BEPS and ATAD have changed the playing field for international structures. Pure letterbox arrangements no longer work — neither under civil law nor for tax purposes. What economic substance means today, and how to build it.
The Context: BEPS and ATAD
BEPS (Base Erosion and Profit Shifting) is the OECD initiative against aggressive tax planning. ATAD (the Anti-Tax Avoidance Directive) is its EU implementation — enacted in Germany essentially through the Anti-Tax Avoidance Act (ATAD-UmsG), in force since 2019. The core principle: Tax structures need economic substance — otherwise the tax authorities will look straight through them.
What "Substance" Actually Means
Personal Substance
- At least one managing director resident or habitually present in the country of incorporation
- Management decisions actually exercised on site
- Staff for operating activities (headcount proportional to the scale of business)
- No mere "nominee directors" whose only role is to sign
Physical Substance
- Dedicated business premises (not a mere letterbox)
- Adequate facilities (office, IT, communications)
- For larger operations: own staff on site
Operational Substance
- Genuine business activity, not merely passive administration
- Own bookkeeping and administration
- Bank accounts in the country of incorporation
- Contracts concluded and performed in the country of incorporation
- Business decisions substantively taken in the country of incorporation
Rule of thumb for a holding structure: for every €10 million of assets under management, there should be at least 1 full-time employee on site. For pure holding companies with equity interests: at least 1 qualified managing director plus 1 administrative employee.
CFC Taxation under §§ 7–13 AStG (German Foreign Tax Act)
Where German shareholders hold interests in foreign subsidiaries in low-tax jurisdictions (effective rate < 15%), CFC taxation may apply. The condition: the subsidiary earns passive income (interest, royalties, certain services). The consequence: that income becomes taxable in Germany, regardless of the foreign taxation. The defence: substance and active business operations. The subsidiary must deliver
The defence: substance and active business operations. The subsidiary must genuine value creation of its own — not merely manage assets.
Anti-Abuse Clauses in Double Taxation Treaties
Modern double taxation treaties (DBA) increasingly contain "Principal Purpose Tests" (PPT): if the main purpose of a structure is to obtain treaty benefits, those benefits can be denied. That is a significant tightening compared with earlier practice.
What Counts as "Enough" Substance
For a German holding GmbH, typically:
- 1 managing director resident or habitually present in Germany
- Dedicated business premises (not a virtual office)
- IHK membership, entry in the commercial register
- Own bookkeeping (DATEV)
- A German bank account
- Documented management meetings at least every six months
- Business decisions taken in Germany (with minutes!)
What Does Substance Cost?
Typical running costs for a substance-compliant holding company (with no operating activity) come to €3,500–6,000 per month:
- Full-service office with secretariat: €800–1,500
- Bookkeeping (DATEV accounting): €300–500
- Annual financial statements (pro rata): €250–400
- Managing director fee (part-time): €1,500–2,500
- Compliance, corporation tax returns, VAT: €500–800
For a holding company with significant assets (> €5 million), these are calculable costs set against substantial tax advantages.
More than 20 years advising entrepreneurs, investors and family businesses. Reserved tax services are provided by our partner tax firm, TABAK Steuerberatung.
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