Domicile companies

Ladies and gentlemen,

dear clients, dear friends,

so-called domicile companies continue to be the focus of the tax authorities. During our daily business we notice increasingly that tax authorities and auditors challenge foreign creditors and payees. There are additional queries, requests of proofs and even the rejection of operating and income-related expenses.

Definition of domicile companies

Domicile companies are foreign entities which do not exercise a noticeable own business operation. They are called inactive if there is actually no business activity which would qualify the company to provide the agreed services. Facts like missing offices, missing employees and managers who are responsible in their function as managing director for several companies indicate that it is about an inactive domicile company.

Special rules for domicile companies

To ensure the domestic taxation and to avoid the transfer of income to foreign countries, expenses like income-related and operating expenses as well as debts cannot be considered if the creditor or recipient is unknown according to § 160 of the revenues code. you have to provide details like the address and name of the shareholders. It is not sufficient if you provide the company’s address and institutions only. Instead, you must define the shareholders respectively the actual economic recipient of your payment. Tax authorities must be enabled to identify the recipient without further investigation.

In practice we see, that this can be an issue if the domicile company is contractual partner only formally. In this case tax authorities demand the details of the person who has actually provided the services and who is therefore entitled to receive the remuneration.

In addition, business relations with foreign entities require an increased cooperation from you according to § 90 par. 2 of the revenue code. As far as reasonable, you have to provide the required evidences, which are required for example for identification of the economic recipient, by exhausting all legal and actual possibilities.

What does it mean for you?

Tax authorities will pay close attention to foreign matters in the future as well. We recommend to keep documentations and records of the respective contracts, negotiations, agreements etc. Identify the company’s shareholders and assure who will be your service provider from your foreign business partner. It is expected that you know your business partner like a prudent businessman would have informed himself e.g. in advance of a contract closing. Please keep potential proofs and declarations. This way, you prevent the reduction of tax-relevant expenses by the tax authorities.

If you have any comments, questions or implementation difficulties, please contact us - we will be pleased to assist you!