22 March 2019

Reimbursement of German dividend tax to parent companies in other EU countries

On dividends to parent companies capital gains tax is levied as withholding tax. This is deducted directly from the paying German subsidiary and transferred to the tax office.

Under the terms of the EU Parent-Subsidiary Directive, the EU parent company can apply to the tax office for exemption from the dividend tax or refund.

However, exemption or reimbursement is excluded if the parent company does not meet significant substance requirements.

In various judgments, the ECJ has confirmed that this regulation violates the freedom of establishment of the EU Treaty.

The German tax authorities reacted to these judgments. Each individual case is now to be examined individually. If only a tax advantage is to be obtained through the parent-subsidiary relationship, the withholding tax on the dividend is to be levied and this can not be reimbursed. The economic meaning of the mother-daughter relationship is important in this examination.

However, the ECJ ruled in its judgments that the parent-subsidiary directive for dividends generally requires a general withholding tax exemption (if the minimum participation rate of 10% is met).

Consequently, Germany can not limit this right of exemption.
According to ECJ case law, exemption from withholding tax can only be refused in cases of tax evasion and abuse. The German regulation therefore remains too broad.

With reference to the case law of the European Court of Justice, we do not recommend accepting refusals for exemption from German dividend tax to EU parent companies without further examination. The filing of an appeal n or a court action should be considered.

Carsten Baums from Auren Germany

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