Introduction to the Problem

When investing in foreign corporations, the fundamental taxation problem arises that dividend payments are generally subject to withholding tax in the country in which the foreign subsidiary is resident. Taking into account double tax agreements,Footnote 1 the foreign country of residence of the subsidiary (source state) can tax dividends with a final withholding tax of 5%Footnote 2 to 15% of the gross amount. If treaty exemptions by a double tax convention (DTC) do not apply, the withholding tax on dividends can amount to 25% or more of the gross dividend.Footnote 3 For the foreign shareholder of such a subsidiary, the withholding tax on dividends in the subsidiary's country of residence means a significant additional tax burden and a reduction in the return on an equity investment in a foreign subsidiary. U.S. corporations as shareholders of a foreign subsidiary are particularly affected by this problem. Under Sec. 245A IRC (Dividend Received Deduction), dividends from foreign subsidiaries are generally tax-free under further conditions (IRS 2021; Schreiber 2020; Dyreng 2023).Footnote 4 Therefore, the final levy of withholding tax on dividends by the country of residence of the foreign subsidiaries results in a significant additional tax burden for these shareholders. Until now, U.S. corporations have largely been able to compensate for this additional tax burden by using foreign holding companies as intermediaries. Due to the introduction of restrictive anti-treaty shopping regulations abroad as part of the OECD BEPS initiative (Valderrama 2020; Weber 2017), this profit repatriation strategy is now ineffective and even leads to an additional tax burden compared to a direct holding. For strategic treaty shopping in general, see Hong (2015) and Park (2021). In this context, for example, all EU Member States have introduced a very restrictive anti-treaty shopping regulation following the Anti-Tax-Avoidance Directive (ATAD 2016; Paulus 2022) with effect from 1 January 2019,Footnote 5 which prevents the interposition of foreign holding companies to avoid withholding tax. Furthermore, double tax conventions contain restrictions regarding the reduction of withholding tax on dividends, in particular concerning the interposition of foreign holding companies and treaty shopping: see e.g. Art. 29 (9) OECD-MTC 2017, principal purpose test (OECD 2017; Moreno 2021; Kok 2016), Art. 28 DTC USA-Germany 2008 (limitation on benefits).

For U.S. shareholders and especially for U.S. corporations, the question arises of how they can structure their investments in foreign subsidiaries in a tax-optimized manner, particularly concerning profit repatriation. On the one hand, the question arises as to how they can react to the now stricter anti-treaty shopping regulations in the country of residence of the foreign subsidiary in terms of tax planning for existing holding structures. On the other hand, it is necessary to derive general tax structuring options for the tax-efficient repatriation of dividends from foreign subsidiaries.

This article takes up these questions and works out selected and realizable profit repatriation strategies that are particularly relevant for U.S. corporations as shareholders of an EU subsidiary. However, the tax structuring options identified are of general relevance for participation in foreign subsidiaries. To keep the level of abstraction of the study appropriate and to increase the comprehensibility of the investigation, the analysis is carried out using the country constellation USA (shareholder)/European Union (subsidiary) as an example. Furthermore, concrete cases are included. The results can be transferred to other country constellations, as the focus is on withholding tax in the country of residence of the distributing subsidiary.

As the focus of the study is on tax structuring strategies to optimize the withholding tax burden about the investment in a foreign subsidiary, the analysis primarily considers the taxation in the country of residence of the foreign company and secondarily the tax law in the country of residence of the shareholder. This results from the subject of the investigation. This is because taxation with withholding tax in the country in which the foreign company is resident is determined by the tax law of that country and not by the tax law of the country in which the shareholder is domiciled.

At the meta-level, effective tax strategies for optimizing the taxation of dividends with withholding tax in the country of residence of the foreign subsidiary can be classified as follows:

  1. 1.

    Implementation of tax structures in which withholding tax is levied by the subsidiary's foreign country of residence, but is refunded in full or to a large extent as in the case of a domestic shareholder; change from final withholding taxation to a structure with tax assessment in the foreign source country

  2. 2.

