Anyone who sets up or invests in a foreign company often comes up against a particularly far-reaching provision of German international tax law: CFC taxation (Hinzurechnungsbesteuerung) under Sections 7 to 13 of the German Foreign Tax Act (Außensteuergesetz, AStG). It does not depend on any actual payment. If a controlled foreign company earns passive income that is taxed at a low rate abroad, the law attributes this income to the German shareholder as their own income, irrespective of whether any distribution is made at all. Most recently, the Minimum Tax Adjustment Act (Mindeststeueranpassungsgesetz) of 22 December 2025 changed the exemption limits.
What Is CFC Taxation? Basic Principle and Purpose
CFC taxation is governed by Part Four of the Foreign Tax Act (Sections 7 to 13 AStG). The former Section 14 AStG on lower-tier intermediate companies was abolished by the ATAD Implementation Act (ATAD-Umsetzungsgesetz) of 25 June 2021, because indirect shareholdings have since been covered by the extended concept of control in Section 7 AStG. Internationally, such rules are referred to as a CFC regime, after the term controlled foreign corporation.
The purpose of the rule: without such a provision, a German shareholder could permanently retain profits from mobile, easily shifted sources of income (such as interest, royalties or certain dividends) in a low-taxed foreign company, typically a foreign holding company, and thus defer German taxation indefinitely. CFC taxation prevents this by overriding, for tax purposes, the shielding effect of a corporation that is legally independent under civil law.
It must be distinguished from exit tax on GmbH shareholdings under Section 6 AStG, which taxes the deemed sale of shares within the meaning of Section 17 of the German Income Tax Act (EStG) on a one-off basis, above all on emigration, and does not require low taxation. Foreign foundations and trusts without shareholders, by contrast, are covered by Section 15 AStG; see our article on the German family foundation as asset protection. These regimes can apply alongside each other and must be examined separately.
The Four Requirements at a Glance
CFC taxation requires, cumulatively: a foreign company, its control by a person subject to unlimited tax liability (alone or with related persons), passive income outside the catalogue of active income and low taxation of this income. If one requirement is missing, there is no attribution under Section 7 AStG. For income of a capital investment nature, Section 13 AStG contains a special rule (see below).
1. The Foreign Company (Section 7 (1) AStG)
The rule covers corporations, associations of persons and pools of assets within the meaning of the German Corporate Income Tax Act (KStG) that have neither their place of management nor their registered office in Germany. Whether a foreign legal form corresponds to a German corporation is examined by way of a comparison of legal types based on its corporate structure; with hybrid legal forms, this is not always clear-cut. Under Section 7 (1) sentence 4 AStG, the provision also applies to persons with limited tax liability to the extent that the shareholding is directly or indirectly attributable to a German commercial permanent establishment.
2. The Control Criterion (Section 7 (2) to (4) AStG)
Control exists if, alone or together with related persons within the meaning of Section 1 (2) AStG, more than half of the voting rights or of the shares in the nominal capital are directly or indirectly attributable to the taxpayer, or if they are entitled to more than half of the profit or of the liquidation proceeds. Under Section 7 (4) AStG, persons who act together through concerted conduct are also treated as related. Until 2021, so-called control by German residents was sufficient, under which the shareholdings of several German residents who were not related to one another were added together; since the ATAD Implementation Act, what matters is the individual taxpayer and their related persons.
3. Passive Income: The Catalogue of Active Income in Section 8 (1) AStG
The foreign company must earn income that does not fall under the catalogue of active income in Section 8 (1) AStG; it is not necessary for such income to predominate. Only the activities listed there are treated as active, and all other income as passive, separately for each source of income. Whether small amounts are disregarded is governed solely by the exemption limit in Section 9 AStG.
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| No. | Activity under Section 8 (1) AStG | Important restriction |
|---|---|---|
| 1 | Agriculture and forestry | None |
| 2 | Manufacturing, processing, finishing or assembly of goods, generation of energy, prospecting for and extraction of mineral resources | None |
| 3 | Operation of insurance undertakings, credit institutions and financial services institutions | Only with substantial economic activity (Section 8 (2) AStG); passive if more than one third of the business is conducted with the taxpayer or related persons |
| 4 | Trading | Passive if the German resident shareholder or a related person gives the company power of disposal over the goods, or vice versa, unless the company maintains a commercially organised business operation and trades without their involvement |
| 5 | Services | Passive if the company makes use of the involvement of a German resident shareholder or a person related to them |
| 6 | Letting and leasing | Passive in particular in the case of certain licensing of rights without the company’s own research or development activity |
| 7 | Receipts within the meaning of Section 8b (1) KStG (dividends) | Passive, among other things, to the extent that the receipts reduced the income of the paying corporation, and for portfolio dividends (Section 8b (4) KStG) |
| 8 | Gains from the sale of shares, liquidation, capital reduction | Passive only in the cases of Section 8b (7) KStG |
| 9 | Reorganisations | Passive to the extent that the assets transferred do not serve active activities, unless it is proven that a book value transfer would be possible in Germany and book values are actually continued abroad |
Operating activities such as production, trading with the company’s own business operation or services provided with its own staff therefore generally remain unproblematic; typically passive are interest from intra-group financing, certain royalty income and portfolio dividends.
