Forming a Company Abroad: Seven Myths Every Founder Should Know

Registering a company in Estonia, Bulgaria or the United States is now a matter of days, often without making a single trip. It is precisely this speed that tempts people to underestimate the tax side. When forming a company abroad, what counts is not the register but the tax law of the country in which you live and work. In our advisory practice we come across the same assumptions again and again. Every founder should know the following seven myths before signing anything; for each one, we cite the relevant provision. The focus is on Germany; where Austria differs, we say so.

“A company abroad automatically pays tax only there”

Anyone who registers a company abroad often assumes that it pays tax only there. German law, however, looks not only at the registered office but also at the place of management. Under § 1 Abs. 1 KStG (German Corporation Tax Act), a corporation is subject to unlimited corporation tax liability if it has its place of management or its registered office in Germany. According to § 10 AO (German Fiscal Code), the place of management is the centre of top-level management, meaning the place where the decisions that govern the running of the business are made; as a rule, this is where day-to-day business is conducted (BFH, judgment of 29 November 2017, I R 58/15).

A case decided by the Federal Fiscal Court (BFH) shows how seriously this is meant: a Swiss-law stock corporation with its registered office in Switzerland became subject to unlimited corporation tax liability in Germany because it was managed from Germany (BFH, judgment of 8 September 2010, I R 6/09). Austria follows the same principle (§ 27 Abs. 2 BAO, § 1 Abs. 2 KStG 1988). So if you run your foreign company from your own desk in Munich or Vienna, you cannot assume that it automatically pays tax only where it is registered. This myth has the most far-reaching consequences, because it can wipe out every other advantage of a structure.

“Anyone who spends fewer than 183 days in Germany is not liable to tax”

Hardly any number is as persistent as the 183 days. In Germany, however, a residence (Wohnsitz) alone is enough for unlimited income tax liability (§ 1 Abs. 1 EStG, German Income Tax Act). A person has a residence if they have a dwelling under circumstances suggesting that they will keep and use it (§ 8 AO). The law sets no minimum number of days. Anyone who spends fewer than 183 days a year in Germany but keeps their home there therefore, as a rule, remains liable to tax without limitation.

The law sets a time limit only for habitual abode, and even there it is not 183 days but a continuous stay of more than six months, with short interruptions disregarded (§ 9 AO). The 183 days come from double tax treaties, where, among other things, they govern which state may tax employees’ salaries (Art. 15 para. 2 of the OECD Model Tax Convention). Austria applies the same system: a residence or a stay of more than six months (§ 26 BAO).

“Low taxes abroad are final”

A low corporation tax rate abroad is not necessarily the last word. Suppose a foreign company in which a person with unlimited tax liability in Germany, alone or together with related persons, holds more than half of the voting rights, the shares or the entitlement to profits earns certain passive income. In that case, the controlled foreign company (CFC) rules under §§ 7 to 13 AStG (German Foreign Tax Act) may apply. Income is regarded as low-taxed if it bears an income tax burden of less than 15% (§ 8 Abs. 5 AStG). The income is then attributed to the shareholder in Germany, even if the company distributes nothing. For income of a passive investment nature, an even smaller shareholding is sufficient (§ 13 AStG).

Companies in the EU or the EEA can escape attribution if it is proven that they carry on a genuine economic activity (§ 8 Abs. 2 AStG). Austria has a comparable rule in § 10a KStG 1988, although it applies only to corporations, not to individuals who hold the shares directly; since 2026, the low-tax threshold there has also been an effective tax burden of less than 15%. Low taxes abroad are therefore only final if there is no control from Germany, the income is active or, for companies in the EU and the EEA, a genuine economic activity is proven. In every case, the place of management must also genuinely be abroad.

