The ECJ had ruled in the Cadbury Schweppes judgment in principle that it is incompatible with the freedom of establishment if profits are added only because of a lower level of taxation in the country of domicile. This is because companies are free to set up a subsidiary in a low-tax country in order to transfer profits. Whether this results in a loss of tax revenue in the home country is no justification for restrictive measures by the national legislator. The only exceptions are in the case of clear abuses such as a letterbox company.
The tax authorities will apply the ruling in all open cases. According to this ruling, no addition is made if the controlled company is actually located abroad, irrespective of tax motives. Sections 7 to 14 AStG are no longer applicable if a company with its registered office or management in an EU or EEA state proves that it carries out an economic activity there.
This requirement (substance) is met if the company actively and sustainably participates in the market in the course of its ordinary business activities and employs qualified personnel. In addition, it must be demonstrated that the income is generated as a result of the company's own activities, that in the case of the exchange of services with predominantly related parties the services are of value-added significance for the recipients and that the capital resources are in an appropriate relationship to the value added generated.