Controlled foreign corporation

As additional taxation, the taxation of income of a foreign subsidiary is referred to the domestic partner.

Basically, a foreign entity - if it is a corporation - seen as a separate taxable entity. The income of the subsidiary under foreign tax law and taxed abroad. The domestic taxation are subject only to the distributions of the subsidiary to the domestic partner.

These regulations allow abuse. For example, a resident taxpayer to establish a subsidiary in the low-taxed foreign and place its bonds there. The related interest he may have only abroad (low) tax as long as he does not distribute, but reinvests.

To misuse defense, the separation between shareholders and society is broken in certain cases. Then the income of the foreign subsidiary are added to the income of the domestic partner directly. The shareholders must then pay tax on domestic income of the foreign subsidiary ( for example, the related interest). The tax paid abroad can usually be counted, as a result, the domestic tax level is reached.

For Germany, the additional taxation is regulated in the fourth part of the External Tax Act. Additional taxation is also available in the UK, France, Italy, Sweden, the USA, New Zealand and Japan and some other countries. The design of additional taxation is very different from state to state.

The European Court has stated in the Cadbury Schweppes decision, the additional taxation to be legal. It is compatible with the freedom of establishment. Condition is, however, that objectively there had been a misuse to exploit different levels of taxation.