Relocation of Accounting

Economic globalization has not spared the accounting sector. More and more companies are considering relocating their electronic financial accounting abroad; whether for cost reasons, to tap into specialized expertise, or to optimize corporate structures. But what is legally permissible, and what do you need to be aware of?

Digitalization has fundamentally transformed accounting. Whereas file folders and physical documents once defined the day-to-day workflow, cloud-based solutions and electronic archiving now prevail. This development opens up new opportunities for companies: location independence and the use of shared service centers abroad. However, German lawmakers have established clear rules.

Accounting: What Is the Legal Framework?

The principle set forth in Section 146 of the German Tax Code (AO) is as follows: Books and records must be maintained and retained within the scope of application of the German Tax Code Tax Code. That is the starting point. However, the legislature has provided for exceptions and these have become significantly more lenient in recent years.

Centralized accounting at a foreign parent company or a shared service center has long been standard practice, particularly for international corporations. However, medium-sized companies with cross-border operations are also increasingly turning to this option.

Greater Flexibility in Financial Accounting: How Has the Legal Situation Changed as a Result of Section 146(2a) of the German Fiscal Code (AO)?

Until the end of 2020, anyone who wanted to move their electronic accounting abroad always needed approval from the tax office – regardless of whether it was just to neighboring France or to the United States. In addition, all paper documents were required to remain in Germany. The hurdles were high, and the bureaucracy was cumbersome.

On December 29, 2020, the situation changed fundamentally. The legislature recognized that the strict rules no longer reflected economic reality and enacted a new Section 146(2a) of the German Fiscal Code (AO).

• This regulation stipulates the following for EU member states: The transfer of electronic bookkeeping is possible without an application. Companies may maintain and store their books and records in another EU country without prior authorization.
• The following applies to non-EU countries: The requirement for prior approval remains in effect. Anyone wishing to relocate their accounting operations to Switzerland, the United States, or Asia, for example, must still submit a written or electronic application to the responsible tax office.

The mandatory requirement in both cases is that the German tax authorities must retain full access to the data at all times. Specifically, this means that the tax authorities must be able to access the electronic records as if they were located in Germany.

Accounting in several EU Member States: What are the implications of the implementation of Directive (EU) 2021/514 for Decentralized Structures and Relocations?

With the Act Implementing Directive (EU) 2021/514 of December 20, 2022, the German legislature drew further conclusions from developments at the European level. The legislature explicitly clarified that accounting records may be maintained not only in a single other EU member state, but in “several member states of the European Union.” Although this change is merely clarificatory in nature, it provides companies with legal certainty for modern, decentralized structures.

Another useful change: Accounting operations no longer have to be relocated to Germany. Companies can also relocate their accounting operations to one or more other EU member states. This provides additional flexibility in the event of restructuring or a change of business location.

Outsourced Accounting under Section 158 of the German Fiscal Code (AO): What clarifications does the Federal Ministry of Finance (BMF) letter from March 2024 contain?

In March 2024, the Federal Ministry of Finance (BMF) published important letters that clarify the practice of outsourced accounting:

• GoBD Updates: The “Principles for the Proper Maintenance and Retention of Books, Records, and Documents in Electronic Form, as well as for Data Access” (GoBD) have been updated to reflect the new legal situation.

Particularly convenient: If, in connection with an approved transfer, a substitute image-based recording (i.e., the scanning of paper documents) is performed, original paper documents will not be objected to if they are transferred to the location of the electronic accounting system abroad. This significantly simplifies day-to-day operations.

• Revised Section 158 of the German Fiscal Code (AO): Section 158 of the AO, which concerns the evidentiary value of accounting records, was also revised by the DAC 7 Implementation Act. The Federal Ministry of Finance (BMF) has announced the corresponding changes in an application decree. This is particularly relevant for companies that relocated their accounting operations abroad some time ago.

Relocation of Accounting to a Non-EU Country: What Should Be Included in the Application?

If you wish to relocate your accounting operations to a non-EU country, you must file an application with the tax office. The tax office with local jurisdiction over the company’s taxation is always responsible which is generally the tax office where the company’s management is headquartered.

The application must include the following detailed information:

• Scope of the Transfer: Which electronic books and records are affected?
• Procedure Description: How is the transfer carried out from a technical and organizational standpoint?
• Location Information: Where is the data processing system located?
• Third-Party Involvement: Name and address of the service provider when the contract is awarded.

Application for Relocation to a Non-EU Country: What Does the Tax Office Review?

The tax office evaluates applications based on various criteria:

• Is the company properly fulfilling its tax compliance obligations?
• Is access to data guaranteed under § 146b(2), second sentence, of the German Fiscal Code (AO), § 147(6) of the AO, and § 27b(2), second and third sentences, of the German Value-Added Tax Act (UStG)?
• Can it be ensured that taxation will not be adversely affected by the relocation?

Please note: A corporate group must submit a separate application for each company. A blanket approval for the entire corporate group is not possible.

For companies that transfer not only their accounting but also operational functions abroad, the 2023 Transfer Pricing Administrative Guidelines (VWG-VP 2023) are relevant. These guidelines contain provisions regarding the tax treatment of function transfers and apply to transfers that took place after December 31, 2021.

Practical Tips: Why Is It Generally Advisable to Consult with the Tax Office?

Even though a formal application is no longer required for the transfer to EU member states as of December 29, 2020, be sure to consult with the tax office well in advance. Retroactive confirmation or documentation can help avoid disputes later on.

Approval for non-EU countries is not a mere formality. The tax office makes its decision based on its discretion in accordance with its duties. Careful preparation and complete documentation significantly increase the chances of success.

Has your company already transferred its accounting operations abroad without authorization? If so, you should consider filing a retroactive application. While the tax office may waive the requirement to transfer the operations back if the conditions are essentially met, it may impose a late-filing penalty.

The GoBD apply in full even when accounting is relocated. Relocating accounting to another country does not exempt a company from complying with the principles of proper accounting.

Our assessment: Take the broader context into account and reap the benefits of an international accounting structure

The options for transferring accounting operations abroad have expanded significantly in recent years. Companies now enjoy a great deal of flexibility, particularly within the EU. The new regulations in effect since 2022 and the current administrative guidelines from 2024 provide additional legal certainty and practical simplifications.

At the same time, tax compliance must be ensured at all times. Access to data is the key criterion. Those who take these requirements seriously and plan carefully can profit from an international accounting structure.

Are you unsure whether your company meets the requirements for relocation? Or do you need help with the application process? Our expert, Lena Karrenberg, will be happy to advise you on all matters related to international accounting and the tax framework. Simply get in touch.