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Refund of German withholding tax on dividends: tax relief for EU holding companies becomes easier

  • United Kingdom
  • Tax planning and consultancy

09-04-2018

German tax authorities have applied a restrictive regime on the refund of withholding tax on dividends paid by German companies to EU holding companies. Now certain changes have been made which make it easier to apply for a refund.

New relief - overview

By way of a circular letter dated 4 April 2018 the German tax authorities now apply less restrictive requirements on all cases which are pending or not yet time barred. If an EU holding company has not applied for a refund of withholding taxes it should review if such an application now has sufficient prospects of success. Subject to a review of each individual matter, an application for dividends received in 2014 to 2017 should be possible (for earlier years an application may be possible under certain circumstances as well).

Requirements for withholding tax relief until 4 April 2018

An EU company holding shares of at least 10% in a German company is in principle entitled to full relief from German withholding tax on dividends paid by the German company. The withholding tax is 25% plus 5.5% solidarity surcharge thereon (in total 26.375%). Before the new circular letter dated 4 April 2018 was published a relief from withholding tax was possible;

  1. if and to the extent that the direct or under certain circumstances indirect shareholder of the EU holding company is entitled to relief if it received the dividend directly, or
  2. if and to the extent that the EU holding company generates its gross earnings from its own business activities other than holding shares or just administering its assets, or
  3. if the EU holding company does not generate its gross earnings from its own business activities in full but

a) in respect of dividends received outside of its own business activities there are economic or other valid reasons for the interposition of the EU holding company, or

b) the EU holding company participates in general commerce by means of a business organization with resources appropriate to its business purpose.

These requirements were restrictively interpreted by German tax authorities and made it difficult to interpose passive holding companies to benefit from the parent-subsidiary directive relief. Additional exemptions also exist for shareholders of a passive holding company if the shares of such a shareholder are listed and sufficiently traded on a recognized regulated stock market or such a shareholder qualifies as an investment fund (as defined by German law).

Decision of the ECJ

On 20 December 2017 the European Court of Justice held that the predecessor version of the current law did not comply with EU law. Another case in which the current law is a subject matter is still pending with the ECJ.

New requirements from 4 April 2018

In light of this 20 December 2017 decision of the ECJ the German tax authorities published a circular letter on 4 April 2018 which includes new binding guidelines for the tax authorities on the interpretation and application of the requirements for passive holding companies (see item 3.a) and 3.b) above). The following relief applies;

item 3.a above

  • it is now possible to reflect the fact that the holding company is part of a group of companies and circumstances deriving from this group status. This was expressly excluded before.

Item 3.b above

  • a passive holding company is not regarded as not participating in general commerce anymore just because it generates gross earnings from administrating assets (e.g. shareholding). However the holding company needs to actually exercise its rights as a shareholder of the Germany company.
  • the business organization maintained by the holding company does not mandatorily require employment of managing employees and other employees in the jurisdiction of its tax residence any more.

Pending cases and refund claims not raised yet

These new guidelines are applied by German tax authorities in all pending cases. If an EU holding company has not applied for refund yet then it should review if the prospects of success for such an application have changed. Applications for dividends received in 2014 should not be time-barred before year end 2018.

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