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Resident Companies to Pay More Than Foreign Multinationals
In the course of the legislation procedure for the 2013 Annual Tax Act, the committee of the Bundesrat submitted proposals on 6 July 2012 to be included in the draft bill. One of these proposals relates to the taxation of dividends received from minority shareholdings in German corporations, and the capital gains derived from such shareholdings. The proposal is a reaction to the decision rendered by the European Court of Justice on 20 October 2011 (Case C-284/09) according to which the current tax regime for outbound dividends violates the free movement of capital. However, the current proposal seems to replace a discrimination of recipients of dividends who are subject to limited taxation in Germany, with a discrimination of dividend recipients who are subject to unlimited taxation. Taxand Germany studies the impact this will have on companies paying corporate income tax in Germany.
Under current German tax law, capital gains derived by a corporation from shareholdings in the form of dividends, as well as capital gains realised by a sale of shares, are effectively 95% exempt from income tax at the level of the corporate shareholder. So far, this applies regardless of a minimum percentage regarding the shareholding quota.
Despite the tax exemption mentioned above, each dividend payment is subject to a withholding of 25% (plus 5.5% solidarity surcharge) applicable on the gross dividend, which is paid by the company to the tax authorities. For corporations subject to unlimited taxation in Germany, this withholding tax will be set off against the actual tax burden of the company in the course of the tax assessment, and a potential excess amount will be refunded.
For the recipients of dividends without a statutory seat or place of management in Germany, and who are therefore only subject to limited taxation in Germany, the situation is different. There is no assessment procedure and only a tax credit of 10% is refunded; the remaining withholding tax of 15% on the dividend distribution constitutes a final tax burden. A further reduction of the tax burden for these recipients is only available under a double taxation agreement, or if the parent-subsidiary-directive applies.
Double taxation agreements provide for a reduction of the German source taxation of less than 15%, only if a shareholding of at least 25% is given. For the applicability of the parent-subsidiary-directive, a shareholding of at least 25% is required.
The European Court of Justice considered this treatment of non-resident dividend recipients with a shareholding of less than 10% as a violation of the free movement of capital (Case C-284/09). As a result, the German legislator was committed to ensure that domestic and outbound dividend distributions enjoy the same tax treatment.
As the Bundesrat claims, the state budget does not allow for establishing equality by granting a refund of the withholding tax to non-resident minority shareholders. Accordingly, the German legislator chose the opposite; pursuant to the proposal, the 95% tax exemption shall no longer apply if the corporate shareholder's share in the company is less than 10%. As a result, these dividends will be fully subject to German corporate income tax and trade tax at a combined tax rate of approximately 30%. Furthermore, the proposal covers not only dividends, but also capital gains derived from the sale of shares in a corporation.
According to the proposed new rules, dividends, and capital gains derived from shares in a corporation, will only enjoy the tax exemption if the shareholding amounts to at least 10% of the company's capital. The decisive date for this determination is at the beginning of the year during which the payments have been received. If at this time the shareholding was less than 10%, but during the year the 10%-threshold was met (eg due to further acquisition of shares), the exemption is also available for that year. According to the draft bill, the new rules are to be applied as of the year 2012, therefore the draft bill does not provide for any grandfathering.
Even though the proposal will help to eliminate the violation of the free movement of capital, it will lead to an unbalanced result where a non-resident shareholder with a shareholding below 10% will have a final tax burden of 15%, while resident shareholders will also be liable to trade tax and will end up with a final tax burden of approximately 30%. With regards to capital gains derived from the sale of shares in a corporation, the result will be even more unbalanced. While resident shareholders with a shareholding below 10% will have a final tax burden of 30% (corporation tax plus trade tax), non-resident shareholders who can claim treaty protection will not suffer any German taxation on these proceeds.
In order to take effect, the above proposal has to be resolved by the German Parliament, the Bundestag, which is scheduled for 26 October 2012. Thereafter, the Bundesrat needs to consent to the 2013 Annual Tax Act, which is likely to happen on 23 November 2012. Due to the guidelines given by the European Court of Justice, it is expected that the proposal will in principle be implemented.
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