“With e-Residency I am tax resident in Estonia”

Many founders pin a particular hope on the digital identity: “With e-Residency I am resident in Estonia and pay my taxes there.” Estonia’s e-Residency is indeed a well-designed tool for setting up and running an Estonian company digitally. It does not, however, make you tax resident in Estonia. The Estonian government states expressly that e-Residency confers neither citizenship nor tax residency, a right of residence or a right of entry. If you live in Germany and run your Estonian OÜ via e-Residency from your study at home, you are straight back at the first myth: the place of management is in Germany. You can find out more about the location itself on our country page for Estonia.

“A foreign bank account stays hidden from the tax office”

Since 2017, tax authorities have been exchanging information on financial accounts automatically, on the basis of the OECD’s Common Reporting Standard. According to the Federal Central Tax Office (Bundeszentralamt für Steuern), more than 90 states take part. The data transmitted include name, address, tax identification number, account number and account balance, as well as interest and dividends. As a rule, a foreign bank account therefore no longer stays hidden from the tax office today. A structure that only holds up as long as nobody looks closely is not a sound structure.

“With a company abroad I avoid German VAT”

The idea seems obvious: the invoice comes from abroad, so I avoid German VAT. For services supplied to businesses, however, the place-of-recipient principle applies. A supply of services to a business is generally made where the recipient carries on its business (§ 3a Abs. 2 UStG, German VAT Act). German VAT therefore arises for business customers in Germany, except that the customers owe it themselves under the reverse-charge procedure (§ 13b UStG). If a customer is entitled to deduct input VAT, they deduct the same tax again (§ 15 Abs. 1 Satz 1 Nr. 4 UStG). So the tax is not saved; it merely changes who owes it.

Separate rules apply to consumers; for electronically supplied services, for example, the foreign provider must generally account for German VAT itself (§ 3a Abs. 5 UStG). How this works in practice through the OSS scheme is explained in our article “The OSS Scheme: VAT on Online Sales to Consumers in the EU”. In addition, the reverse-charge procedure requires a supplier established abroad (§ 13b Abs. 1, Abs. 2 Nr. 1 and Abs. 7 UStG). If the place of management is in Germany, the company must charge the VAT itself.

“An address with a registered office provider is enough for a foreign company”

In many countries, a business address with a registered office provider is enough for entry in the commercial register, and for tax purposes, too, such an address can be the registered office under the articles of association (§ 11 AO). But it does not determine where a foreign company is managed, and it does not prevent a permanent establishment in Germany. If the company maintains a fixed place of business in Germany, a permanent establishment can arise there; § 12 AO lists the place of management first. Profits attributable to this permanent establishment are taxed in Germany.

On top of this come general anti-abuse rules. Under § 42 AO, tax law cannot be circumvented by abusing legal structuring options. And a foreign company without economic activity of its own can lose relief from German withholding taxes under a double tax treaty by virtue of § 50d Abs. 3 EStG. As a rule, a structure is therefore only robust if it has genuine substance: premises, staff and decisions made on the ground. You should clarify these points before the company is formed, not at the first tax audit.

What really matters when forming a company abroad

The seven myths share a common cause: the company is planned around the location rather than around the founder’s own circumstances. What really matters can be boiled down to three questions. Whether forming a company abroad pays off for tax purposes depends on how honestly you answer these three questions in advance:

• Residence: Where do you live, and where do you have a home? Your personal tax liability depends on this.
• Place of management: Where are the company’s important decisions actually made?
• Substance: Does the company have real structures at its registered office, or does it exist only on paper?

How double tax treaties allocate taxing rights between two states is explained in the article “Double Tax Treaties: How a Treaty Protects Your Company Abroad”. What to bear in mind when relocating is covered in “Moving to Dubai” and “Leaving Austria”. In addition, before forming a company abroad, you should always run the planned structure past your own tax adviser.

Frequently asked questions about forming a company abroad

Some questions about forming a company abroad that we are frequently asked in initial consultations, answered briefly:

This article is for general information only and does not replace tax or legal advice. Last reviewed: October 2026.