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In the globalized shipping community different taxation regimes play an important role. Monique Giese and Sebastian Krüger illustrate potential challenges for German companies
Globalization is growing at a fast pace and more and more companies are quickly adapting. The speed of how goods[ds_preview] are transferred around the globe has

increased enormously. Therefore, international trading companies – and not only large corporations – offer their products or services worldwide.

Companies establish subsidiaries abroad to be closer to their customers and provide faster services to them. However, doing business internationally means different national taxation principles and – if applicable – bilateral conventions to avoid (among others) double taxation.

Before setting up such kind of international company structures, a tax structuring is necessary, especially beneficial to shipping companies – since they are required to establish an international corporate network.

The following article displays – based on a hypothetical example – a piece of the challenges of international taxation for German shipping companies.1 This example displays a hypothetical international shipping group, headed by a holding company (»HoldCo«) located in Germany. HoldCo holds shares in the following companies located in Germany:

– A-GmbH (established as a corporation) which offers ship management services to several companies of the group

– B-GmbH (established as a corporation) having a holding function for its foreign subsidiaries (US-Co and NL-Co) and running its own shipping business in Germany

– C-GmbH (established as a corporation) which acts as an unlimited liability partner for the German KGs

KGs (established as limited partnerships) that run operative shipping businesses in Germany. The limited liability partner is located in the UK.

Selected international tax implications

Dividend distributions from US-Co to B-GmbH: Taxation in the USA

US-Co runs a shipping agency for the German shipping group. The company is located in the US and therefore subject to US taxes. Distributions from US-Co to B-GmbH could trigger withholding tax in the US. The Double Taxation Treaty (DTT) between the US and Germany allocates the right of taxation for the dividend income generally to Germany but reserves a right of taxation also for the US. The withholding tax is 15%, if B-GmbH holds less than 10% of the shares in US-Co. In most other cases the withholding tax rate is 5%. A complete exemption from withholding tax may be available if at least 80% of the shares are held and certain additional conditions are met.

Dividend distributions from US-Co

to B-GmbH: Taxation in Germany

B-GmbH is resident in Germany and runs its own shipping business. It is assumed that B-GmbH opted for the German Tonnage Tax Regime. From a German tax perspective it is questionable then whether B-GmbH’s entire income is taxed under the German Tonnage Tax Regime or whether the company needs to be seen as a mixed operational business (Mischbetrieb). According to the German tax authorities’ opinion dividend income is generally not covered by tonnage taxation since there is no direct connection to the shipping business. Therefore dividend income will generally not be taxed as shipping income and all profits and expenses of B-GmbH have to be divided into shipping income and non shipping income. For the shipping income the tonnage tax system applies, therefore the taxable profit is determined on the basis of the net tonnage of the vessels and the number of operating days during the fiscal year.

The dividend income, under general principles, will be tax exempt (if the mother company holds at least 10% of the shares) but, 5% of the dividend income will be treated as non deductable expense and will be taxed under regular tax principles with a tax rate of approx. 30%. One may consider this a double taxation scenario because the US also deducts 5% withholding tax on the dividend distribution. Since the DTT between Germany and the US requires that Germany avoids the double taxation by exempting the dividend income from taxation the questions arises whether the taxation of the 5% has to be seen as a treaty override. However, based on a decision of the German Federal Tax Court to a similar question and the majority of German tax literature a treaty override is not in place in the described example.

Another question is whether or not the dividend income could be covered under tonnage taxation. As described above the German tax authorities argue that dividend income is not covered by tonnage taxation since there is no link to the shipping business. However, if US-Co as a shipping agency supports the activity of the vessels of B-GmbH, represents B-GmbH in the US, ensures that the transportation process runs without any problems and organizes new tonnage, it could potentially be argued that an immediate connection to the shipping business of B-GmbH exists so that the dividend income is covered by tonnage taxation.

Special Purpose Vessels

Due to the limitation of fossil fuels, like gas or oil, the development of alternative energy sources has increased. Energy from offshore wind turbines has become more and more important as a way to exploit new energy sources. The installation of such offshore wind turbines requires special offshore vessels. The shipping group in the aforementioned example wants to offer such services. In Germany such vessels are not covered by the German Tonnage Tax Regime. Therefore, the taxable income would be subject to the regular taxation principles (effective tax rate is approx. 30%). However, other jurisdictions could be used, e. g., the Netherlands. According to the Dutch Tonnage Tax Regime, also companies that run offshore vessels could (under certain conditions) apply for tonnage taxation, in order to get a lower tax rate for the income arising from the offshore vessels B-GmbH established NL-Co.

