Controlled foreign company (CFC) rules exist to stop one simple trick: park passive income in a low-tax company abroad, don’t pay it out, and let it compound tax-free while you live in a high-tax country. Germany’s version is called Hinzurechnungsbesteuerung (“add-back taxation”) and lives in §§7–14 of the Foreign Tax Act (AStG).
It was rebuilt in 2022 to implement the EU Anti-Tax Avoidance Directive (ATAD), and the low-tax threshold dropped in 2024. This guide covers the rules as of September 2026. General information, not tax advice.
Who this is for
CFC rules matter if you’re unlimited taxable in Germany (you live there) and hold shares in a foreign company. Typical readers:
- Germans who set up a company in Dubai, Cyprus, Estonia or Malta but haven’t moved (yet).
- Germans who moved away but kept a family member in Germany as co-shareholder.
- German GmbHs with foreign subsidiaries (the rules apply to corporate shareholders too).
If you’ve left Germany properly, the German CFC rules no longer apply to you, although your new country may have its own. If you haven’t left, read place of management first: a company run from Germany is usually taxed in Germany directly, before CFC rules even come into play.
The four questions of a CFC check
A foreign company is a CFC problem in Germany if all four answers are yes:
| Question | Test (as of 2026) | Where |
|---|---|---|
| 1. Is it a foreign corporation? | A company with neither seat nor management in Germany that’s subject to corporate tax elsewhere | §7(1) AStG |
| 2. Do you control it? | You, alone or with related persons, hold more than 50% of the votes, the capital or the profit entitlement | §7(2)–(4) AStG |
| 3. Does it earn passive income? | Income not listed as “active” in the catalogue of §8(1) AStG | §8(1) AStG |
| 4. Is that income low-taxed? | The effective tax burden on it is below 15% | §8(5) AStG |
If yes, the passive income is added to your taxable income in Germany. Let’s go through the tests.
Control: the more-than-50% test
Since 2022, control is measured per shareholder. You control a company if you, together with related persons (nahestehende Personen, §1(2) AStG – for example companies you hold 25% or more of, or people with their own interest in your income), hold more than half of the voting rights, the share capital or the right to profits or liquidation proceeds. People acting in concert with you are treated as related persons.
That’s a change from the old law, which added up all German residents, related or not. Today, five unrelated German friends with 20% each in a Cyprus company don’t control it individually. You with 30% plus a company you control with another 30% do – and family members holding shares can count too, depending on the facts.
Direct and indirect holdings both count. Owning a CFC through a holding company doesn’t hide it.
The 1% exception for investment-type income
For certain passive income with capital-investment character (for example interest, and income from holding and managing liquid assets), §13 AStG goes further: a participation of at least 1% is enough, and no control test applies. If such income makes up (almost) all of the company’s income, even smaller holdings can be caught. This mainly targets “cash box” companies.
Low taxation: 25% became 15%
Income is low-taxed if the effective tax burden on it is below 15% (§8(5) AStG). That threshold was 25% until the end of 2023; the Growth Opportunities Act (Wachstumschancengesetz) lowered it to 15% from 2024. That was a big relief for many EU structures – and it lines up the threshold with the global minimum tax rate.
How the burden is measured:
- It’s the effective burden on the passive income, calculated using German profit rules. Nominal rates don’t decide; deductions, exemptions and special regimes that lower the real tax do.
- Refunds count. Taxes refunded to the company or to its shareholders are deducted from the burden. That’s why Malta’s 35% rate with a 6/7 shareholder refund (≈5% effective) is low-taxed for CFC purposes.
- Where a country taxes profits only on distribution (like Estonia), the burden in the year the profit is earned may be 0%. How later distribution tax is treated is technical: get it checked.
Quick look at common destinations for a German shareholder (as of 2026, headline rules only):
| Company in | Headline tax | Likely low-taxed for CFC purposes? |
|---|---|---|
| UAE | 9% above AED 375,000, 0% below; 0% on qualifying free zone income | Yes |
| Cyprus | 15% since 2026 | At exactly 15%, no; with the IP box or other reductions pulling the effective rate below 15%, yes |
| Estonia | 0% on retained profits, 22% on distributions | Often yes while profits are retained |
| Malta | 35%, with shareholder refunds to ≈5% | Yes, because refunds count |
| Liechtenstein | 12.5% | Yes |
Passive vs active income (§8(1) AStG)
German law doesn’t list passive income. It lists active income; everything else is passive. The catalogue in §8(1) AStG, simplified:
| Activity | Generally active | Turns passive when (simplified) |
|---|---|---|
| Agriculture and forestry | Yes | – |
| Manufacturing, energy, mining | Yes | – |
| Banks and insurers | Yes, with a real business operation | Mainly doing business with German related persons |
| Trading | Yes | Goods bought from or sold to German related persons, unless the company runs a real trading business with its own staff and doesn’t rely on those persons |
| Services | Yes | The company uses German related persons to provide them, or provides them to German related persons, without a real business operation of its own |
| Renting and leasing | Often | Licensing IP the company didn’t develop itself; renting to German related persons |
| Raising and lending capital | Only in narrow cases | Most intra-group lending and interest income |
| Dividends | Mostly | Exceptions, e.g. where the paying company could deduct them |
| Capital gains on shares | Often | Gains attributable to passive assets of the sold company |
| Restructurings | Often, under conditions | – |
The pattern: real businesses that do their own work with their own people are active. Income that’s mobile, paper-based or depends on deals with the German owner’s circle is passive.