4. Low Taxation: The 15 % Threshold under Section 8 (5) AStG
Low taxation exists if the passive income, determined in accordance with German principles for determining profits, is subject to an income tax burden abroad of less than 15 per cent. The threshold has been changed several times: until the end of 2023, it was 25 per cent (since 2001; previously 30 per cent), initially set out in the former Section 8 (3) AStG. The ATAD Implementation Act of 2021 moved it to Section 8 (5) AStG. Only the Act implementing Directive (EU) 2022/2523 on global minimum taxation of 21 December 2023 (Federal Law Gazette, BGBl. 2023 I No. 397, in force since 28 December 2023) lowered the threshold to 15 per cent. Under Section 21 (6) AStG, it applies to intermediate income from financial years ending after 31 December 2023.
The reduction has narrowed the scope of application: since then, countries with an income tax burden between 15 and 25 per cent are no longer treated as low-tax countries. What remains decisive, however, is the actual burden on the specific income, which can be below 15 per cent even in countries with a higher standard rate as a result of special regimes (such as IP or licence boxes).
Unclear legal position: obtain a binding ruling. Where the tax assessment in Germany is not certain or is foreseeably subject to change, an application to the tax office for a binding ruling (verbindliche Auskunft, Section 89 (2) of the German Fiscal Code, AO) belongs before implementation. It binds the tax office to the assessment given for a precisely defined set of facts that has not yet been realised, and it is subject to a fee. In our view, a tax adviser who does not recommend this in such a situation is acting irresponsibly: the client risks having to litigate over the outcome years later, and that costs time and money.
The Exemption Limit for Mixed Income: New Values from the 2026 Financial Year (Section 9 AStG)
In the case of mixed income, there is no attribution under Section 9 AStG if the passive income does not exceed certain thresholds. In the version introduced by the ATAD Implementation Act, a relative exemption limit of 10 per cent of the company’s total income applied, combined with an absolute, shareholder-related exemption limit of 80,000 euros.
The Act on the Adjustment of the Minimum Tax Act and the Implementation of Further Measures of 22 December 2025 (BGBl. 2025 I No. 353, in force since 24 December 2025) raised both values: the relative exemption limit is now one third of the foreign company’s total income, and the absolute exemption limit is 100,000 euros. The latter is now company-related, meaning that it applies to each intermediate company as a whole and no longer to each shareholder. Under Section 21 (9) AStG, the new values apply to financial years beginning after 31 December 2025; where the financial year corresponds to the calendar year, therefore, from 2026. For earlier financial years, including a non-calendar financial year 2025/2026, the values of 10 per cent and 80,000 euros continue to apply.
Substance Test for EU/EEA Companies (Section 8 (2) to (4) AStG)
For companies with their registered office or place of management in the European Union or the European Economic Area, there is an important way of obtaining relief: under Section 8 (2) AStG, there is no attribution to the extent that the taxpayer proves that the company carries on a substantial economic activity there. Adequate local resources in terms of premises and staff are required (the company’s own business premises, qualified staff with decision-making authority); a letterbox address is not sufficient.
This requirement goes back to the case law of the Court of Justice of the European Union (CJEU). In Cadbury Schweppes (C-196/04, Grand Chamber judgment of 12 September 2006), the CJEU held that a national CFC rule may restrict the freedom of establishment only if it is limited to wholly artificial arrangements intended to avoid tax. The German legislature implemented this in Section 8 (2) AStG, but with limits:
- Under Section 8 (3) AStG, the proof is available only for companies with their registered office or place of management in the EU or the EEA.
- Under Section 8 (4) AStG, it requires the state in which the company is based to provide the necessary information.
- It is excluded if the company has its activities carried out predominantly by third parties.
- Only income that corresponds to the arm’s length principle is allocated to the company.
For companies in third countries (for example in the United Arab Emirates or in Hong Kong), this proof of substance is not available. There, CFC taxation generally continues to apply, provided that the other requirements are met. Foreign tax law must be examined by an adviser in the respective country.