    Implementation of tax structures in which no withholding tax is levied by the foreign source state

These aforementioned tax strategies or approaches can be implemented from the outset (tax planning ex-ante). However, they can also be implemented by transferring an existing structure into one of these structuring ideas (tax planning ex-post), possibly using reorganizations and reorganization tax law. This can also resolve the existing problem of intermediate holding companies, which have now turned out to be unfavorable due to anti-treaty shopping regulations. Furthermore, tax optimization can be achieved concerning withholding tax on dividends in the country of residence of the foreign subsidiary.

In the following, the aforementioned tax strategies are concretized utilizing selected and non-exhaustive case studies. In this respect, U.S. shareholders of foreign EU subsidiaries are considered.

Literature Review, Relevance of the Study, and Methodology

Tax effective profit repatriation strategies on investments in foreign subsidiaries have hardly been analyzed and discussed in the literature. There is hardly any literature on the solution to the fundamental problem of profit repatriation in the case of shareholdings in foreign subsidiaries (Finnerty 2007; Bueltel & Duxbury 2021; Duhoon & Singh 2023; Kouroub & Oubdi 2022). On a legal basis, this study develops the theoretical and practical framework for tax-optimised profit repatriation when investing in foreign subsidiaries. This solves a substantial legal problem in corporate practice, namely how the profits of foreign subsidiaries can be repatriated to the parent company without incurring withholding tax. Thus, this study has general relevance. Furthermore, legal research and the corresponding literature has not dealt with this question in detail, nor has it derived stable legal solutions. Therefore, this article expands the existing literature and knowledge.

This article is concerned with international tax law. Since the questions under investigation are legal in nature, the methodological approach of using various research methods—theoretical analysis, legal analysis, legal research methods—is suitable and appropriate. Methodologically, the research questions are traced with the theoretical analysis, and the analysis of tax law (legal analysis). Furthermore, legal case studies used to illustrate the analysis and develop legal solutions. Since the relevant questions have not yet been examined in the literature, it is also necessary to transfer the existing case law to derive corresponding legal conclusions. Thus, this article applies theoretical analysis and legal research methods (McConville and Chui 2017). The research topic at hand involves a legal issue, so the legal framework is the basis for the analysis. Therefore, the methodological approach used in this article is justified and well-founded.

Shifting the Place of Effective Management to the Country of Residence of the Subsidiary

For a U.S. parent corporation, the question arises as to how it can avoid withholding tax on dividends from a German subsidiary. Currently, the U.S. parent company indirectly holds a 60% interest in a German corporation (OpCo) via a wholly-owned Liechtenstein subsidiary, which acts as a holding company.Footnote 6 Therefore, the U.S. parent company utilizes the strategy of treaty shopping, the interposition of a foreign holding company to avoid withholding tax on dividends. The German corporation is active (production), is profitable, and has retained its profits to date. It is now to distribute its retained earnings. For U.S. tax purposes, the German corporation has been treated as a permanent establishment under the check-the-box election (Lischer 1998; Mullis 2011; Yoder 2015). The current shareholding structure can be illustrated graphically as follows (Fig. 1):

Fig. 1
figure 1

Existing adverse treaty shopping structure (own illustration)

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By interposing the Liechtenstein holding company, the withholding tax on dividends of the German subsidiary can generally be reduced to 0% by Art. 10 (2)(a) DTC Liechtenstein-Germany 2012. Any holding periods should be fulfilled. In the case of direct participation of the U.S. shareholder in the German corporation (OpCo), Germany would levy withholding tax following its domestic law in conjunction with Art. 10 (2) DTC USA-Germany 2008 in the amount of 15% to 5% on the gross dividend.Footnote 7 The German national withholding tax rate on dividends is 25%.

