carry out genuine economic activities, regardless of the administrative nature of CyprusCo’s economic activities in Cyprus and potential tax motives which may have been considered when setting up CyprusCo. In practice, this means that the German tax authorities can only apply anti-abuse legislation, be it CFC rules or other anti-abuse provisions under domestic tax law or tax treaty law, in situations of clear abuse where foreign companies have no economic substance or activity whatsoever (i.e. a letterbox company).

What the decision means for business

The decision of the GFTC is in line with a series of decisions of the CJEU1 . It is interesting to note that national courts around Europe have not yet deviated from the wholly artificial arrangement doctrine laid down by the CJEU. Already in the past, the GFTC held that German CFC rules and other anti-abuse provisions when applied in an international context are not consistent with EU Law.

The decision of the GFTC also comes at a time characterised by significant legal uncertainty caused by the way anti-abuse legislation has been applied by the German tax authorities and the implementation of new tax rules as a result of the OECD Base Erosion and Profit Shifting (BEPS) Project. EU Member States have to implement certain BEPS measures as from 1 January 2019 in accordance with the EU anti-tax avoidance directives (ATAD I and II).

In this environment, the decision of the GFTC is positive and contributes to legal certainty as it confirms once again that to be out of reach of German anti-abuse legislation, a company’s organisational substance needs to be adequate, rather than excessive, when compared with its business activities.

This GFTC ruling clarifies important points regarding the level of substance required for a company to fall out of the scope of German CFC and anti-abuse rules.


1 See more comprehensive publications on some of this case law under:



Related : Atoz Luxembourg ( Mr. Olivier R. Hoor ,  Mr. Andreas Medler )

[+ http://www.atoz.lu]

Mr. Olivier R. Hoor Mr. Olivier R. Hoor
Mr. Andreas Medler Mr. Andreas Medler

Click here to see the ad(s)
All articles VAT

Lastest articles VAT

VAT Circular on transactions between related parties

On 19 January 2019, the Luxembourg VAT authorities published Circular 790(“Circular”) to clarify Article ...

VAT Circular on transactions between related parties Read more

VAT Circular on transactions between related parties

On 18 January 2019, the Luxembourg VAT authorities published a new Circular (N°790), which clarifies the provisions of...

Read more

New tax measures revealed in the coalition agreement published by the future government – ATAD Bi...

Further to the elections for Parliament held in October this year, the former ruling coalition between the liberal, ecolog...

Read more

Brexit relocations: The view from CMS Luxembourg

Luxembourg’s well-established reputation as a leading financial centre makes it a natural candidate for financial co...

Read more

Lastest articles by Mr. Olivier R. Hoor

Corporate Tax Reform 2019

On 5 March 2019, the 2019 budget draft law was presented to Parliament. The draft law introduces mainly the following c...

Read more


The law of 21 December 2018 implements the EU Anti-Tax Avoidance Directive (“ATAD”), the aim of ATAD being to ...

Read more

CJEU decides in Danish cases relating to beneficial ownership

On 26 February 2019, the Court of Justice of the European Union (“CJEU”) issued its decisions in six cases whi...

Read more

General Court annuls the decision of the EU Commission on the Belgian excess profit regime

Since June 2013, the EU Commission has been investigating the tax ruling practices of several EU Member States with a view...

Read more

Lastest articles by Mr. Andreas Medler

Upcoming German tax law changes relevant to real estate investments

On 1 August 2018, the German Ministry of Finance published the amended draft bill of the Annual Tax Act 2018 which will be...

Read more

EU Court of Justice rules on the limits of anti-abuse rules

On 20 December 2017, the Court of Justice of the European Union (CJEU) decided on two cases involving German anti-abuse le...

Read more

LexGO Network