What happens if the rules apply
The passive income of the CFC (the Hinzurechnungsbetrag) is added to your income:
- As an individual: taxed as capital income at your full personal rate (up to 45% plus solidarity surcharge). The 25% flat tax on investment income and the 60% partial-income method don’t apply.
- As a German company: added to its taxable income, without the 95% dividend exemption of §8b KStG – and it’s also subject to trade tax.
- Foreign tax paid by the CFC on that income is generally credited against the German tax (§12 AStG), so you don’t pay twice – you pay up to the German level.
- Later distributions of profits that were already taxed under CFC rules are generally not taxed again (§11 AStG). Keep good records so you can prove it years later.
- Timing: the add-back follows the CFC’s financial year, not its payouts. It doesn’t matter whether anything was paid out.
The EU/EEA escape (§8(2) AStG)
If the company has its seat or management in an EU or EEA country, you can escape the CFC rules by proving that it carries on a substantial economic activity there. That’s the EU law safeguard, following the CJEU’s Cadbury Schweppes line: genuine businesses in other member states can’t be taxed as if they were tax dodges.
What you have to show, in practice:
- People: qualified staff in the country, doing the core work.
- Premises and equipment: an office and the tools the business needs.
- Independent activity: the company runs its business itself. If the core activity is mostly outsourced to third parties or related persons, the escape doesn’t work (§8(2)–(3) AStG).
- For EEA countries: sufficient exchange of tax information with Germany.
The escape doesn’t exist for third countries. A Dubai, Georgian or Hong Kong company with passive income can’t use it, no matter how much substance it has. Only the active-income catalogue can help there.
What it means for Dubai, Cyprus and Estonia companies
Dubai company, owner lives in Germany. Low-taxed (9% or 0%), no EU escape. Whether CFC rules bite depends only on whether the income is active. A genuine trading or services business with its own staff in Dubai and no German related-party dealings can be active. A one-person consulting company whose owner works from Germany almost certainly isn’t even a CFC case – it’s a place of management case, and fully German-taxable.
Cyprus company, owner lives in Germany. At the standard 15% rate, not low-taxed. If the income benefits from the IP box or other reductions, check the effective rate. If it’s low-taxed and passive, the EU substance escape is available – with real people and an office in Cyprus.
Estonian OÜ, owner lives in Germany. e-Residency doesn’t change where you live or where the company is managed. If the OÜ is managed from Germany, it’s German-taxable directly. If it’s genuinely managed and staffed in Estonia, retained profits may be low-taxed; passive income then needs the EU substance escape.
The bottom line for Germans who stay in Germany: a foreign company is rarely a tax saver. It becomes one when you move – see leaving Germany.
Worked example with numbers
Lena lives in Hamburg and owns 100% of a UAE company with a genuine local team. The company earns €400,000 in 2026 from licensing software it bought from a third party (not developed itself), mostly to a German company Lena also owns. It pays about €28,000 in UAE corporate tax (effective ≈7%).
| Test | Result |
|---|---|
| Foreign corporation | Yes |
| Control | Yes, 100% |
| Passive income | Yes: licensing IP it didn’t develop, and dealing with a German related company |
| Low taxation (below 15%) | Yes, ≈7% |
| EU/EEA escape | Not available (UAE) |
Consequence, roughly (single, no other income, 2026 tariff):
| Step | Amount |
|---|---|
| Add-back amount | €400,000 |
| German income tax + solidarity surcharge at the full rate | about €169,000 |
| Credit for UAE tax | –€28,000 |
| German tax due on the add-back | about €141,000 |
The company paid out nothing. Lena still owes the tax. That’s the whole point of CFC rules: they switch off tax deferral in low-tax companies for passive income.
Had the company developed the software itself with its own team and sold licences to unrelated customers worldwide, the analysis would look very different.
