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Germany: Lower tax court rules on direct shareholding requirement under EU PSD


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.


Alexander Linn

Alexander Linn (


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