German Foreign Transaction

Tax Act (AStG)

The German Foreign Transaction Tax Act (FTTA) is another challenge for shipping companies. From a German tax perspective, structures with companies in countries that apply a lower effective tax rate than 25% could face an additional tax burden in Germany depending on the substance and business in the respective countries. NL-Co will charter in the vessels on the basis of a time charter agreement. The ship management will be carried out by A-GmbH. Regardless of whether NL-Co can apply for the Dutch Tonnage Tax Regime §8AStG can apply if certain conditions are met and passive income is generated by NL-Co. I.e., if NL-Co has no substance in the Netherlands, main parts of its services rendered to their customers are carried out by A-GmbH as the shipping manager (legal entity related to B-GmbH) and B-GmbH as the shipping company has all the relevant expertise, the German tax authorities could assume that NL-Co obtains passive income. In a consequence NL-Co’s income would be allocated to B-GmbH and taxed in Germany. The income allocated to B-GmbH could potentially be offset against future dividend distributions.

Assuming that the Dutch Tonnage Tax Regime applies, the next step would be to determine which income would be taxed in Germany – the income calculated under the Dutch Tonnage Tax principles or the income determined in accordance with the regular German taxation system. The second more likely solution would result in the same tax burden that would arise in case the vessels are operated by B-GmbH and not NL-Co.

Transfer Pricing

All service fees rendered and provided to companies across the border have to be at arm’s length. A documentation of the services and the calculated fees is required. If the German tax authorities request a transfer pricing documentation, the company must file it within 60 days or 30 days in case of extraordinary transactions. The deadline cannot be extended. Amendments with regard to transfer pricing issues could lead to an additional tax burden and even double taxation. Certain double taxation controversies could only be avoided by initiating a mutual agreement procedure which could last several years.

Different types of the shipping clauses

in DTTs (Art. 8)

According to Article 8 of the OECD Model Tax Convention shipping income can only be taxed in the state where the effective management of the shipping company is based. Shipping income itself is not defined. According to the tax literature on the OECD Model Tax Convention shipping income has to be defined in accordance with the tax laws in the respective countries. For this reason there could be different interpretations of the income that is covered by Article 8. Besides different interpretations there are also different wordings of Article 8 that could lead to different results in comparison to other DTT as the following example shows.

HoldCo has a subsidiary in the UK that is a limited liable partner of German KGs. The effective management of the KGs is located in Germany. Article 8 of the DTT between UK and Germany allocates the right of taxation of the shipping income of the KGs to UK and not to Germany even though the effective management of the KGs is in Germany. Article 8 of the DTT between Germany and UK does not refer to the effective management of the shipping company but to profits of an enterprise of a Contracting State from the operation of ships. Since the German KG is not considered a person in the sense of the DTT the income of the KGs is likely to be allocated to the enterprise of UK-Co in the UK and to be taxed in UK.

From a German tax perspective the KGs are transparent for tax purposes. Therefore the limited partner (UK-Co) would be subject to limited taxation in Germany for the income arising from the KG. The advantage of the German perspective would be that the German tonnage taxation applies and the tax burden would be quite low. It is questionable whether the German tax authorities would agree with the UK perspective resulting in a complete tax exemption in Germany. As long as there is no common understanding there is a potential double taxation (possibly mitigated by a tax credit in the UK under domestic law). Also in this case the incentive of German tonnage taxation would be totally gone. If the limited partner were not a UK-Co but an NL-Co, Germany would have the right of taxation for the income of the KGs according to the respective DTT, as the wording in the Germany/Netherlands DTT refers to the effective management of the KGs.

Summary

The hypothetical example shows the challenges for companies that run an international shipping business with subsidiaries in several countries. Company structures do not only serve tax purposes but any structuring should always also consider the tax consequences in the respective countries. The different tax systems around the globe are very complex not only with regard to income taxes but also with regard to VAT (the latter not discussed in the short example above).


Monique Giese, Sebastian Krüger