German CFC Rules: When Your Dubai Company's Profits Get Attributed Back to You in Germany

German CFC rules decide whether the German tax office treats your Dubai company as a real business or as a paper one. CFC stands for controlled foreign company, and Germany's controlled foreign company rules live in sections 7 to 14 of the Aussensteuergesetz (the Foreign Tax Act, or AStG). If the rule applies, Germany taxes the foreign company's profits in the hands of its German shareholders, in the year they arise, even if nothing is ever paid out. The trigger is not the low tax rate in the UAE, which is what almost every summary online gets wrong. The trigger is what the company actually does.

What the German CFC rule actually is

The German version of the controlled foreign company rules is an anti-deferral measure. It exists to stop profits being parked in a low-tax jurisdiction inside a company that does nothing to earn them. The mechanism has three moving parts. If German taxpayers control a foreign company, and if that company earns low-taxed passive income, then German tax law treats that income as though it had landed directly with the German shareholders. It is taxed in Germany.

It is taxed there whether or not a dividend was paid. That is the part that surprises people. No distribution, no bank transfer, no money crossing a border. The attribution happens on paper, every year, based purely on the foreign company's own profit. German law calls a company whose income is captured this way a Zwischengesellschaft, an intermediary company.

The people exposed are, first and foremost, those still subject to unlimited tax liability in Germany. If you still have a home there, if your habitual residence is there, or if your spouse and children stayed behind, this rule is your rule. Someone who has genuinely and completely left Germany has different problems on the desk, namely exit tax and, in certain cases, extended limited tax liability. Those are separate tests with separate consequences, and both belong with a German tax adviser.

The 9 percent misconception: a low rate alone triggers nothing

The arithmetic circulating on every forum runs like this. The UAE charges 9 percent corporate tax, Germany draws its line at 15 percent, therefore attribution applies. The first half is right. The conclusion is wrong.

The German low-tax threshold has been 15 percent since 2024

Until the end of 2023 the line sat at 25 percent. On 1 January 2024 it dropped, as part of the law implementing the EU minimum taxation directive, so that German CFC taxation and global minimum taxation would use the same figure. The reduction from 25 to 15 percent in section 8(5) AStG is why this question is live for founders in the UAE at all.

Nine percent is below fifteen. A free zone company with the qualifying status sits lower still. The UAE Ministry of Finance confirms that a Qualifying Free Zone Person can benefit from a corporate tax rate of 0 percent on their qualifying income. So the low-tax condition is, in most UAE cases, simply met. If you want the UAE side of the arithmetic in detail, we cover the UAE's 9 percent corporate tax rate separately.

One aside that causes confusion. Since 1 January 2025 the UAE has run its own 15 percent domestic minimum top-up tax, but only for very large multinational groups with consolidated revenue of EUR 750 million or more (Cabinet Decision No. 142 of 2024). For an ordinary founder-owned company this changes nothing. It sits orders of magnitude below that threshold.

The active-income catalogue in section 8(1) is what really decides

Here is the heart of the rule, and the point almost everyone skips. German CFC rules do not capture all income of a low-taxed company. They capture passive income only. What counts as active is set out in a catalogue in section 8(1) AStG: genuine trade, genuine services, manufacturing, agriculture and forestry, and certain banking and insurance business conducted through a properly established operation. Income from those activities is not intermediary income. Not at 9 percent, and not at 0 percent either.

Passive income is the mirror image: pure asset management, a holding company with no activity of its own, licence income earned without any development work behind it, intra-group financing with no staff and no decision-makers on the ground. An agency in Dubai with employees, an office and real clients is a fundamentally different animal from a company that only collects royalties. The law treats them differently because they are different. This is exactly why a Dubai holding company structure raises the question more sharply than a trading business does. A holding sits closer to the passive end of the catalogue by its very nature.

The three tests that decide attribution

The German tax office works through three questions in order. If any one of them comes out negative, no attribution happens.

Test 1: do you control the company?

Attribution requires control by German taxpayers. Section 7 AStG asks whether a taxpayer, alone or together with related parties, is attributed more than half the voting rights, more than half the shares in nominal capital, or a claim to more than half the profit or liquidation proceeds. The measuring point is the end of the foreign company's financial year.

