On 20 December 2017, the largest tax reform for over 30 years was enacted in the USA. It incorporates numerous changes and innovations into US tax law. Against this background, German companies with US-subsidiaries should also review their previous tax planning. The following aspects might be of particular importance:
Problems within the scope of controlled foreign company taxation
The reduction of the corporate tax rate at US federal level from 35 percent to 21 percent together with the respective applicable state and local taxes will lead to an overall tax burden between 21% and around 31.5%. However, depending on the state and local taxes, German Companies with US subsidiaries may be faced with problems concerning the German tax treatment of CFCs under the German Foreign Tax Act if the tax burden is less than 25%.
Even the new concepts of GILTI (global intangible low-taxed income) and FDII (foreign-derived intangible income), which are intended to provide incentives to relocate highly profitable sources of income to the USA, may entail problems: A US subsidiary making use of FDII benefits might thereby reduce its tax burden to less than 25%. Whether, on the contrary, the controlled foreign company taxation of GILTI, which applies in addition to the controlled foreign company taxation under the Subpart F rules, will be recognized within the framework of the German Foreign Tax Act is still unclear.
In general, German companies with US subsidiaries will need to act with respect to their tax planning. Companies with a tax burden of less than 25% will, in the future, have to undergo an audit as to whether they earn any passive income. If the tax burden depends on FDII, a very precise tax calculation will additionally be required. In cases where the US subsidiaries have their own foreign subsidiaries, a review of the tax planning will be required especially as regards the GILTI and FDII rules.
Possible conflict of FDII and royalty barrier rule
Whether royalty payments made by a German company to a US company that uses benefits under the FDII regime fall under the so-called royalty barrier rule of the German Income Tax Act is still uncertain. In our opinion, the better arguments are opposed to this view: A fictitious excess return assumed to originate from immaterial goods is determined for the purposes of FDII. The actual income from royalties, in contrast, is fully added to the taxable income.
FDII is therefore rather a digressive corporate tax which is to be understood as part of standard taxation and also covers other income than royalties. German companies paying royalties to US companies should, however, keep an eye on this issue in order to be able to react in time.
Tax charge through BEAT (Base Erosion and Anti-Abuse Tax)
BEAT is a taxation concept intended to prevent US companies from reducing their tax assessment basis by making payments to related parties domiciled in foreign countries. Companies affected by BEAT will also need a revision of their tax planning as options to reduce the resulting tax charge must be checked in each individual case.
If you have any questions regarding the US tax reform and its consequences or wish to adapt your tax planning in view of the US tax reform, our international tax team will be pleased to advise and support you.