Withholding tax exemption even for pure EU holding companies?



Through § 50d (3) of the Income Tax Act, German lawmakers seek to prevent unauthorized persons from deliberately interspersing a company based in a DTA contracting state or an EU state in order to claim benefits under the DTA or under the Parent-Subsidiary Directive (implemented in § 43b of the Income Tax Act) or the Interest and Royalties Directive (implemented in § 50g of the Income Tax Act), both of which have been implemented into national law (“treaty/directive shopping”). This statute was first introduced in 2007 (“old version”) and revised in 2012 (“new version”), and the new version has been in effect unchanged ever since.

In an effort to fight abuse, the German rules call for a “transparent” examination of the entire shareholding chain, and a full withholding tax exemption/refund can only be claimed if there are personal and material grounds entitling each individual company within the chain to claim the refund or exemption. With this statute, Germany extends its taxation claim to shareholders outside of its territory.

For example, German lawmakers consider the interspersal of a pure EU holding company to be abusive in every case and refuses a tax exemption or refund in such cases, contrary to the Parent-Subsidiary Directive and the Interest and Royalties Directive. In such a case, the 15% German withholding tax becomes a definitive tax expense.

On 20 December 2017, the European Court of Justice (ECJ) found in the joined cases of “Deister Holding” and “Juhler Holding” that the old version of § 50d (3) of the Income Tax Act violates EU law in that it violates the Parent-Subsidiary Directive and the freedom of establishment. The German Federal Ministry of Finance adopts this view in its letter of 4 April 2018 and states that it will no longer apply the old version of the statute.

The ECJ has recently ruled that § 50d (3) of the Income Tax Act, as amended, also violates EU law (ECJ, Order of 14 June 2018– Case No. C-440/17). The court found that Germany’s restrictions on withholding tax exemptions are overly broad for the prevention of tax evasion and abuse.

Moreover, the ECJ has found France’s anti-treaty shopping statute to be in violation of EU law (Case No. C-6/16 of 7 September 2017). As a result, even “pure” EU holding companies can now claim the benefits of the Parent-Subsidiary Directive provided only that they are not merely artificial constructions. German lawmakers will now presumably seek to enact a new anti-treaty shopping statute which is formulated so as to conform with European law and so as to withstand review by the ECJ.

Insofar as distributions/royalties were paid in the past from Germany to other EU states but an application for a refund/exemption from German withholding tax was not filed with the Federal Central Tax Office in Bonn because such an application had little prospect for success at the time, such an application could be made now, provided the general four-year deadline for these applications has not yet expired. For example, applications for the year 2014 may be filed with the Federal Central Tax Office through the end of 2018 at the latest.




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