The lower tax court of Cologne has ruled on the definition
of the 'direct shareholding' requirement under the EU
Parent-Subsidiary Directive (PSD) in a decision dated September
13 2017. The case involved the refund of withholding tax in a
case where a foreign corporation was a partner in an
asset-managing partnership that held shares in a German
corporation. The court held that the interposition of an
asset-managing partnership between the German dividend-paying
corporation and its foreign corporate shareholder did not
conflict with the direct shareholding requirement and,
therefore, the 0% withholding tax should be applicable.
In the case, a Dutch corporation held a 33.6% share in a
German asset-managing partnership (GbR, civil law partnership).
The GbR, in turn, held 100% of the shares of a German AG (stock
corporation). The AG distributed a dividend and withheld tax at
the German domestic rate of 26.375%. Subsequently, the Dutch
corporation requested a refund of the full amount of
withholding tax from the German federal tax office. The refund
was denied, but the withholding tax rate was reduced to 15%
based on the Germany-Netherlands tax treaty. To qualify for a
0% withholding tax under the PSD and Germany's implementation
of the Directive (section 43b of the Income Tax Code [ITC]), a
qualifying dividend recipient must hold directly at least 10%
of the German distributing company.
At issue in the case was whether the requirements for a full
refund were met despite the interposition of an asset-managing
partnership. The taxpayer argued that it held more than 10% in
the AG and the fact that the shares were legally held through
an intermediary asset-managing partnership was irrelevant
because the partnership was transparent for tax purposes and
its assets were allocated to its partners. The German tax
authorities took the position that the existence of the
partnership from a civil law perspective must be taken into
account and, therefore, the partnership could not be
disregarded for purposes of the application of the dividend
withholding tax refund claim.
The court agreed with the taxpayer. In its decision, the
court emphasised the transparent nature of an asset-managing
partnership and applied section 39 (2) No. 2 AO, and concluded
that civil law principles did not have to be applied for
purposes of the direct shareholding requirement in the PSD and
section 43b ITC. The tax court highlighted the fact that
section 39 (2) No. 2 AO, as a specific tax provision, has
priority over civil law principles.
This is the first time that a German tax court has ruled on
what has been a long-standing dispute between taxpayers and the
German tax authorities. The interpretation of what is a direct
shareholding is relevant for the application of the PSD and for
the application of a number of Germany's tax treaties. The tax
authorities have appealed the lower tax court's decision to the
federal tax court (pending case ref. I R 77/17), which
hopefully will finally settle this long-standing dispute.
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| Alexander Linn |
Alexander Linn (allinn@deloitte.de)
Deloitte
Tel: +49 89 29036 8558
Website: www.deloitte.de