Circular On 2012 Anti-Treaty / Anti-Directive Shopping Rule Issued

Author:Ms Pia Dorfmueller and Hardy Fischer
Profession:P+P Pöllath + Partners

On January 25, 2012, the German Federal Ministry of Finance has published a circular regarding the withholding tax relief of foreign companies. It replaces the previous circulars of 2007 and 2010.

I. Overview

§ 50d para. 3 ITA has been amended as of January 1, 2012 due to the previous potential violation against EU law. According to § 50d para. 3 ITA, a foreign company shall only be entitled to (full or partial) relief from withholding tax under a EU Directive / Double Tax Treaty, to the extent

the company is owned by shareholders that would be entitled to a corresponding benefit if they earned the income directly (individual relief entitlement), or the substance requirements under § 50d para. 3 sent. 1 ITA (factual relief entitlement) are met (non-harmful income). Income is "not harmful", if

it consists of gross receipts generated by own business activities or with respect to income generated by non-business activities, there are non-tax related reasons for interposing the foreign company and the company has adequately equipped business substance. According to the circular and as before, the lack of an individual relief entitlement excludes indirect relief of higher-tier shareholders. Moreover, indirect domestic shareholders are not entitled to relief.

According to the circular, the tax administration will apply the new rules to all open cases retroactively, if the new rules lead to a favorable relief entitlement compared to the previous rules.

II. New Pro Rata Test

§ 50d para. 3 ITA has new legal consequences. If a foreign company earns income on which withholding tax is imposed, this withholding will be reduced – unless there is an individual relief entitlement applicable – only to the extent there are non-harmful gross receipts compared to the overall gross receipts earned (Pro Rata Test). Contrary to the previous rules, an "all-or-nothing" principle does not exist and only pro rata relief will be granted insofar as there is...

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