Refund Of German Withholding Taxes - Good News For Foreign Investors


Originally published on January 12, 2012

Keywords: Parent Subsidiary Directive, portfolio dividends, EEA, withholding tax

European Court of Justice Decision on Portfolio Dividends

In its decision dated October 20, 2011, (Case C- 284/09), the court of justice of the European Union, (ECJ), has held that Germany violates the principle of free movement of capital as set out in the rules of the European Union (EU) and the European Economic Area (EEA). It does so to the extent that it imposes withholding tax on dividend distributions made to EU/EEA shareholders who do not benefit from the withholding tax exemption provided under the Parent Subsidiary Directive. Pursuant to this, shareholders residing in the EU/EEA are entitled to receive dividends from subsidiaries located in other Member States free of withholding tax, provided that their shareholding represents at least 15 percent (from 2007) or 10 percent (from 2009) of the share capital.

Distributions within the EU/EEA on shareholdings below these thresholds are subject to the statutory withholding tax rate of 26.375 percent (which can be reduced to 15 percent upon application) or to the respective lower rate provided under the applicable double taxation treaty.

The reason why the ECJ has qualified the German withholding tax regime as being discriminative in relation to EU/EEA shareholders was that a German corporate shareholder is granted a full tax credit or refund, respectively, in case of a comparable shareholding below the thresholds of the Parent/Subsidiary Directive. Moreover, 95 percent of the dividend distributions are also free of corporate income tax if distributed from one corporate entity to another. Germany has justified this by referring to its objective to levy tax on the level of the corporation, as well as on that of the ultimate (private individual) shareholder, but to eliminate any additional tax burden at the level of corporations interposed between the Tax Germany Legal Update January 12, 2012 dividend paying company and its ultimate (private individual) shareholder. This argument was rejected by the ECJ because the full taxation requires that the corporate shareholder actually distributes the profits further to the ultimate shareholder; however, if they are accumulated the tax exemption guarantees that no taxation occurs on this level. This is a disadvantage for a comparable EU/EEA shareholder who does not enjoy this tax privilege.

From our perspective, the consequence of this ECJ...

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