Corporate dividends: Tax refunds
Corporate shareholders from the EU and EEA can reclaim dividend tax paid previously.
According to the previous German tax regime, dividends distributed to domestic corporate shareholders generally enjoyed exemption of 95% in real terms, which was not applied with respect to shareholdings of foreign companies of less than 10%, including companies from EU and EEA (cases that are not covered by the EU parent-subsidiary directive).
The incompatibility of this regulation with EU law was discussed in Germany for a long time; however the German fiscal authorities and legislators did not act but waited instead for a reaction from the EU.
Finally the European Court of Justice (ECJ) concluded with its the decision on case 284/09 dated 20.10.2011 that this German withholding tax regime violates the provision governing the free movement of capital in the EU treaty.
After protracted efforts by German legislators to bring the German withholding tax regime in line with the principles of the ECJ decision and EU law, the German lower house of parliament passed a draft bill on 9 November 2012 that allows corporate shareholders resident in other EU or EEA member states to claim a refund of the tax withheld on dividend distributions in certain cases. The provision also covers the tax withheld on dividends paid in the past. When the upper house of the German parliament rejected the bill, it was referred to the conciliation committee to come up with a recommendation that would be accepted by both houses. In accordance with a recommendation of the conciliation committee the new law was adopted on 01.03.2013.
Under the new law no tax exemption will be granted for future tax periods in cases where the corporate shareholder owns less than 10% of the shares in the corporate entity. This law applies irrespective of whether the corporate shareholders are domestic or not.
However tax exemption for capital gains from shares in the corporate entity remains unchanged.
As a result of the incompatibility of the previous withholding tax regime with EU law, shareholder companies from EU and EEA can apply for exemption from all previous dividends distributed before 28.02.2013. Informal applications for tax refunds can be submitted at the federal tax office (Bundeszentralamt für Steuern) by companies registered or with their place of management within the EU or EEA, provided they own less than 10% of the shares in the German corporate entity.
It is unclear whether third country (i.e. non-EU/EEA) corporate shareholders also can rely on the principles of the ECJ decision due to the “standstill clause” in the EU treaty. Under the standstill provision, restrictions of the free movement of capital can be justified in relation to third countries if the restrictions existed on 31 December 1993 and involve direct investment. The clause does not apply where, after that date, legislation is enacted and is “based on an approach that differs from that of the previous law and establishes new procedures” and gives rise to a restriction. In 2000, dividend taxation in Germany switched from a full imputation system to an exemption system, so there are valid arguments why the standstill clause should not apply to withholding tax.
Tobias Koch