Legal Consequence: The Attributed Amount (Section 10 AStG)
If all requirements are met, the passive, low-taxed income is attributed to the taxpayer as the attributed amount (Hinzurechnungsbetrag) in proportion to their direct and indirect shareholding in the nominal capital (or, where profits are distributed differently, in accordance with the profit distribution key). Under Section 10 (3) AStG, the income is determined by applying German tax law accordingly; it is treated as business income, and profit is determined in accordance with Section 4 (1) EStG. The attributed amount is deemed to have been received in the assessment period in which the relevant financial year of the foreign company ends.
For the shareholder, the attributed amount is part of income within the meaning of Section 20 (1) no. 1 EStG under Section 10 (2) sentence 1 AStG. If they hold the shares as business assets, the amount increases the profit of the business under Section 10 (2) sentence 2 AStG and is then also subject to trade tax.
One restriction is of central practical importance: the usual concessions for investment income do not apply. Under Section 10 (2) sentence 4 AStG, the partial income method (Section 3 no. 40 sentence 1 (d) EStG), the flat withholding tax rate under Section 32d EStG, the exemption under Section 8b (1) KStG and the trade tax deduction under Section 9 no. 7 of the German Trade Tax Act (GewStG) are expressly excluded. Individuals therefore pay tax on the amount at the progressive rate, and corporations at the full corporate income tax rate.
Avoiding a Double Burden: Deduction Amount and Credit (Sections 11, 12 AStG)
Under Section 11 AStG, later profit distributions by the intermediate company (including hidden profit distributions) and gains from the sale of the shareholding remain tax-exempt up to a deduction amount, to the extent that the underlying profits have already been taxed as an attributed amount. The benchmark is the attribution correction volume (Hinzurechnungskorrekturvolumen) determined separately for each taxpayer. If the determination under Section 10 AStG results in a negative amount, there is no attribution. Losses from intermediate income can be carried forward to later years in accordance with Section 10d EStG (Section 10 (3) sentences 5 and 6 AStG); a carry-back is excluded.
Under Section 12 AStG, the taxes actually levied on the intermediate company in respect of the attributed income are additionally credited against the German income or corporate income tax attributable to the attributed amount.
Special Case: Income of a Capital Investment Nature (Section 13 AStG)
Section 13 AStG covers intermediate companies with income of a capital investment nature, that is, income from holding and managing cash, receivables, securities and similar assets. Here, a shareholding of at least 10 per cent of the voting rights or of the nominal capital (alone or with related persons) is sufficient; control within the meaning of Section 7 AStG is not required. The 10 per cent threshold was introduced by the Minimum Tax Adjustment Act with retroactive effect for financial years from 2022 (Section 21 (8) AStG). Section 13 AStG does not apply to investment funds within the meaning of the German Investment Tax Act.
Procedural Law: Separate Determination under Section 18 AStG
The tax bases, in particular the attributed amount and the creditable taxes, are not determined in the normal assessment procedure but in a separate determination procedure (with several participants, a separate and uniform determination procedure) under Section 18 AStG. The competent tax office is the one with local jurisdiction for taxing the taxpayer’s income from shareholdings; where there are several participants, jurisdiction depends on the participant with the largest shareholding. Each participant must submit a determination return electronically using the officially prescribed data record. Anyone who wishes to rely on proof of substance under Section 8 (2) AStG must notify this electronically and provide proof under Section 18 (3) AStG; the requirements for the exemption limit under Section 9 AStG must be set out in the determination return.
No Protection from Double Taxation Treaties: Treaty Override under Section 20 AStG
It is often assumed that an existing double taxation treaty with the country in which the foreign company is based protects against CFC taxation, for example because it allocates the right to tax business profits to the other state. Section 20 (1) AStG, however, provides that the rules on CFC taxation apply notwithstanding any conflicting treaty provisions (a so-called treaty override). A treaty with the company’s country of residence therefore offers no protection against attribution.
Distinction from Related Regimes of German Foreign Tax Law
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| Regime | Legal basis | Point of reference | Triggering event |
|---|---|---|---|
| CFC taxation | Sections 7 to 13 AStG | Controlled foreign company with passive, low-taxed income | Ongoing, at the end of the foreign company’s financial year, regardless of any distribution |
| Exit taxation | Section 6 AStG | Shareholding of at least 1 % in a corporation (Section 17 EStG) | One-off, above all on the shareholder’s emigration |
| Attribution taxation for foundations/trusts | Section 15 AStG | Foreign family foundation or comparable pool of assets | Ongoing, regardless of any distribution to the beneficiaries |
| Exit taxation of business assets (Entstrickung) | Section 4 (1) sentence 3 EStG / Section 12 (1) KStG | Hidden reserves of an asset that leaves Germany’s taxing jurisdiction | One-off, when the asset is transferred |
If not just a shareholding is held but the entire registered office of the business is relocated, exit taxation of business assets and further consequences come into play, which are described in our article on moving a company’s registered office abroad.
