CFC taxation sounds complicated, but it concerns one clearly defined situation. It applies to entrepreneurs who live in Germany and hold a low-taxed foreign company with certain types of income. For everyone else it plays no role. And even in that situation there are good solutions.
This article explains in plain language when the rule applies and which three routes you have: move your residence, use the US LLC as a location-independent structure, or build genuine substance in the EU.
What it is about: three points that must come together
CFC taxation (Hinzurechnungsbesteuerung) is the rule under which Germany taxes certain profits of your foreign company in your hands, as if they had already been distributed to you. That only happens if three things apply at the same time:
- You hold a majority of the company, alone or together with related persons.
- The company earns passive income, meaning income without its own business operation.
- That income is taxed abroad at less than 15%.
If one of these points is missing, there is no attribution (section 7 AStG). That makes the rule easy to plan around. You can start with any of the three points, and with a fourth one: your residence.
In short: attribution only happens when a majority stake, passive income and low tax come together.
Active income: trading and services with a business of its own
The law lists which income counts as active. It includes trading, services, production, letting and income from shareholdings. For most entrepreneurs that is the good news: a genuine operating business is usually active.
One condition matters. Trading and services stay active if the company provides them through its own operation. If you personally provide, from Germany, the consulting that your foreign company invoices, the service counts as passive (section 8 AStG). Royalties are active if the company exploits its own development work.
In short: an operating business with its own operation is active and therefore outside the rule.
The 15% threshold: what is actually paid
Income is low-taxed if it bears less than 15% income tax (as of 09/2026). What counts is what is actually paid in the end. Three examples show how this looks in practice:
- Cyprus has taxed profits at 15% since 2026. For qualifying royalty profits in the IP box, the burden is arithmetically lower (Cyprus country page).
- Malta refunds a large part of the tax to shareholders on distribution. The refund is included in the calculation (Malta country page).
- Estonia and Georgia only tax on distribution (Estonia country page, Georgia country page).
For a shareholder resident in Germany it is therefore worth calculating the actual burden before incorporating. For a shareholder who moves, the question does not arise at all.
In short: what counts is the actual tax after refunds and reliefs.
Route 1: move your residence
CFC taxation requires that you have unlimited tax liability in Germany. If you give up your home and habitual abode in Germany, you fall outside the rule. This is the clearest route, and it also settles the question of the place of management.
For German nationals who move to a low-tax country and keep larger economic interests in Germany, there is an addition. For the company’s income from German sources, attribution can continue for up to ten years (section 5 AStG). If you put your German interests in order before the move, this point is solved as well (Extended limited tax liability).
In short: once you leave Germany for tax purposes, CFC taxation no longer applies to you.
Route 2: the US LLC for location-independent entrepreneurs
For many readers the US LLC is the simplest structure. A single-member LLC is transparent for US income tax. Without US business activity, a foreign owner usually pays no US federal income tax. Taxation follows the owner’s residence (USA country page).
If you live without a fixed tax residence or in a country without income tax on this income, the LLC fits especially well. CFC taxation then plays no role, because you are not taxable in Germany. If you stay resident in Germany, you pay tax on the profits here. How is decided by the entity comparison (Typenvergleich): if the LLC counts as transparent, the profits are attributed directly to you. If it counts as a corporation, it is reviewed like any other foreign company.
In short: the LLC follows your residence, which is why it suits entrepreneurs who live location-independently or in countries without income tax.
Route 3: genuine substance in the EU
If you stay resident in Germany and hold a company in the EU or EEA, you have a route of your own. Attribution does not apply to income from a genuine economic activity on the ground (section 8 AStG). In practice that means an office, qualified staff who work independently, and contracts at market prices. You keep this substance test evidence up to date with documents.
This route suits businesses that are building a team abroad anyway, such as a development office in Tallinn or a sales team in Limassol. It is not available for companies in Georgia or the United States.
In short: with a real team and office in the EU, the company stays outside the rule even if you live in Germany.
Germany, Austria, Switzerland
Austria has a comparable rule for corporations as shareholders (section 10a KStG 1988). How it affects individuals is clarified by an Austrian tax adviser. Switzerland has no CFC rule. There, what matters most is where the company is actually administered.
In short: Austria has a similar rule for corporations; Switzerland has none.
Our recommendation
For location-independent entrepreneurs we recommend the US LLC from €1,800. It fits especially well if you have no fixed tax residence or live in a country without income tax on this income. The company is quick to form, run online and known to customers and payment providers worldwide.
If you are planning an EU corporation, the order is: move your residence first, then incorporate. The residence models are listed under /residency, such as Cyprus with non-dom status, Italy with its flat tax or Bulgaria with 10% income tax (as of 09/2026). You form the company at your new home: the Cypriot Ltd from €4,500, the Maltese Ltd from €2,250, the OÜ from €650. All countries are listed under /jurisdictions.
If you deliberately stay resident in Germany, a business with a real team elsewhere in the EU is the right route. When you move, exit taxation on existing shares and a properly moved residence belong in the plan. GCS plans the sequence and coordinates the tax advisers in both countries.
What to do now
First, settle where you will live over the next few years. If you live location-independently or move to a country without income tax, the US LLC is usually the direct route. If you move within the EU, settle your residence and incorporate afterwards. If you stay in Germany, calculate the actual burden with your tax adviser and plan substance on the ground.