International tax law: from both perspectives.

An external audit begins with a formal administrative act and follows fixed steps:

1. Audit order (§ 196 AO): it names the taxes, the periods and the scope. It can be challenged, and the audit is confined to what it says.
2. Notification “a reasonable time before the audit begins”, with the expected start date and the names of the auditors (§ 197 Abs. 1 AO). A postponement can be applied for on good grounds.
3. Access to data (§ 147 Abs. 6 AO): directly on the system, indirectly through an evaluation, or through the handing over of a data medium. For the last of these we produce the GDPdU file.
4. Closing meeting (§ 201 AO), where the points in dispute are discussed before the audit report is issued.

Alongside the tax audit runs the audit by the Deutsche Rentenversicherung, the German pension insurance, on its own cycle (see German Payroll & HR).

We take on the preparation, the correspondence, the data medium and attendance at the closing meeting.

As soon as there are cross-border transactions with related parties, which covers most subsidiaries that receive services from the parent or supply them to it.

The extent is graduated: a transaction matrix and documentation of the facts and of arm's length pricing for everyone, a master file only from EUR 100 million of turnover. Below the thresholds in § 6 GAufzV (EUR 6 million for supplies of goods, EUR 600,000 for other services) the record-keeping duties count as satisfied.

Since 2025 a 30-day deadline running from notification of the audit order applies, with no separate request from the tax authorities. The deadlines, the surcharges and the language requirement are set out under transfer pricing: the 30-day deadline.

A hidden profit distribution arises where the company confers a benefit on its shareholder that it would not have granted to an unrelated third party. The expense is then not recognised for tax purposes, the profit increases, and the benefit additionally counts as a distribution subject to withholding tax on capital income.

Within a group, these are the situations that come up most often:

• Management charges without a contract or without an allocation key that can be followed
• Loans from the parent at rates that are not at arm's length, or interest-free
• Services provided free of charge by head office that were never invoiced
• Directors' remuneration that does not withstand a comparison with third parties

What usually decides the point is the form: agreements have to be concluded in advance, be legally effective and actually be carried out. Retrospective agreements are generally not recognised where the shareholder has a controlling interest.

We review the intercompany contracts and the documentation against this.

To begin with, 25 % withholding tax on capital income plus the solidarity surcharge is withheld and paid over, regardless of what the treaty provides.

Relief comes at a second stage:

• § 43b EStG implements the Parent-Subsidiary Directive: no withholding tax where the EU parent company holds at least 10 % directly and has held that interest for an uninterrupted twelve months. Where the period is only completed later, a refund is provided for.
• Where that does not apply, the double taxation treaty caps the rate.

What matters in practice is the procedure: without an exemption certificate from the Bundeszentralamt für Steuern, tax has to be withheld even where none would be due in substance. Otherwise only the refund route remains.

Separate conditions apply to royalties and interest. We handle the application and the procedure with the Federal Central Tax Office, in good time before the resolution on the distribution of profits.

In Germany in both cases, but on a different basis:

• Subsidiary: a taxable person in its own right. It pays tax on its own profit; only the distribution triggers withholding tax. Losses stay with it and cannot be set against the parent's result.
• Permanent establishment: a dependent part of the foreign company. Germany taxes the profit attributable to it; there is no distribution and therefore no withholding tax. In return, the attribution of profit between head office and permanent establishment is regularly the subject of an audit.

In practice the choice turns above all on liability, market presence and authority to represent the business; the tax treatment follows the structure chosen.

A permanent establishment can also arise alongside an existing subsidiary. The conditions are set out under the home office as a permanent establishment, and for construction projects under Setup in Germany.