Due to strengthening the rules to combat treaty shopping in the European Union and the 27 EU Member States through the implementation of Art. 6 ATAD with effect from 1 January 2019, the German withholding tax on dividend payments by the German corporation in the case above is generally 25% of the gross dividend (Section 50d (3) EStG, Section 43a (1) no. 1 EStG). Due to the implementation of Art. 6 ATAD into domestic law, the unmitigated national withholding tax rate is applied to dividends. The benefits of the DTC Liechtenstein-Germany 2012 are not granted. The interposition of the Liechtenstein holding company is considered to be abusive, as the withholding tax would not have been reduced to 0% if the U.S. shareholder had held a direct interest. Moreover, a pure holding company does not have the necessary substance under Art. 6 ATAD (Kok 2016; Valderrama 2020), and Section 50d (3) EStG.

The question now arises as to a tax structuring strategy. How can the retained earnings of the German corporation be repatriated to the USA as dividends without incurring German withholding tax? Furthermore, a way must be found out of the German anti-treaty shopping rule, which leads to a definitive charge of German withholding tax of 25% of the gross dividend.

In the first step, the German corporation (subsidiary) distributes its retained earnings to the Liechtenstein holding company. According to German tax law, the German corporation must first withhold a withholding tax of 25% of the gross dividend and pay it to the German tax authorities on behalf of the taxpayer, the Liechtenstein holding company. At the level of the Liechtenstein holding company, the dividend is tax-free due to a national dividend participation exemption. The Liechtenstein holding company then distributes the dividend received to the U.S. shareholder in a second step in the same tax year. Under Liechtenstein national tax law, no withholding tax is payable on dividend payments to non-residents, meaning that the dividend is not taxed in Liechtenstein.

At a certain time after this onward distribution of the dividend by the Liechtenstein holding company to the U.S. shareholder, but still in the same tax year as the dividend distribution by the German corporation to the Liechtenstein holding company, the Liechtenstein holding company shifts its place of effective management from Liechtenstein to Germany. For the relevance of the place of management in treaty law, see Maisto (2018). It thus changes from limited to unlimited tax liability in Germany in this tax year, whereby its unlimited German corporate tax liability only arises after the profit distribution to the U.S. shareholder has been made. Therefore, the (further) distribution made by the Liechtenstein holding company to the U.S. shareholder is not subject to German withholding tax, as this company is not subject to unlimited tax liability in Germany at the time of the distributionFootnote 8 and its shareholder, the U.S. shareholder, is neither subject to unlimited nor limited tax liability in Germany; see also Section 43 (1) No. 1, (3) EStG.

As the Liechtenstein holding company changed from limited to unlimited tax liability in the tax year in which it received the dividend from the German subsidiary by shifting its management to Germany (relocation), its German dividend income is included in a tax assessment in Germany, Section 32 (2) No. 1 KStG. According to German corporate income tax law, taxation with withholding tax is not final if a taxpayer, in this case, the Liechtenstein holding company, had both unlimited tax liability and limited tax liability during the same calendar year. In such cases, the income earned during the period of limited tax liability, the German dividends, must be included in an assessment for unlimited corporate tax liability in Germany. The Liechtenstein holding company must therefore file a corporate tax return in Germany and declare the dividends received from the German subsidiary. Concerning this tax assessment, the Liechtenstein holding company is taxed with the German dividends in the same way as a German parent company and receives a full refund of the German withholding tax of 25% levied on the gross dividend of the German subsidiary (Section 8b (1) sentence 1 KStG, Section 36 (2) No. 2 EStG).

