Tax reclaim opportunities regarding withholding taxes in Germany

Tax reclaim opportunities regarding withholding taxes in Germany

Fri 09 Apr 2021

As a result of a number of recent cases there are tax reclaim opportunities for non-German investors in German companies that have suffered withholding taxes (WHT), subject to meeting certain conditions. 

Points to consider

  • A complete or partial WHT relief may now be possible: i) where there is no Double Taxation Treaty (DTT) in place with Germany; and ii) where there is a DTT reduction to 15% or 5% for it to be further reduced
  • The individual facts and circumstances need to be examined to determine if the underlying conditions for WHT relief are satisfied and what new rate of WHT is available.
  • The normal four year statute of limitations should be taken into account (see Sec. 169 para. 2 number 2 German Fiscal Code): the submission of claims should be considered now for the period back to 1st January 2017.

Practical issues

  • There is no German legislative change to allow for such claims as of yet, and the line of German case law considering these issues is not final.  However draft law was officially published in Germany on 20 January 2021 proposing revisions to WHT procedures and digitisation of the WHT relief process.  In addition significant changes are proposed to the German anti-treaty shopping rules which could significantly tighten the existing strict rules.  Essentially it would be necessary to demonstrate an absence of abuse, rather than to apply a look-through or equivalent beneficiary approach.
  • From practical experience the tax authority could hold these claims behind existing cases, but there is the possibility that each claim may need to be litigated itself.
  • It may be possible to reclaim interest along with any WHT refund.

Next steps

Should your company have received German dividends from subsidiary or a German company in which your company has a 10% or higher holding for a continuous period of at least 12 months and have suffered more than 0% WHT, you should consider a cost benefit analysis of seeking an additional reclaim. Further background on case law and the current application of German dividend withholding tax rules are set out below.

Case-law background

The Court of Justice of the EU has dealt with a number of cases holding that the application of German withholding tax on dividends paid to non-German residents is contrary to EU principles of freedom of establishment (see for example case C-440/17 in the case of dividends paid to an EU parent) and freedom of movement of capital (see for example Case C-641/17).

In the former case we understand German law has yet to be updated.  In the latter case consideration is being given to whether the German law as it was in 2002 is still effective under the standstill provisions that would have applied to law in existence in December 1993.

In a recent development in German case law, a Nuremburg Court has held that a relief from German withholding tax should (contrary to existing German law) be available to non-German residents under the freedom of movement of capital on the basis that the German law is discriminatory against non-German investors.

Withholding taxes on dividends paid from German companies

German withholding taxes on dividends before any reliefs are currently 26.375% (25% WHT charge plus a 5.5% solidarity surcharge). The available reliefs from withholding taxes available for companies can be summarised as follows:

  1. A corporation can claim relief from 2/5th of the 25% withholding tax, whether it is resident in tax Germany or not. Obtaining this relief results in the effective tax rate of 15% being equal to the domestic corporate tax rate. This relief by claim is available irrespective of the level of shareholding.
  2. Subject to meeting strict anti-treaty shopping rules, further relief for foreign companies may be available through a Double Taxation Treaty. Many of the approximately 100 German treaties provide for a reduction of withholding tax on dividends to 5%. Access to these lower rates depends on there being a minimum holding and, often, also a minimum holding period.
  3. For non-German companies based in the EU, the EU Parent-Subsidiary Directive can reduce German withholding tax on dividends paid to EU associates to 0%. There is a minimum holding requirement of 10% and an uninterrupted minimum holding period of 12 months.

Dividend income of companies is taxable in Germany, but German tax resident entities are able to exempt 95% of the dividend receipt from tax, provided there is a minimum 10% holding in the payer at the beginning of the calendar year for corporate income tax purposes and a minimum 15% holding in the payer at the beginning of the fiscal year (“Erhebungszeitraum”) for trade tax purposes.  The effective corporate tax rate on the receipt of a dividend from another German company then becomes around 1.5% (5% multiplied by the German corporate tax rate of 15% and a local German trade tax of around 15%).  However, this 95% exemption is not, in law, available to foreign companies. 

As noted above, this difference in treatment between German and non-German resident recipients of German dividends has been held to be contrary to EU principles of freedom of establishment and freedom of movement of capital.