German Foreign Tax Act · Sections 7 et seq. AStG
German CFC taxation under the AStG: foreign companies and German shareholders
German controlled foreign company rules can cause certain income of a foreign company to be taxed directly at the level of a taxpayer in Germany even though no dividend has been distributed. Key requirements include control of the foreign company, low-taxed income and the classification of the relevant income under the activity catalogue in Section 8 AStG.
Basic principle
Germany can tax income of a foreign company before a distribution is made
Corporations and their shareholders are generally treated as separate taxpayers. Profits of a foreign company therefore normally become directly relevant to the German shareholder only when they are distributed.
German CFC taxation under Sections 7 et seq. AStG can override that separation for certain foreign companies. If the statutory conditions are met, a CFC inclusion amount can be taxed at shareholder level even though the profits remain inside the foreign company.
Multi-step analysis
Owning a foreign company does not automatically trigger German CFC taxation
The AStG analysis follows several stages. Only the interaction of the relevant statutory requirements can lead to a CFC inclusion.
- foreign company within the scope of the AStG
- taxpayer subject to unlimited German taxation
- control under Section 7 AStG
- income for which the company qualifies as an intermediary company
- low taxation below 15%
- review of the activity catalogue in Section 8 AStG
- where applicable, threshold relief under Section 9 AStG
- calculation of the inclusion amount under German tax principles
Section 7 AStG
General German CFC taxation normally requires control
Control generally exists where the German taxpayer, alone or together with related persons, is directly or indirectly entitled at the end of the relevant financial year to more than half of the voting rights or more than half of the nominal capital.
Control can also exist where the taxpayer is directly or indirectly entitled to more than half of the profits or liquidation proceeds of the foreign company.
Voting Rights
More than 50% of the voting rights can establish control.
Capital
More than 50% of the nominal capital can be sufficient for Section 7 AStG.
Profit or Liquidation Rights
Entitlement to more than half of profits or liquidation proceeds can also be relevant.
Related persons
Interests held by related persons can be aggregated
The control analysis is not limited to the shareholder's directly held percentage. Interests held by related persons may have to be included.
The AStG can also take coordinated conduct into account. A structure may therefore fall within Section 7 even if the individual German shareholder personally owns less than 50%.
Section 8 AStG
The AStG uses a statutory activity catalogue
German CFC taxation does not automatically apply to every profit earned by a controlled foreign company. Section 8 AStG identifies categories of income that can qualify as active income where the statutory requirements are met.
Income that does not fall within the statutory active-income exceptions and is also low-taxed can constitute intermediary income. Each material income stream should therefore be analyzed separately.
Manufacturing
Manufacturing, processing, production and assembly activities are generally included among the active categories specified by law.
Trading
Trading can qualify as active income, although transactions involving shareholders or related persons are subject to additional requirements.
Services
Service income can qualify as active where the statutory requirements are met and there is no harmful involvement of related persons.
Rental Income
Rental and leasing income requires a differentiated review. IP and movable assets can be subject to specific rules.
Participation Income
Dividends and gains from shareholdings are specifically addressed in the statutory activity catalogue and are not automatically passive.
Financing & Investments
Interest, financing and investment income can be particularly CFC-sensitive and may also require analysis under Section 13 AStG.
Services
Cross-border service companies require careful analysis
A foreign company earning consulting, management, software or other service income is not automatically treated as active under the AStG.
Structures can become sensitive where the foreign company relies substantially on the activities of the German shareholder or other related persons in providing its services.
- Who actually performs the services?
- Where is qualified personnel located?
- Which functions are performed by the German shareholder?
- Who negotiates with and manages customers?
- What operational substance does the foreign company have?
- Are related-party transactions arm's length?
Low taxation
The low-tax threshold is below 15%
Low taxation within the meaning of Section 8(5) AStG generally exists where the relevant income, calculated under German AStG principles, is subject to income taxes of less than 15%.