Two details matter. First, related parties count towards your total; the law points to section 1(2) AStG for who qualifies. Family holdings cannot simply be looked at in isolation. Second, indirect holdings count, so a chain through a second company is not a shield. Whether a particular shareholding structure crosses the line is a calculation an adviser has to run on the real numbers.

Test 2: is the income passive?

This is the test that matters most in practice and the one most often ignored. It runs through the active-income catalogue described above. Importantly, the company is not classified as a whole. Income is sorted by type, so one company can have both active and passive income at the same time. That is precisely what the third test is for.

Test 3: does the de minimis carve-out apply?

Section 9 AStG holds a small-amounts carve-out for mixed income. It stops a modest passive slice inside an otherwise active business from dragging the whole machinery of attribution into motion. That carve-out was widened substantially for 2026, and it is the most reader-relevant change to the rules in years.

What changed in the de minimis carve-out for 2026

For financial years beginning before 2026, two limits applied together. Passive income could not exceed 10 percent of the company's total gross income, and it could not exceed EUR 80,000 in absolute terms. On top of that there was a separate threshold measured at the level of each individual shareholder.

The Mindeststeueranpassungsgesetz changed all three. The Bundestag passed it on 13 November 2025, the Bundesrat approved it on 19 December 2025, and it was published in the Federal Law Gazette (BGBl 2025 I Nr. 353). The German Federal Ministry of Finance summarises the change directly: the de minimis thresholds for mixed income were raised from 2026 from 10 percent to one third, and from EUR 80,000 to EUR 100,000.

Three points make this practically significant:

• The relative threshold rises from 10 percent to one third. The passive slice can now be far larger before anything is attributed.
• The absolute threshold rises from EUR 80,000 to EUR 100,000.
• The old shareholder-level threshold is gone. The test now runs solely at the level of the foreign company.

The new figures apply for the first time to intermediary income from a financial year beginning after 31 December 2025. They are therefore already the live numbers for 2026. Any guide or adviser note still quoting 10 percent and EUR 80,000 is quoting law that has been superseded.

One thing has not changed. This is a threshold, not an allowance. Cross it and the passive income is captured in full, not just the excess above the line.

German CFC rules and German exit tax are not the same thing

These two get confused constantly, and the confusion produces wrong expectations in both directions. The difference fits in two sentences.

Exit tax hits once, at the moment of departure. It taxes unrealised gains in shareholdings as though you had sold them on the day you left Germany. How that works and why timing matters so much is covered in our piece on the German exit tax on departure.

CFC attribution hits every year afterwards. It does not tax your shares. It taxes the company's passive profits, and it keeps doing so for as long as the conditions are met. You can be caught by one and not the other. They are two separate tests with two separate triggers.

A third point belongs here. There is currently no double taxation agreement in force between Germany and the UAE. That means there is no treaty provision to argue against an attribution with. We explain why there is no double taxation agreement in force and what follows from it.

What genuine economic substance in the UAE looks like

Substance is not a form you file or a checklist you tick. It is the question of whether the company would be recognisable as a standalone business without its German shareholders standing behind it. In practice, examiners look for a coherent overall picture:

• People on the ground. Employees or management who actually work in the UAE, not names on a register.
• Premises that get used. An office that matches the activity, not an address with mail forwarding.
• Decisions taken there. Contracts, pricing, purchasing, hiring: who really decides, and where?
• Real customers and real output. Revenue from third parties, not exclusively from related companies.
• Documentation that proves it. Minutes, employment contracts, a lease, travel records, correspondence.

A company that has these features is generally carrying on active business within the meaning of the catalogue. A company missing them will struggle to argue otherwise. That holds regardless of the tax rate, and it holds for free zone structures too. If you are looking at free zone status, understand in parallel how a free zone company keeps its 0 percent rate, because the substance requirements on both sides pull in the same direction.

What to do with this information

German CFC rules do not hang on the tax rate alone. They hang on control, on the character of the income, and on the de minimis carve-out. A founder building a real business in the UAE, with people, clients and decisions on the ground, is in a completely different position from someone using a company as a container.

This article is general information, not tax advice. Whether and how the rule reaches your structure depends on numbers, contracts and shareholdings that nobody can assess from a distance. That assessment belongs with a German tax adviser experienced in international tax law, and it belongs there before the structure is built, not after.

On the UAE side we handle the operational build: licence, visas, office, bank account and ongoing local compliance. Contact START for a free consultation.