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German Federal Ministry of Finance clarifies anti-treaty shopping rules on multi-level holding structures

26 Jul 2010

On 21 June 2010, the German Federal Ministry of Finance officially announced their interpretation of the German anti-abuse provisions on withholding tax relief as set out in the Income Tax Act. Taxand Germany examines the interpretation and presents the clarifications introduced.

The current regulations deny withholding tax benefits under a Double Tax Treaty ("DTT"), the EU-Parent-Subsidiary-Directive or the EU-Interest-and-Royalty-Directive to a non-resident company. This applies if their shareholders weren't entitled to the tax benefit when receiving income directly, (individual requirement), and the so called substance provisions regarding the non-resident company, (objective requirements), are not met. Under German tax regulations substance is declined if one of the following elements applies:

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

In 2007 the Federal Ministry of Finance issued a decree containing details on the rule interpretation. The 21 June 2010 decree now clarifies the treatment of shareholders with multi-level holding structures. The individual and objective requirements must be checked on each level. In case the direct non-resident shareholder of the resident company does not fulfill the substance requirements, the respective indirect shareholder must be checked as long as the direct and indirect shareholders are situated in a state to which a DTT or respective EU-Directive applies. The 2007 decree did not comment on the application of the approach. Therefore confirmation of the rule interpretation on 21 June was a welcomed move.

In addition, the German Federal Ministry widens the application of the exception for non-resident companies, which are listed on a recognised stock exchange with regularly traded shares, as well as for non-resident open-ended trust companies that are subject to the German Investment Tax Act. Individual and objective requirements do not apply to non-resident companies to benefit from reduced withholding taxes. To direct shareholding the decree now allows for indirect shareholders to be considered for the purpose of the exception.

Taxand's Take

For multinational companies the decree is a welcomed clarification concerning the entitlement to withholding tax benefits. There is now more confidence and flexibility towards the practical handling of German anti-treaty shopping rules.

For stock traded companies and open-ended trust companies the exception to the German anti-treaty shopping rules is an unexpected improvement. The rules even apply if there are no direct shareholders. German anti-treats shopping regulations can also be a significant administrative burden which has now been lifted.

Please note that the German anti-treaty shopping rules are constantly subject to changes and should therefore be monitored constantly. Future change might result in a request of the European Commission similar to that dated 18 March 2010 requesting Germany to amend its anti treaty shopping rules - read more from Taxand Germany on the European Commission's recent attack on German anti-abuse provisions on withholding tax relief here.

Your Taxand contact for further queries is:
Arianne Jerey-Hener
T. +49 6196 592 24810

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