It is therefore not sufficient simply to compare the nominal corporate income tax rate of the foreign jurisdiction with 15%. The actual tax burden on the relevant income must be determined under the statutory calculation rules.
U.S. Corporation
The U.S. federal corporate tax rate alone does not answer the 15% test
The nominal U.S. federal corporate income tax rate of a U.S. C corporation is generally above the German low-tax threshold. That does not mean the AStG analysis can automatically be skipped.
The relevant question is the effective tax burden on the income that qualifies as potential intermediary income under German principles. Tax credits, special deductions, losses and the type of income can affect the effective rate.
State corporate taxes can also be relevant. They are not simply added mechanically; the actual income-tax burden imposed on the relevant income must be determined.
Section 9 AStG · 2026 Rules
Mixed-income companies benefit from higher thresholds from 2026
Where a company has both active and intermediary income, Section 9 AStG can exclude the intermediary income if both statutory thresholds are satisfied.
- intermediary income does not exceed one third of total income
- the excluded amounts do not exceed EUR 100,000 in total
- both requirements must be met simultaneously
- this is a threshold exemption, not a deductible allowance
2026 change
The statutory thresholds were increased for 2026
Through 2025, Section 9 AStG applied lower thresholds. From 2026, intermediary income may generally amount to up to one third of total income, while the absolute threshold has been increased to EUR 100,000.
This can allow mixed operating companies with a limited proportion of passive income to remain outside the CFC inclusion more often. The requirements must nevertheless be tested separately for each relevant financial year.
Threshold, not allowance
Exceeding the limit can affect the entire relevant amount
The threshold in Section 9 AStG should not be understood as an allowance that simply shelters the first EUR 100,000. If the statutory conditions are not met, the consequences are not limited to the amount exceeding the threshold.
Companies with passive income close to the relative or absolute limit should therefore be monitored carefully because relatively small changes in income can have significant German tax consequences.
EU / EEA
For EU and EEA companies, proof of substantial economic activity can be decisive
Section 8 AStG contains a specific exception for qualifying companies whose registered office or place of management is in an EU Member State or an EEA state.
Where the statutory requirements are met, the taxpayer can demonstrate that the company carries on substantial economic activity there. Relevant factors include its own business premises, personnel and qualified employees who perform the activity independently and on their own responsibility.
The exception also requires the necessary exchange of information between the relevant jurisdictions.
United States
The EU/EEA substance exception does not apply to a U.S. corporation
A company with its registered office or place of management in the United States is outside the EU and EEA. The specific substantial-economic-activity exception under Section 8(2) and (3) AStG therefore cannot simply be claimed for a U.S. corporation.
Genuine operating substance in the United States remains important for the activity catalogue, transfer pricing, management location and the overall tax structure.
Germany–U.S.
When a U.S. corporation can become particularly relevant under the German CFC rules
Holding Company
The U.S. company primarily owns investments and earns dividends, capital gains or other investment income. Each income category must be classified separately under Section 8 AStG.
Financing Company
The corporation provides intercompany loans or holds substantial interest-bearing investments. Interest and investment income can be particularly sensitive.
IP or Licensing Company
Royalty income and licensing arrangements can create intermediary income depending on the origin of the IP and the company's own development activities.
Service Company
The U.S. corporation invoices services that are actually performed substantially by the German shareholder or a German related company.
Cash Box
Operating profits are accumulated and invested in financial assets that generate interest or other investment income.
Mixed Company
An operating U.S. business also earns passive income. The Section 8 activity catalogue and Section 9 thresholds then become particularly relevant.
Investment-type income
Section 13 AStG can become relevant from a 10% participation
Section 13 AStG contains a special rule for low-taxed income with investment character. It can apply even where the general control requirement in Section 7(1) is not satisfied.
As a general rule, at least 10% of the voting rights or nominal capital must be attributable directly or indirectly to the taxpayer alone or together with related persons.
Investment-type income can include income from holding, managing, preserving or increasing the value of certain cash assets, receivables, securities and comparable financial assets.