The tax structuring strategy can be illustrated in Fig. 2:

Fig. 2
figure 2

Relocation of the dividend-receiving company after onward distribution to the foreign country of residence of the distributing subsidiary (own illustration)

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From the perspective of U.S. tax law, the shift of the Liechtenstein holding company's place of effective management (POM) from Liechtenstein to Germany has no tax implications. The Liechtenstein holding company is a foreign non-transparent corporation that is actively engaged in business. The participation in the German subsidiary does not exist for U.S. tax purposes, as this company is treated as a permanent establishment of the Liechtenstein company under the check-the-box election. From a U.S. perspective, the shift of the place of effective management does not lead to the abandonment of an existing unlimited tax liability or the assumption of an additional unlimited tax liability in the host country. The tax structuring strategy outlined above is tax-neutral concerning U.S. tax law.

As a result, the retained earnings of the German subsidiary were repatriated to the U.S. or abroad without being subject to German withholding tax. Without this tax structuring strategy, a definitive German withholding tax of 25% of the gross dividend of the German subsidiary would have been incurred. The tax structuring strategy of the foreign company receiving the dividend at a coordinated point in time and then transferring its place of effective management to the country of residence of the distributing foreign subsidiary after the dividend has been paid out is very beneficial. This strategy is especially applicable if profits are retained for a longer period and later distributed en bloc. Moreover, this strategy can also be considered to neutralize anti-treaty shopping regulations.

The aforementioned tax strategy is not abusive (General Anti-avoidance Rule/GAAR, Section 42 AO). The shift of a company's place of effective management within the EU/EEA, which is not merely short-term and has taken place, does not constitute abuse (CJEU 2011, 2017).Footnote 9 Furthermore, a company is free to decide whether and when it distributes its profits or retained earnings. The refund of the German withholding tax to the Liechtenstein holding company is granted by the provisions of German tax law (Section 36 (2) No. 2 EStG). Therefore, there is no room for the assumption of tax abuse. This is because the Liechtenstein holding company does not take advantage of any tax benefits not provided by law (CJEU 2015, 2010). The taxpayer, in this case, the Liechtenstein holding company, must file a tax return in the foreign source state (Germany) and is then taxed by law as a resident of that state. To summarize, the tax strategy outlined here for the tax optimization of profit repatriation from foreign subsidiaries has a high degree of tax stability and recognition. Moreover, the strategy is relatively easy to implement.

Implementation of a Structure with Tax Assessment or Without Withholding Tax

The Initial Choice of a Tax-Optimized Legal Form in the Foreign Source State

Another strategy for optimizing the repatriation of profits is to implement a structure in the foreign source state that is subject to tax assessment instead of a final withholding tax. This can be achieved through the choice of the legal form in the foreign source state. The choice of legal form is a key driver influencing the tax burden (Amberger & Kohlhase 2023; Finnerty 2007). For example, instead of the legal form of a corporation, the legal form of a transparent partnership or a permanent establishment can be used in the foreign source state to avoid a withholding tax burden. For example, no withholding tax is payable on profit withdrawals regarding the investment in a partnership in the foreign source state. The same applies to profit withdrawals from permanent establishments. Due to European law, there is also no branch profits tax (Barsuk 2016) in the EU/EEA, as such a tax is not levied in purely domestic cases. Thus, for U.S. shareholders, it can be favorable to use transparent tax structures such as partnerships or permanent establishments in the foreign source state instead of a foreign corporation (subsidiary). Accordingly, withholding tax in the foreign investment state can be completely avoided. This tax strategy is illustrated below using a case study.

U.S. shareholder A (natural person) wishes to invest in Germany (direct investment). If he chooses the legal form of a German subsidiary (corporation), German withholding tax in the amount of 15% of the gross dividend with definitive effect is due upon profit repatriation: Art. 10 (2)(b) DTA USA-Germany 2008, § 43a (1) No. 1 EStG. See Fig. 3(1).

Fig. 3
figure 3

Effects of the choice of legal form on withholding taxation in the foreign source state (own illustration)

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If the U.S. shareholder holds the German subsidiary via an intermediary Liechtenstein holding company, a German withholding tax of 25% of the gross dividend of the German subsidiary is levied with definitive effect (Section 50d (3) EStG, Section 43a (1) No. 1 EStG). See also Fig. 3(2). The German anti-treaty shopping rule (Section 50d (3) EStG) is relevant for a shareholding structure with an intermediate foreign holding company.

