Legal entities are independently taxable internationally and are taxed in their country of residence. Only distributions from corporations domiciled abroad to domestic shareholders are subject to domestic taxation. The domestic tax authorities have no access to retained profits.
This shielding effect of the legal person is consciously used with the interposition of foreign companies in order to realize tax-reducing profit shifts. With the addition taxation in the AStG, income shifts should be avoided if domestic shareholders hold more than 50 % shares in a foreign company and this intermediate company generates income from passive activity (activity clause) that is subject to low taxation abroad.
As a result, the low-taxed passive income such as investment income is added to the domestic shareholder. The fictitious distributions are subject to domestic taxation at the earliest possible point in time and are credited again in the event of an actual distribution at a later date. Additional restrictions apply to investment income. The access taxation of the AStG becomes independent of one Tax treaty applied (Treaty overriding).