Section 13 AStG · 2026
Higher thresholds also apply to investment-type income from 2026
The threshold relief applicable to the special CFC rules for investment-type income was also adjusted.
- a participation of at least 10% can be sufficient
- low taxation is still required
- investment-type income must not exceed one third for the threshold relief
- absolute threshold: EUR 100,000 in total
- German Investment Tax Act rules can take precedence
Section 10 AStG
The CFC inclusion amount is calculated under German tax rules
The income subject to German CFC taxation is not simply taken from the foreign financial statements or foreign tax return.
Under Section 10 AStG, the underlying intermediary income is generally calculated by corresponding application of German tax law. For these purposes, the income is treated as business income.
Timing
The CFC inclusion is generally attributed when the foreign company's financial year ends
The inclusion amount is generally attributed to the German taxpayer in the assessment period in which the relevant financial year of the foreign company ends.
German tax can therefore arise even though no distribution has been made and the shareholder has received no cash from the foreign company.
No flat investment tax rate
The CFC inclusion is subject to special German taxation rules
For an individual, the inclusion amount is generally treated as income under Section 20(1) No. 1 EStG. The ordinary flat investment income tax regime under Section 32d EStG does not apply to the inclusion amount.
The partial-income exemption under Section 3 No. 40 EStG is also generally excluded for the CFC inclusion. The resulting tax burden can therefore differ materially from the taxation of an ordinary later dividend.
German corporate shareholder
A German GmbH or other corporation can also be subject to CFC taxation
German CFC rules do not apply only to individuals. A German-resident corporation can also be a shareholder of a foreign intermediary company.
The inclusion amount is then generally included in the German corporate income tax position. The ordinary participation exemption in Section 8b(1) KStG does not apply to the CFC inclusion.
Foreign tax credit
Foreign income tax imposed on intermediary income can generally be credited
Section 12 AStG provides for a credit for income taxes actually imposed on the foreign company in relation to the income underlying the CFC inclusion amount.
The credit must be calculated specifically. The foreign tax expense of the entire company is not automatically fully attributable to the German CFC inclusion.
Later distributions
Profits already taxed under the CFC rules should not be fully taxed again when distributed
If a taxpayer has already been taxed on a CFC inclusion and the foreign company later distributes the same profits, Section 11 AStG provides a correction mechanism.
A CFC correction balance must therefore be maintained. Later distributions should be coordinated with previously taxed inclusion amounts.
Tax treaties
A tax treaty does not automatically prevent German CFC taxation
German CFC taxation is a domestic anti-deferral and anti-abuse regime. The existence of a double tax treaty with the country of the foreign company does not automatically exclude its application.
For Germany–U.S. structures, the AStG and the Germany–U.S. tax treaty must therefore be considered together. Foreign tax credits and the treatment of later dividend distributions can also become relevant.
Place of management
Before applying CFC rules, check whether the supposedly foreign company is actually foreign for German tax purposes
Section 7 AStG generally applies to a foreign company that has neither its registered office nor its place of management in Germany.
If, for example, a U.S. corporation is actually managed entirely from Germany, the company may already be subject to unlimited German corporate income tax because its place of management is in Germany. The CFC analysis then arises in a different context.
Order of analysis
Entity classification and management location come before the CFC analysis
Particularly for U.S. companies, German CFC taxation should not be reviewed in isolation.
- determine the German classification of the entity
- review the place of management
- determine the German residence of the shareholder
- analyze ownership and control
- classify income under Section 8 AStG
- calculate the effective foreign tax burden
- review Section 9 and, where relevant, Section 13 AStG
- calculate the CFC inclusion and foreign tax credit
Separate determination procedure
German CFC taxation can create additional procedural filing obligations
The tax bases relevant to German CFC taxation are generally determined separately under Section 18 AStG. This can create an additional German assessment procedure alongside the ordinary income or corporate income tax return.