As a tax strategy, the U.S. shareholder could instead establish a Liechtenstein corporation from the outset that maintains a commercial permanent establishment in Germany or participate in a commercial German partnership (transparent tax structure in the foreign source state). See Fig. 3(3). In this case, there is no German withholding tax on profits withdrawn by the Liechtenstein corporation from the German permanent establishment or the transparent German partnership. There is also no branch profits tax. At the same time, the underlying investment, the actual economic activity, is the same as when using the legal form of a subsidiary in the foreign source state. The Liechtenstein corporation is taxed with German corporate income tax (15%) on the profits from the German permanent establishment or partnership interest in the same way as a German corporation. Profit distributions by the Liechtenstein corporation to the U.S. shareholders are not subject to taxation in Liechtenstein. Liechtenstein does not levy withholding tax on dividend payments to non-resident shareholders by domestic law.

From a U.S. tax perspective, the three alternative investment structures in Fig. 3(1)–(3) are each tax-neutral. In each case, there is an actively operating foreign corporation at hand that is treated as a non-transparent corporation for U.S. tax purposes.

The tax strategy outlined above shows how foreign investors can use the choice of legal form ex-ante to achieve tax-optimized profit repatriation concerning investments in foreign subsidiaries. The tax effect of this strategy (tax-optimized choice of legal form) is not limited but applies to the repatriation of current as well as retained profits. Regarding this tax strategy, a German subsidiary with a commercial permanent establishment in Germany is substituted by a Liechtenstein subsidiary with a German permanent establishment or participation in a partnership with a commercial permanent establishment in Germany. In both cases, from the perspective of the U.S. shareholder and the source state (Germany), the taxable person is a corporation. However, only the tax strategy, here Fig. 3(3), has a beneficial tax-transparent structure (permanent establishment or partnership) in the foreign source state that is not subject to withholding tax there.

A comparative graphical comparison of the above-mentioned investment alternatives is shown in Fig. 3, which once again illustrates the effect of the tax-optimized choice of legal form on withholding taxation in the foreign source state.

The choice of legal form is not an abuse of law. The taxpayer is free to choose the legal form that results in the lowest tax burden (settled case law; CJEU 2015, 2010; BFH 2020, 2021). Thus, the above-mentioned strategy can be attested to have a significant degree of tax stability and recognition.

Converting an Existing Legal Form in the Foreign Source State into a Tax-Optimized One

The tax planning strategy of using transparent structures (partnership or permanent establishment) in the foreign source state instead of non-transparent structures (foreign corporation) can also be used if the U.S. shareholder already holds a direct or indirect interest in a foreign corporation (ex-post tax planning). In such cases, the existing structure would have to be converted into a transparent structure in the foreign source state through tax-neutral reorganization. Concerning the constellation in Fig. 3(2), this can be achieved, for example, by the Liechtenstein holding company transferring its interest in the German subsidiary to a transparent commercial German partnership of which it is or becomes a partner. Accordingly, the Liechtenstein holding company is subject to a tax assessment in the source state (Germany) with its profit share from the German commercial partnership, in which the dividends are included. This leads to a full refund of the German withholding tax levied on this dividend to the Liechtenstein company (Section 15 (1) No. 2 EStG, Section 32 (1) No. 2 KStG, Section 8b (1) sentence 1 KStG, Section 36 (2) No. 2 EStG).

