StartInternat. Tax LawFunction relocation

Function relocation

Because of the ever accelerating speed of digitalisation and globalisation of our economy, international business transactions are routine events even for small- and medium-sized companies today. As a result of this development, companies and their responsible shareholders and managing directors regularly face border-crossing design and (re-) structuring measures.

Parts of production and services should and have to be relocated abroad, in part, as a result of specific tax management (compared with other countries, the average tax burden in Germany is at a historical high) and, in part, also because of the sustained skills shortage to ensure that the companies based in Germany remain competitive at a global level. Because the legislator did not want to stand by and watch this erosion of the tax base without taking measures, it added the taxation of function relocations in the context of the introduction of the Sales Tax Reform Act in 2008.  According to the explanatory memorandum (Bundestag printed document no. 16/4841 p. 84 ff.), the reform was only intended to provide clarification and be in line with the internationally accepted arm’s length principle which had already been applied to assets before the introduction of the law. The relocation of internally created intangible assets, such as unprotected know-how or trademark rights, remained uncovered before the reform. However, the taxation base of these internally created intangible assets was to be protected in Germany.

Function relocation in international tax law

Because the fight for the taxation base is increasingly hard in international tax legislation, in practice, criminal tax proceedings are initiated much faster and more frequently in practice today, resulting in partly considerable fines being imposed on companies and their executive bodies.

How is the topic of function relocation classified?

What is the definition of a function relocation?

What is a “function” within the meaning of foreign transaction tax legislation?

Who or what is a related person?

When is a function restricted?

What is a function duplication?

What are negative delimitations as per section 1 sub-section 7 FVerlV?

Can the launch of a business activity start a function relocation?

Do the legal consequences of a function relocation apply even in the case of a temporary function relocation?

How is a transfer package assessed?

Documentation and duty of cooperation

Which legal consequences and sanctions might apply in the event of violations of the documentation requirements for transfer prices?

Function transfer at the EU level

Special expertise in the field of function relocations

As LHP specialist lawyers, tax advisers and international tax law consultants, we are pleased to support you in connection with questions regarding function relocations.  Based on our long-standing experience in international tax law, we often advise our clients on the avoidance of a function relocation or in determining the “right” transfer package. This helps to avoid potential pitfalls and points of contention with the fiscal administration in a very early phase.

In addition, we review our clients’ existing documentations in connection with function relocations and disclose potential points of attack and weaknesses. In any case, the client should be aware of these aspects during the preparations for a field audit. Finally, criminal tax proceedings and high fines for the companies and their executive bodies have to be avoided in connection with the (complex) rules on function relocations.

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