Companies that operate abroad, or wish to, quickly find themselves faced with a whole range of tax-related issues, such as what country their revenues should be taxed in. The problem here is that national tax systems usually apply both the worldwide income principle and the source state principle. This means that companies operating internationally are taxed on their worldwide income in their home country, while also having limited tax liability in respect of income earned abroad in the country concerned. In short: sometimes they must pay taxes on the same income in several countries.
To prevent such multiple taxation, Germany has entered into double taxation conventions, which have the status of an international treaty, with numerous countries. These conventions govern which country taxes a company’s income from what entrepreneurial activities, and how double taxation is prevented. To avoid unwelcome and unexpected tax implications, it is essential that you are familiar with these rules.
The term “permanent establishment” alone is difficult as there are various definitions. As a rule of thumb, branches, offices and production facilities belonging to a corporate group are all considered permanent establishments. For the purpose of taxing these permanent establishments, it needs to be determined what proportion of total corporate profit generated in the country in which the permanent establishment is located must be taxed in that country. To do this, permanent establishments must be identified as such in good time and companies must gain a thorough understanding of the international tax rules in the respective area.
The wide variation in tax systems across different countries means that it is not always easy for companies to comply fully with their tax obligations. There is always the risk that something is overlooked or classified incorrectly. This might result in both unplanned additional tax payments and penalties. For this reason, it is important to submit tax returns in the affected countries that are well aligned with one another. In this context it is vitally important to allocate income in different countries accurately.
It is inevitable that a company operating across national borders will sometimes need employees to work in other countries on a temporary basis. This situation can quickly turn into a foreign posting, in which case the legal framework of the respective country applies. When an employee is posted abroad, companies must not only take account of local employment law and administrative aspects and make extensive preparations – there are also lots of tax-related issues to consider. It is especially important to know where the posted employee has to pay taxes and thus which taxes the employer has to withhold and pay abroad.
Companies in international groups often have various business links with affiliated enterprises abroad. Supplies of goods and services between these enterprises must be priced according to the arm’s length principle. This means that they must charge the price they would have agreed with unrelated third parties. These prices are not always easy to determine, and it is not unusual for there to be different methods of doing so. Because these prices have a significant influence on profits generated in a country and thus on tax payable in that country, transfer prices are a subject of perennial interest to tax authorities. Companies should therefore always be able to give solid evidence of how an individual transfer price was arrived at. It is crucial that this process is fully documented and that the related documentation is available for submission to the tax authorities in case of queries.
The requirements imposed by tax law on companies that operate across national borders are enormous. This is why you need an internationally experienced tax advisor you can trust. Schultze & Braun advises and supports clients with their international tax situation, clarifies legal questions and enables them to plan their cross-border activities with confidence. Our experts have extensive networks in the countries they work with and can consult with local specialists if necessary. Our work focuses on France, Switzerland and Italy.
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