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:



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

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

Mr. Olivier R. Hoor Mr. Olivier R. Hoor
[email protected]
Mr. Andreas Medler Mr. Andreas Medler
[email protected]

Tous les articles TVA

Derniers articles TVA

VAT e-commerce package for B2C transactions

A VAT e-commerce package for business-to-consumer (B2C) transactions came into force as from 1 July 2021.

VAT e-commerce package for B2C transactions Read more

Favourable CJEU clarification on the VAT exemption for fund management services

On 17 June 2021, the Court of Justice of the European Union (CJEU) rendered its judgment in joined cases K (C-58...

Favourable CJEU clarification on the VAT exemption for fund management services Read more

Further guidance from the ECJ on VAT exemption for the management of special investment funds

The European Court of Justice (ECJ) ruled that the VAT exemption for the ‘management of special investment funds&rsq...

Further guidance from the ECJ on VAT exemption for the management of special investment funds Read more

VAT fixed establishment non-existing without staff

The European Court of Justice (ECJ) ruled in the highly anticipated Titanium case that own staff is required for a ‘...

VAT fixed establishment non-existing without staff Read more

Derniers articles de Mr. Olivier R. Hoor

COVID-19: The possibility to hold general meetings and other meetings of corporate bodies of enti...

On 22 September 2020, the draft law n°7673 providing measures concerning the holding of meetings of companies and othe...

Read more

New measures for Luxembourg investment funds in the context of COVID-19

Considering the development of the COVID-19 crisis, a number of new measures and communications have been issued to the at...

Read more

DAC6 – Luxembourg implements the New Reporting Obligations of Tax Intermediaries

On Saturday 21 March 2020, the Luxembourg parliament passed the law implementing the Council Directive (EU) 2018/822 of 25...

Read more

Luxembourg starts the implementation of ATAD 2

On 8 August, the draft law (the “draft law”) implementing the EU Directive 2017/952 of 29 May 2017 (“ATA...

Read more

Derniers articles de Mr. Andreas Medler

Luxembourg tax authorities issue circular on interest deduction limitation rules

On 8 January 2021, the Luxembourg tax authorities issued a new Circular n° 168bis/1 (the “Circular”) in or...

Read more

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