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Germany: CJEU asked to rule on German anti-treaty shopping rule


The Tax Court of Cologne (Case ref. 2 K 2995/12) has referred the German anti-treaty shopping rule to the Court of Justice of the European Union (CJEU) to determine whether it complies with the fundamental freedoms of the EU and the Parent-Subsidiary Directive.


Alexander Linn

Thorsten Braun

These rules have seen several changes and have been scrutinised by the European Commission in an infringement procedure in 2010 (IP/10/298). That investigation resulted in the most recent amendment of the rules being applied to payments made on or after January 1 2012. Under these rules, the recipient of a payment which is subject to German withholding tax (WHT) is denied the benefits of a double tax treaty or an EU directive in cases where the entity's shareholders would not be entitled to similar benefits, or the recipient can prove that it earns active business income. If both tests are failed, relief will only be granted if both a business purpose test and a substance test can be met.

The case referred to the CJEU was still covered by the old rules as the respective dividend was paid in 2007. However, the ruling of the CJEU is expected to shed some light on the question of whether the amended rules are compatible with the fundamental freedoms and the Parent-Subsidiary Directive, as well.

The case concerned a Dutch entity, which had two employees and managed several shareholdings in Germany and in foreign entities, with the Dutch entity owning between 33% and 100%. The Dutch entity was directly held by a German-resident individual and had to meet the requirements of the anti-treaty shopping rule as German-resident shareholders are not entitled to benefits within the EU Parent-Subsidiary Directive with regard to German-sourced dividends.

The taxpayer in the case claims that the application of the anti-treaty shopping rules result in a violation of the freedom of establishment rules because a comparable German corporation would have received the payments without having to effectively pay any corporate income tax on the dividend income. By being too strict in terms of substance-requirements, the restriction of the freedom of establishment caused by the anti-treaty shopping rule cannot be justified.

The Tax Court of Cologne followed the taxpayer with regard to the potential violation of the fundamental freedoms and mainly argued that the restriction cannot be justified because, by requiring active business income in order to meet the conditions of the anti-treaty shopping rule, all entities which predominantly earn income from holding activities would face a general presumption of abuse without being able to prove the opposite. Another argument brought forward by the taxpayer and shared by the Tax Court of Cologne was that the definition of abuse under the German anti-treaty-shopping rules is too broad against the anti-abuse provision of the Parent-Subsidiary Directive.

The proceedings will be interesting to follow with regard to both the amended German anti-treaty shopping rules and the subsequent amendments of the Parent-Subsidiary Directive in the light of the OECD's BEPS Project. Within the EU common market, the definition of abuse does not follow the same concepts as within a single member state.

Alexander Linn ( and Thorsten Braun (


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


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