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European Commission Attacks German Anti-abuse Provision on Withholding Tax Relief


Over the past few years German tax law has increasingly been influenced not only by German legislative and judicial forces / authorities but also by European institutions, such as the European Court of Justice and the European Commission. Taxand Germany reviews the provison and its impacts on taxpayers.

With its recent request in March this year, the European Commission moved forward with the second step of the formal infringement procedures against Germany concerning the anti-abuse provisions on withholding tax relief affecting EU holding companies specifically.

In principle Double Tax Treaties, the EU Parent-Subsidiary-Directive as well as the EU Interest-and-Royalty-Directive provide for the reduction or even exemption from withholding taxes on, for example, dividend payments by German companies to their foreign corporate (intermediate) shareholder. The Directives allow the individual member countries a certain amount of tolerance with regard to the application.

The current national regulations applicable for Germany deny withholding tax benefits to a non-resident (intermediate) company if any of the following conditions (substance requirements) are met:

  • there is no economic or other relevant reason to establish the foreign company
  • the foreign company does not earn more than 10% of its gross income from its own economic activity
  • the foreign company has no adequate business premises for its activities

The German legislator aims to prevent foreign companies from choosing structures that mean they benefit from favourable treaty provisions only, rather than choosing structures for business considerations. Germany introduced the second condition stated above in 2007. Thus, in addition to adequate premises and a non-tax reason for the interposition of the foreign company, German law requires that more than 10% of its gross income must be earned from the foreign company's own business. Furthermore, to be eligible for withholding tax benefits businesses must not meet any of the conditions stipulated above.

The international tax community has already reacted to the introduction of this legislation. The various substance requirements and economic or business rationale of using holding companies has already impacted the use of intermediary holding companies. Indeed, international tax planning efforts concerning German investments have increased in recent years and the discrimination of foreign companies adds an element of uncertainty for foreign investors who want to invest into Germany.

In its request the European Commission now concludes that the requirement for economic activity is disproportionate in its typical application that the proof of the contrary is not possible to the foreign company. With this condition Germany did eventually exceed what was necessary to meet its objective of preventing tax avoidance. EC law and related European case law require from its member states such as Germany to review each individual case rather than applying general standardised requirements. Initially Germany was granted a two month period until mid-May 2010 to respond which we understand has not been taken up, meaning the Commission may bring this matter to the European Court of Justice.

Taxand's Take

The German anti-abuse provisions concerning withholding tax benefits on dividends and licence payments were heavily criticised when first introduced as they significantly increased tax planning efforts and even presented an element of uncertainty for foreign investors to invest in Germany.

Taxpayers being denied withholding tax reliefs or withholding tax refunds based on this provision should take the appropriate steps to keep their cases open for the time being to be in a position to reclaim withholding tax relief in case of an amendment of the German anti-abuse regulations.

The European Commission in particular criticises a lack of proof of the contrary in the German anti-abuse provisions. Thus, in principle, Germany could remedy the concerns of the European Commission by introducing the possibility for foreign companies not meeting the substance requirements to provide proof of the contrary. However, as of now no official reaction from Germany has been put forward. It would seem they would rather await the reaction from the European Commission. Watch this space for new developments.

Your Taxand contact for further queries is:
Ulrich Siegemund
T. +49 (6196) 592 16364

Article first published on Director of Finance, September 2010

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