To completely avoid the accrual of German withholding tax, group taxation can be implemented in the foreign source state between the commercial partnership and the German subsidiary (corporation) by concluding a profit and loss transfer agreement and the prior establishment of the German commercial partnership's ability to act as a controlling company (Sections 14, 17 KStG). Profit withdrawals by the Liechtenstein company from the German partnership are not subject to taxation and no German withholding tax is levied. A branch profits tax does not exist. From a U.S. tax perspective, these reorganizations, and the implementation of group taxation in the foreign source state are tax-neutral, since these transactions take place within the foreign permanent establishments of the Liechtenstein corporation. From a U.S. perspective, these transactions are tax-irrelevant internal transactions within the same legal entity, the Liechtenstein subsidiary. Both, the German subsidiary and the German partnerships were treated as permanent establishments of the Liechtenstein subsidiary under the check-the-box election.

Transfer of Retained Earnings Through Tax-Neutral Conversion

Another tax strategy for optimizing profit repatriation in the case of foreign subsidiaries is to transfer their retained earnings to another foreign company before distribution using a tax-neutral cross-border conversion (Kollruss 2023). The other foreign company to which the retained earnings are transferred by way of conversion has its registered office and place of effective management in a foreign country that does not levy withholding tax under national law and does not tax dividends. After the conversion and transfer of retained earnings to the acquiring foreign subsidiary, the latter can distribute the retained earnings without incurring withholding tax.

As possible types of conversion, a cross-border merger (Papadopoulos 2019; Simon 2023) or a cross-border change of legal form (Fillers 2020; Benedetti 2019; Kollruss 2024) is feasible. The possibility of a cross-border change of legal form of corporations within the EU/EEA area was introduced by EU Directive 2019/2121 on cross-border conversions in all 27 EU Member States, with effect from 31 January 2023 (EU 2019). As a result, there is a clear legal basis and a statutory right to carry out a cross-border change of legal form. The 27 EU Member States have implemented the necessary civil law requirements for carrying out a cross-border change of legal form into their national reorganization law and must apply these requirements (in Germany, Sections 333–345 UmwG). As a result, there is high legal certainty concerning the implementation of a cross-border change of legal form within the EU. Furthermore, the cross-border change of legal form within the EU/EEA is protected by the freedom of establishment under Art. 49 TFEU and may not be treated less favorably by the Member States under civil and tax law than a purely domestic change of legal form (CJEU 2017).

In the case of a cross-border change of legal form, the EU corporation cumulatively transfers its registered office and place of management from one Member State A to another Member State B and assumes the legal form of a corporation of the latter Member State (Kollruss 2024). In contrast to a cross-border merger (Simon 2023), the legal entity remains identical under civil law and only changes its legal form. In contrast to a merger, a change of legal form does not involve a transfer of assets (to another person). These civil law features of a cross-border change of legal form make it very flexible and easier than a merger (Kollruss 2024). In addition, a cross-border change of legal form does not require another company in the host or destination Member State, as is the case with a cross-border merger (Kollruss 2024). This is because the cross-border change of legal form takes place within the same legal entity. The cross-border change of legal form within the EU is generally tax-neutral, as the permanent establishments (PE) of the EU corporation changing its legal form remain in the Member State of departure. In general, exit taxation is not applicable (Kollruss 2024). This also means that any loss carry forward by the corporation changing its legal form is retained, which could be lost in the event of a cross-border merger (Kollruss 2024).

As the EU corporation changing its legal form remains the same under civil law in the case of a cross-border change of legal form and there is no transfer of assets to another person, the cross-border change of legal form—in contrast to a cross-border merger—is generally associated with low transaction costs. A company valuation (Nurhan 2017; Xiangxiang 2022) as in the case of a merger (Aluko and Amid 2005; Boeh 2011; Hyoung-Goo 2018) is not required. An exchange of shares, as in a merger, does not take place concerning the cross-border change of legal form. The EU corporation merely moves its registered office and place of management from one EU Member State to another and only changes its legal form. As a result, there is no difference in management costs, as these remain unchanged in substance and only the place of management has moved to another Member State. The registered office only concerns the registration in a commercial register and is only subject to moderate fees. Administrative costs may be incurred for registration fees, the change of legal form plan, and the change of legal form report. However, these can be categorized as moderate. Overall, the transaction costs for a cross-border change of legal form are not an obstacle.

