Germany - Russian subsidiaries and Section 8 of the German Taxpayers Act (StAbwG) from 2027

Nov 4

4 min read

Russian subsidiaries from 2027 onwards: Is there a risk of their revenue being added back?

Jörg Gulden

From 2027, the deduction of business expenses under the Tax Haven Prevention Act will apply to business transactions with Russia. It remains unclear whether this will also affect the controlled foreign company (CFC) rules for Russian subsidiaries. If so, an operating company normally taxed at 25% would become a low-tax company, and German companies would face a tax burden that far exceeds their profits from Russia.

What it's about

Since December 20, 2023, Russia has been on Germany's list of non-cooperative tax jurisdictions. The countermeasures of the Tax Haven Prevention Act (StAbwG) have been implemented gradually since then.

Since 2024: stricter controlled foreign company (CFC) rules. A controlled Russian company is considered an intermediary company for all its income if this income is taxed at less than 15% (§ 9 StAbwG).
Since 2026: Dividends and capital gains from the investment are no longer tax-exempt under Section 8b KStG (Section 11 StAbwG).
From 2027 onwards: Expenses from business relationships with Russia will no longer be deductible (§ 8 StAbwG). At the same time, Germany will completely suspend its double taxation agreement with Russia.

With a 25% Russian corporate tax rate, operating subsidiaries were not previously taxed at a low rate. However, the 15% threshold is not based on the Russian tax base, but rather on a comparative calculation according to German tax law (Section 10 Paragraph 3 of the German Foreign Tax Act). Therefore, from 2027 onwards, the question arises whether the new deduction prohibition also applies in this calculation. The tax authorities have not yet commented on this.

What's at stake

If the deduction prohibition applies in the comparative calculation, virtually all of the subsidiary's expenses vis-à-vis Russian business partners are blocked: personnel, rent, services, cost of goods sold, and depreciation. German income increases sharply, the tax burden falls below 15%, and the same deduction prohibition then determines the amount to be added back.

Example (tax rate 400%, all operating expenses affected):

position	Without § 8 StAbwG	With § 8 StAbwG
Sales volume	€1,000,000	€1,000,000
Operational effort	€900,000	not removable
Income determined according to German law	€100,000	€1,000,000
Russian corporate income tax	€25,000	€25,000
Burden in the low-tax test	25%	2.5%
Additional amount	€0	€1,000,000
Corporate income tax and solidarity surcharge after crediting	€0	€131,875
Trade tax (no credit)	€0	€140,000
German tax	€0	€271,875

For an economic profit of €100,000, approximately €272,000 in German tax was levied, in addition to Russian tax.

This is not an isolated case. With a 25% Russian tax rate, a company is taxed at a low rate as soon as its restricted expenses exceed two-thirds of its profit. This affects virtually every operating subsidiary. Loss-making companies would be hit the hardest: they pay no Russian tax, but according to German accounting standards, their profit would be close to their revenue.

This affects shareholders who are subject to unlimited tax liability in Germany, meaning both corporations and individuals who, alone or with related parties, hold more than half of a Russian company. An indirect shareholding is sufficient, for example, via an Austrian holding company. Even in the worst-case scenario, payments from suppliers whose income is taxable in Germany, such as from the German parent company, remain deductible.

Our assessment

We consider the application of the deduction prohibition in the add-back calculation to be incorrect, both in the low-taxation test and with regard to the amount of the add-back:

Section 8 of the German Tax Evasion Act (StAbwG) requires a business relationship between a taxpayer and the listed territory. The Russian subsidiary is not a German taxpayer; the tax authorities themselves confirm that it remains a foreign company even under the controlled foreign company (CFC) rules.
The legislator focused Section 8 on the paying domestic company and Section 9 on the shareholding. He expressly wanted to avoid double jeopardy.
The result would be circular: One defensive measure would create the low taxation that is a prerequisite for another defensive measure.

This is not legally certain. The wording of Section 10 Paragraph 3 of the German Foreign Tax Act (AStG) is broad, and the tax authorities already apply other deduction restrictions, such as interest and license barriers, to foreign intermediary companies. Until this is clarified, companies must expect a differing interpretation.

What companies should do now

Quantify the burden. Based on the 2027 projected figures, break down the subsidiary's expenses by cost type and contractual partner, and calculate the German tax in the worst-case scenario. This should be completed by mid-January 2027.
Use binding rulings strategically. They are particularly useful when considering a withdrawal or sale. Exiting the market is also expensive: Russian approval practices regularly require a discount of at least 60% on the market value and a "voluntary" payment to the state treasury, and capital gains have been fully taxable in Germany since 2026.
Prepare the determination procedure. The question will be decided in the separate determination procedure pursuant to Section 18 of the Foreign Tax Act (AStG). For 2027, a declaration of determination is recommended in any case, clearly stating your legal position. An objection and a stay of execution are possible against a differing decision.
Record the supply routes. Payments from companies whose profits are taxable in Germany remain deductible in all cases. Payments from group companies in other EU member states raise additional questions under EU law.
Reconcile the annual financial statements. Clarify the tax provision or risk disclosure for 2027 with the auditor at an early stage.