Germany: Taxpayer satisfied “motive test“ under CFC rules (lower tax court decision)

A lower tax court decision concerning “motive test“ under controlled foreign corporation rules.

A lower tax court decision on “motive test“ under controlled foreign corporation rules.

The Lower Tax Court of Cologne held (file ref. 6 K 2661/18) that the taxpayer satisfied the "motive test" under the German controlled foreign corporation (CFC) rules. 


In the case of EU and European Economic Area (EEA) companies, the application of the CFC rules may be avoided if evidence can be provided that the controlled subsidiary pursues a genuine and actual business activity in the member state in which it was established (“motive test”).

The court held that a Dutch corporation (BV1) that acquired and sold film licenses in the Netherlands satisfied the motive test even though BV1 employed no personnel apart from its two managing directors, and such managing directors (who were also responsible for the management of another Dutch company belonging to the same group (BV2)) received no separate remuneration from BV1. For liability reasons, the acquisition and marketing of film licenses had been outsourced from BV2 to BV1, while the material and personnel resources required for the business were provided by BV2.

The court found that BV1 was pursuing an actual business activity in the Netherlands by acquiring and marketing film licenses, and the law does not require that the "actual business activity" be realized solely by an entity's own personnel. In the court's view, the activities of BV2's personnel were attributable to BV1 because BV2’s personnel were operating in the name of and on behalf of BV1. The court determined that, for group companies, the outsourcing of multiple managerial functions can be sensible from a commercial perspective to create synergy effects, ensure an aligned strategy and keep communication and decision-making channels short. Further, BV1 was established for liability reasons and not for tax reasons.

No appeal to the German Federal Tax Court (BFH) was allowed, so the decision of the court is final. 

KPMG observation

It should be noted that the requirements for the motive test have been tightened from the 2022 tax assessment period onwards. The new rules state that the motive test can explicitly not be applied if the company has arranged for its main business activity to be provided largely by third parties.

Read a January 2023 report [PDF 897 KB] prepared by the KPMG member firm in Germany 


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