The cross-border change of the legal form of a corporation within the EU/EEA is a suitable tax strategy for optimizing the repatriation of profits from EU subsidiaries (Kollruss 2023). By a cross-border change of legal form, the retained earnings of the departing EU corporation are transferred in a tax-neutral manner to the EU corporation of the new legal form, which is the same under civil law and now has its registered office and management cumulatively in the new EU Member State. The cross-border change of legal form within the EU between corporations of different Member States does not lead to a distribution or deemed distribution of retained earnings by national tax law. As a result, no withholding tax is incurred in connection with a cross-border change of legal form in the EU Member State of departure. Once the cross-border change of legal form has taken place and the corporation is now solely resident in the new EU Member State, the EU corporation can distribute its retained earnings to its foreign shareholders without triggering withholding tax. Only the domestic tax law of the EU host Member State is relevant here. According to this law, no withholding tax is levied on dividends. The EU host Member State can be chosen freely. In addition to the 27 EU Member States, a cross-border change of legal form is also possible with the EEA states (Liechtenstein, Iceland, Norway).

The cross-border change of legal form is a tax structuring strategy for tax-optimized profit repatriation. The foreign EU subsidiary initially retains its profits. Later, it is converted into a foreign EU/EEA corporation through a cross-border change of legal form whose country of residence does not levy withholding tax on distributions (e.g. Liechtenstein, Hungary, Cyprus). Once the change of legal form has been completed, the EU corporation distributes its retained earnings without incurring withholding tax. Therefore, the cross-border change of legal form is particularly suitable for the repatriation of retained earnings.

Furthermore, the cross-border change of legal form enables to repatriation of current profits with tax optimization, concerning the former EU/EEA State of residence of the EU corporation. This is because the permanent establishments of the departing corporation remain in this state. The profits of these permanent establishments can be withdrawn without incurring withholding tax in the EU/EEA State of departure. Thus, the cross-border change of legal form is suitable for optimizing the repatriation of retained profits from foreign EU subsidiaries as well as current profits.

The implementation of a cross-border change of legal form is not an abuse of law, as confirmed by the Court of Justice of the European Union (CJEU) in its settled case law (CJEU 2017, 2005). It is a legal option provided by European Law and, the conversion law of the EU Member States. Moreover, the taxpayer does not gain any tax benefit not provided for by law with the cross-border change of legal form. This is because, in the case of a cross-border change of legal form, there is no distribution of retained earnings under tax law and no deemed distribution. The legal entity, which is the same under civil and tax law, continues the retained earnings. In contrast to “treaty shopping”, where the aim is to avoid a legally existing withholding tax, a cross-border change of legal form does not give rise to any withholding tax in the EU country of departure under tax law. Within a cross-border change of the legal form, there is no real or deemed profit distribution and no dividend payment at hand. Therefore, no withholding tax arises by law. As a result, the taxpayer does not avoid withholding tax there, as no tax claim for withholding tax has already been incurred. Accordingly, an abuse of laws does not exist.

U.S. shareholders who invest in EU/EEA subsidiaries can use the cross-border change of legal form for tax-optimized profit repatriation (Kollruss 2023). To this end, the U.S. shareholder initially holds the relevant foreign EU subsidiary indirectly via a foreign EU/EEA holding company in whose country of residence, no withholding tax is levied under national law. The EU subsidiary initially retains its profits. Later, the EU subsidiary carries out a cross-border change of legal form to the EU/EEA holding company's country of residence. Once the cross-border change of legal form has been completed, the EU subsidiary that has changed its legal form can distribute its retained earnings without triggering withholding tax. The benefit of this tax strategy is that it allows for tax-optimized profit repatriation and at the same time the U.S. shareholder will have the desired legal form of a non-transparent corporation in the EU target state.