Checklist: Examining CFC Taxation of a Foreign Company
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| Step | Content |
|---|---|
| 1. Check the type of company | Comparison of legal types with a corporation within the meaning of the KStG |
| 2. Determine control | Together with related persons, more than 50 % of the voting rights, capital or profit? |
| 3. Classify the income | Check each source of income against the catalogue in Section 8 (1) AStG |
| 4. Determine the tax burden | Burden below 15 % (Section 8 (5) AStG)? |
| 5. Check the exemption limit | From the 2026 financial year, one third and 100,000 euros per company; before that, 10 % and 80,000 euros per shareholder (Section 9 AStG) |
| 6. Substance test for the EU/EEA | Document substantial economic activity (Section 8 (2) to (4) AStG) |
| 7. Calculate the attributed amount | Under German tax law, without the partial income method or flat withholding tax (Section 10 AStG) |
| 8. Deduction and credit | Record the attribution correction volume (Section 11 AStG) and foreign taxes (Section 12 AStG) |
| 9. Determination return | Submit electronically under Section 18 AStG |
| 10. Do not overestimate treaty protection | Observe the treaty override under Section 20 AStG |
Example
Example: Frank, an entrepreneur resident in Germany, holds 100 % of the shares in a corporation based in a country outside the EU as private assets; the company’s income tax burden there is 9 %. The company grants loans to affiliated companies and earns interest income from them; it has no business operation of its own with local staff. The interest is passive, Frank controls the company and the burden is below 15 per cent; proof of substance is not available in a third country. The interest income is therefore attributed to Frank as an attributed amount, even without a distribution. For Frank, the attributed amount is subject to income tax at the progressive rate. The income tax of 9 % paid by the company is credited under Section 12 AStG; if the company later distributes the profits already taxed, the distribution remains tax-exempt under Section 11 AStG by means of the deduction amount.
Conclusion
CFC taxation overrides the shielding effect of low-taxed foreign intermediate companies. Anyone who knows the four requirements, carefully documents proof of substance for EU/EEA companies and takes into account the exemption limits applicable from the 2026 financial year can realistically assess the risk. Neither a double taxation treaty nor the participation exemption protects against attribution.
Frequently Asked Questions
When does CFC taxation apply?
It applies if a foreign company is more than 50 per cent controlled by a person subject to unlimited tax liability (alone or with related persons), earns passive income outside the catalogue of active income in Section 8 (1) AStG and this income is taxed at less than 15 per cent. It is not necessary for passive income to predominate. For income of a capital investment nature, a shareholding of 10 per cent is sufficient under Section 13 AStG.
Which low-tax threshold currently applies?
Under Section 8 (5) AStG, low taxation exists if the income tax burden is below 15 per cent. The threshold applies to intermediate income from financial years ending after 31 December 2023; before that, it was 25 per cent. The actual burden on the specific income is decisive.
Is there a de minimis limit for mixed income?
Yes, the exemption limit in Section 9 AStG. For financial years beginning after 31 December 2025, there is no attribution if the passive income amounts to no more than one third of total income and no more than 100,000 euros per company. For earlier financial years, 10 per cent and 80,000 euros per shareholder apply.
Does a double taxation treaty protect against attribution?
No. Section 20 (1) AStG provides that CFC taxation applies notwithstanding any conflicting treaty provisions. A treaty with the company’s country of residence therefore offers no protection.
Can attribution be avoided for an EU company through substance?
For companies with their registered office or place of management in the EU or the EEA, the taxpayer can prove under Section 8 (2) AStG that the company carries on a substantial economic activity with its own staff and premises (CJEU, Cadbury Schweppes, C-196/04). The proof is excluded if the state in which the company is based does not provide information or if the activity is carried out predominantly by third parties. Reliance on this must be notified electronically to the tax office under Section 18 (3) AStG.
Attorney Dr. Johannes Fiala and the firm have published extensively on German foreign tax law and CFC taxation and advise entrepreneurs and shareholders on examining foreign shareholdings, from the control and activity tests and proof of substance to coordination with foreign tax advisers. Please get in touch with the firm without obligation to have your international shareholding structure reviewed in an initial consultation.
