Foreign Tax Act (AStG)

Definition and legal basis:

The Foreign Tax Act (AStG) is a German tax law that regulates the taxation of cross-border situations. It was introduced in 1972 and primarily serves to prevent tax avoidance and evasion by shifting income and assets abroad. The AStG supplements national tax law and double taxation agreements (DTAs) with regard to international tax issues. Main objectives and areas of application: The main objectives of the AStG are: 1. preventing the shifting of profits abroad
2. Ensuring appropriate taxation of cross-border activities
3. Implementation of the arm’s length principle for transfer pricing
4. Combating tax havens and harmful tax practices

Important regulatory areas of the AStG:

1. exit taxation (§ 6 AStG): – Taxation of hidden reserves when assets are transferred abroad – Affects in particular natural persons with significant shareholdings in corporations 2. Taxation of add-backs (sections 7-14 AStG):
– Attribution of income of foreign intermediate companies to domestic shareholders
– Aims to prevent the transfer of passive income to low-tax countries 3. Transfer pricing (Section 1 AStG):
– Rules for determining appropriate prices for transactions between affiliated companies
– Implementation of the internationally recognized arm’s length principle 4. Transfer of functions (Section 1 (3) AStG):
– Taxation when corporate functions are transferred abroad
– Recording of the transfer package including profit potentials

Practical significance and challenges:

The AStG has a high practical relevance for internationally active companies and private individuals: 1. For companies:
– Need for careful transfer pricing documentation
– Consideration when structuring international groups
– Effects on cross-border restructurings 2. For private individuals:
– Observance of exit taxation when relocating abroad
– Reporting obligations for shareholdings in foreign companies Challenges arise in particular from:
– Complexity of regulations and frequent legislative changes
– Interactions with foreign tax law and DTAs
– Difficulties in the valuation of intangible assets

Current developments and international aspects:

The AStG is subject to constant adjustments in order to keep pace with international developments: 1. BEPS initiative of the OECD:
– Implementation of measures against base erosion and profit shifting
– Adaptation of transfer pricing regulations to international standards 2. EU Anti-Tax Avoidance Directive (ATAD):
– Implementation of uniform regulations to combat tax avoidance in the EU
– Effects on add-back taxation and exit taxation 3. Digitalization of the economy:
– Challenges in the taxation of digital business models
– Discussions on new concepts of profit allocation 4. Tightening of transparency requirements:
– Extended reporting obligations for cross-border tax arrangements
– Increased international exchange of information

Criticism and discussions:

The AStG is also criticized: 1. Complexity and bureaucracy for companies
2. Possible overtaxation and competitive disadvantages for German companies
3. Tension with EU law, in particular freedom of establishment
4. Challenges in practical implementation, e.g. in the relocation of functions

Future prospects:

The future of the AStG will be significantly influenced by international developments: 1. Further harmonization within the EU and OECD
2. Adaptation to new business models and technological developments
3. Increased focus on substance requirements and economic reality
4. Possible simplifications to reduce the administrative burden

Summary:

The Foreign Tax Act is a key instrument for regulating international taxation in Germany. It aims to ensure appropriate taxation of cross-border situations and to combat tax avoidance. The complexity of the law and the constant adjustments to international developments present companies and consultants with major challenges. At the same time, the AStG is indispensable for ensuring fair taxation in a globalized economy and preventing the erosion of the German tax base. For internationally active companies and private individuals, it remains important to pay close attention to the provisions of the AStG and to closely monitor possible changes. Careful planning and, if necessary, professional advice are often essential to ensure compliance and minimize tax risks.