Transfer of German Functions and Tax Deductibility in China

Sat May 01 16:24:38 EDT 2010
By Dr. Alexander Voegele and Chunyu Zhang

As part of its tax reform package in 2008, Germany enacted tax legislation that contains provisions applicable to the relocation of business. The legislation applies to all "transfer of functions" out of Germany. In July 2009, the German Federal Ministry of Finance released draft administrative guidelines that explain the tax authorities’ view on the transfer of functions using case examples, and addresses issues not contained in the legislation. The implementation of the new regulation raises challenges for German multinational companies that seek to expand their presence in the global marketplace. Along with an increased administrative burden due to additional documentation standards, companies may face uncertainty over tax treatments in the receiving countries while the risk of disputes between tax authorities will be increased on an international level. At the same time, many companies in Germany are pursuing business in/with China and are conducting an increasing number of cross-border transfers of business functions from Germany to China.

This article, by NERA Special Consultant Dr. Alexander Voegele and Chunyu Zhang, examines the questions that Germany’s new tax regime raises for companies about how to address the issues related to the tax treatments of transferred functions in Germany and China. In addition to uncertainty about the amount of tax, the companies may have to face non-deductibility of the payments in China, and any disagreement between tax authorities will lead to double taxation. The authors discuss potential tax exposures that taxpayers must take into account when relocating businesses and functions, and address forms and possibly tax treatments of remuneration in China.