Where there are multiple shareholders, ownership chains or different categories of income, the procedural requirements should be addressed from the beginning.
Typical U.S. case
German entrepreneur owns 100% of a U.S. corporation
A German-resident entrepreneur owns all shares in a U.S. corporation. The corporation carries on an operating business but also holds substantial cash and earns interest and investment income.
For German tax purposes, it is not enough to establish that the corporation pays U.S. corporate income tax. The operating income and investment income must be analyzed separately, the effective foreign tax burden determined and the applicable thresholds reviewed.
At the same time, it must be determined whether the corporation is genuinely managed in the United States or whether its place of management is in Germany because of the German shareholder-manager.
Common mistakes
What is often misunderstood under the German CFC rules
Looking only at the shareholder's percentage
Related persons and coordinated conduct can change the control analysis.
Using the headline foreign tax rate
The effective tax burden on the relevant income under AStG principles is what matters.
Treating all operating revenue as automatically active
Trading and services are subject to specific conditions, particularly for transactions involving related persons.
Assuming U.S. substance is a general exemption
The specific substantial-economic-activity exception in Section 8(2) and (3) applies only to EU/EEA companies.
Treating Section 9 as an allowance
It is a threshold exemption. Exceeding the statutory limits can affect more than merely the excess amount.
Ignoring Section 13 AStG
Investment-type income can become relevant at participation levels starting from 10%.
Copying foreign taxable income
The CFC inclusion is calculated using German tax principles.
Failing to track later distributions
Previously taxed CFC amounts must be coordinated with subsequent distributions and the correction balance.
Review process
How a foreign shareholding is reviewed for German CFC exposure
Identify the company and tax residence
Legal form, registered office, place of management and German entity classification are reviewed.
Map ownership and related persons
Direct and indirect ownership, voting rights, profit rights and possible aggregation rules are documented.
Test control under Section 7 AStG
Capital, voting rights, profit rights and liquidation rights are reviewed against the statutory control threshold.
Classify income under Section 8 AStG
Operating, passive, participation, licensing, financing and other income streams are analyzed separately.
Calculate low taxation
The actual foreign income-tax burden on the relevant income is determined under German principles.
Review threshold relief
Section 9 AStG and, for investment-type income, Section 13 AStG are considered where applicable.
Calculate the CFC inclusion
Intermediary income is calculated under German tax rules and attributed according to the relevant ownership percentage.
Coordinate foreign tax and later distributions
Foreign income taxes, the correction balance and later dividends are tracked across tax years.
Documents
Information typically required for a German CFC review
Cap Table
Direct and indirect ownership, voting rights and historical changes.
Financial Statements
Balance sheet, income statement and detailed breakdown of the individual income streams.
Tax Returns
Foreign tax returns and assessments used to determine the actual foreign tax burden.
Related-Party Transactions
Service, financing, licensing and trading transactions involving shareholders and related entities.
Substance
Employees, premises, functions, decision-making authority and actual foreign business activity.
Prior Years
Prior CFC determinations, inclusion amounts and correction balances for later distributions.
Related guidance
Related topics
Frequently asked questions
German CFC taxation under the AStG
What is German CFC taxation?
Which provisions govern German CFC taxation?
When is a foreign company controlled?
Does owning more than 50% automatically make the company a CFC?
What is the German low-tax threshold?
Is the foreign country's nominal tax rate decisive?
What threshold applies to mixed income in 2026?
Is the EUR 100,000 amount a tax-free allowance?
Does the EU/EEA substance exception apply to a U.S. corporation?
Is a genuine operating U.S. corporation automatically outside the CFC rules?
Can Section 13 AStG apply below 50% ownership?
How is the CFC inclusion amount calculated?
Can foreign corporate income tax be credited?
What happens when the foreign company later distributes the profits?
Does the Germany–U.S. tax treaty prevent German CFC taxation?
What should be checked before applying the CFC rules to a U.S. corporation?
International Tax Advice
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