Germany: Domestic tax law provisions and Brexit

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Germany: Domestic tax law provisions and Brexit

Linn-Alexander
Braun

Alexander Linn

Thorsten Braun

German companies need to rely on EU law to distribute dividends to UK parent companies free of withholding tax. One obvious consequence of the Brexit would be that EU law, such as the Parent-Subsidiary Directive, would no longer apply. For German entities, this would mean increased withholding tax on dividends paid to UK holding entities since the Germany-UK tax treaty only reduces the rate to 5%.

It should also be noted that German domestic tax law includes references to EU and European Economic Area (EEA) residence. For example, UK subsidiaries earning interest income would potentially be subject to German controlled foreign company (CFC) rules post-Brexit, while they could rely on a substance-test exemption from the rules as long as they are an EU/EEA resident.

Dividends received from UK subsidiaries by German entities will also have to meet certain criteria regarding the activities of the distributing entity to qualify for the dividend exemption from German trade tax. Certain restructurings, such as a hive-down of a German branch of a UK entity into a subsidiary would no longer qualify for rollover relief post-Brexit. There are discussions around potential violations of certain lock-in periods by the mere fact that UK would cease to be an EU member state, e.g. where exit taxes have been deferred in the past, or for a hive-down with a UK entity contributing a branch relying on the rollover relief.

Although the UK will not depart the EU immediately as a result of the June 23 2016 vote to leave the EU, political discussions suggest that the notification to leave under Article 50 of the Treaty on the Functioning of the European Union will be delivered in early 2017. This would trigger a negotiation period of two years, after which (unless extended based on unanimous consent of all EU member states) the UK would be independent of the EU. Taxpayers will need to monitor developments and the negotiations after Article 50 has been triggered by the UK. The developments could potentially require companies to amend existing structures within the two-year period to be prepared for the post-Brexit world.

Alexander Linn (allinn@deloitte.de) and Thorsten Braun (tbraun@deloitte.de)

Deloitte

Tel: +49 89 29036 8558 and +49 69 75695 6444

Website: www.deloitte.de

more across site & shared bottom lb ros

More from across our site

ITR’s data has highlighted the US firm’s ambition to become America’s ‘premier’ tax player via a concerted partner recruitment strategy
Jaap Zwaan’s arrival continues a recent streak of A&M Tax investing in the region; in other news, the US and Japan struck a deal that significantly lowered tariff rates
In a world where international tax concepts rely on human activity, Leonard Wagenaar poses existential questions about the future of such ideas when AI is ever-present
France v Axa provides a practical illustration of how the burden of proof is applied in TP matters under French law, ITR also heard
In an exclusive interview with ITR, Ian Gary calls for a central public CbCR database and bemoans the US’s lack of involvement in international tax transparency
Reckitt Benckiser is to divest its Essential Home business, which includes more than 70 brands, to private equity firm Advent International
In the first of a new series of weekly opinion pieces, ITR Editor Tom Baker reflects on the OECD’s attempts to sanitise the US’s brazen pillar two negotiations
The threat of 50% tariffs on Brazilian goods coincides with new Brazilian legal powers to adopt retaliatory economic measures, local experts tell ITR
The country’s chancellor appears to have backtracked from previous pillar two scepticism; in other news, Donald Trump threatened Russia with 100% tariffs
In its latest G20 update, the OECD also revealed tense discussions with the US where the ‘significant threat’ of Section 899 was highlighted
Gift this article