Entity classification election rules in Germany and beyond: necessary tools to achieve neutrality of legal form or invitation to engage in tax avoidance?

Journal article

Tax systems worldwide differentiate between pass-through income taxation of transparent entities (especially partnerships) and corporate income taxation of opaque entities (corporations). Very recently, Germany introduced the possibility of certain pass-through entities being able to opt for taxation under the corporate tax regime. This form of breaking the dividing line between business tax regimes is already known, the United States (US) "check-the-box" regulations in particular being a prominent example of entity classification election rules. In Germany, the election is presented as ensuring neutrality of legal form, but the US regulations are often portrayed as a tool for international tax avoidance. This article evaluates the policy implications of entity classification election rules in light of the German example and identifies whether the German design can be a model for other jurisdictions. The analysis focuses on the pivotal points of the discussion on entity classification election, specifically neutrality of legal form and robustness to avoidance, together with their dimensions of fairness, efficiency and simplicity. The analysis identifies entity classification election as a measure that has conceptual advantages over fundamental reforms and (other) small-scale means of aligning the business tax regimes. It is a legislative tool with distinct policy goals and its own scope of application in which it achieves necessary improvements provided its use is confined and coordinated domestically to prevent avoidance.

Authors: Traut, N

• Publication status: Published
• Peer review status: Peer reviewed
• Publisher: Sweet and Maxwell
• Journal: British Tax Review
• Volume: 2024
• Issue: 1
• Pages: 133-163
• Publication date: 2024-03-18
• Acceptance date: 2023-09-24
• ISSN: 0007-1870
• Language: English
• Keywords: tax avoidance; tax administration; United States; partnerships; Germany; classification; hybrid entities