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Germany: Domestic tax law provisions and Brexit


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 ( and Thorsten Braun (


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