Regarding U.S. taxation, the cross-border change of legal form abroad is tax-neutral. The actively operating EU subsidiary is treated from the outset as a permanent establishment of the intermediate EU/EEA holding corporation under the check-the-box election. The same applies to the EU subsidiary following a cross-border change of legal form and the shift of its place of effective management to the country of residence of the EU/EEA holding company. The check-the-box election therefore remains in place. For US tax purposes, there is always a foreign permanent establishment of the EU/EEA intermediate holding company in the respective EU target state. Concerning U.S. taxation, the cross-border change of legal form abroad does not result in a tax-relevant transfer of assets. As a result, the cross-border change of legal form remains tax-neutral for U.S. tax law.

The cross-border change of legal form is particularly suitable for U.S. shareholders to achieve tax-optimized profit repatriation from foreign subsidiaries throughout the EU/EEA area without incurring withholding tax. This is a significant benefit. Furthermore, the restrictive requirements of double taxation conventions (limitation on benefits) are not relevant. The tax strategy of profit repatriation by using a cross-border change of legal form is independent of double taxation conventions. This is another significant benefit. In addition, the cross-border change of legal form has a high level of legal certainty, structural stability, and tax recognition due to its implementation in the national law of the EU Member States (EU Directive 2019/2121). Hence, U.S. shareholders should use the new option of a cross-border change of legal form to optimize profit repatriation when investing in foreign EU/EEA subsidiaries. Such a cross-border change of legal form is possible from January 31, 2023, with legal certainty.

Summary and Conclusions

The tax-optimized repatriation of profits from foreign subsidiaries is a major problem in taxation practice and international tax law. This article addresses this issue by analyzing and developing selected innovative tax strategies. U.S. shareholders investing in foreign EU subsidiaries were analyzed as an example. The tax structuring strategies for optimizing the repatriation of profits from foreign subsidiaries can be divided into two sub-strategies. One option is to implement tax structures in the foreign country of residence of the subsidiary, in which the foreign shareholder gets taxed there with dividends by a tax assessment and not with a final withholding tax deduction. Another option is to implement tax structures in the foreign source state in which the latter does not levy withholding tax. In this respect, a concrete structuring option is the transfer of the place of effective management of a foreign intermediate holding company, which holds the interest in the relevant foreign subsidiary, to the country in which the foreign subsidiary is resident. The transfer of the place of effective management of the intermediate holding company takes place after the distribution of the retained earnings of the foreign subsidiary to the head of the corporate chain has been carried out. By doing so, the dividend recipient, here the intermediate holding company, is subject to tax assessment in the foreign source state of the dividends. Accordingly, the foreign withholding tax on the dividends can be refunded in full or in part. Another option is the choice of the legal form in the foreign source state. The choice of tax-transparent legal forms such as a permanent establishment or partnership instead of non-transparent legal forms (corporation) in the foreign source state can already avoid the accrual of withholding tax. Distributions are replaced by tax-neutral profit withdrawals. The tax-optimized choice of legal form is possible from the outset. Existing investments in foreign corporations can be converted into tax-transparent structures in the foreign source state through tax-neutral reorganization. Finally, another option for tax-optimized profit repatriation is the cross-border conversion of the foreign subsidiary. This can be done by a cross-border merger or a cross-border change of the legal form. As part of this conversion, the retained earnings of the foreign subsidiary transferred tax-neutral to another foreign subsidiary and could be distributed from there without incurring withholding tax. The aforementioned profit repatriation strategies are of great importance. The far-reaching implementation of anti-treaty shopping regulations abroad as part of the OECD BEPS initiative has largely restricted the established strategy of interposing foreign holding companies and using favorable double taxation conventions to avoid or reduce withholding tax on dividends. Therefore, new tax strategies and considerations are needed. This article provides the basis for this. It also makes a relevant contribution to the literature. So far, the literature has hardly dealt with effective profit repatriation strategies for investments in foreign subsidiaries. This article closes this gap and develops general guidelines, strategies, and specific structural considerations.