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Anti-Treaty Shopping Rules Amended
Foreign entities holding shares in German corporations like an AG or a GmbH are completely or partially relieved from any withholding tax on dividends received on the basis of the applicable tax treaties or the EU parent-subsidiary-directive. However, under the current anti-abuse provision of the German Income Tax Act (ITA), such foreign entities can only benefit from these exemptions if certain requirements are met. Taxand Germany considers the amendments and further tax implications they may have on German taxpayers.
a) existence of economic or other relevant reasons to interpose the foreign company as a shareholder of the German entity in relation to the payments received;
b) the foreign company has with respect to its own business purpose adequate business substance to engage in general commerce; and
c) more than 10% of the foreign company's gross income is derived from own business activities.
If these requirements are not met by the foreign company, the German tax authorities will examine the company's shareholding structure. A bottom-up review will be carried out and if a shareholder (at a level further up the corporate chain) meets all the conditions, then relief will be granted in relation to the portion of that shareholder's holding; if the shareholder is a resident of a non-treaty country, no relief from German withholding tax will be granted.
This amendment is of limited assistance for pure holding companies, unless they decide to engage in the active management of their subsidiaries, as holdings will often lack appropriately equipped business premises. Non-German companies holding German companies should analyse whether the amendment to sec. 50d para. 3 ITA can result in an extended refund.
Your Taxand contact for further queries is:
T. +49 89 23714 17375