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Germany: Tax Court confirms favourable tax treatment of dividends under tax group rules



Alexander Linn

Thorsten Braun

Germany's Federal Tax Court (BFH) issued a decision (I R 39/14) on December 17 2014 in which it confirmed the decision of the lower court of Muenster on the trade tax treatment of dividends distributed by a non-resident subsidiary to its German parent company that is a controlled entity in a German tax group. The lower court held that the dividends are fully exempt from trade tax and that German tax law does not provide for an add-back of 5% of the dividend income for trade tax purposes in tax groups. Under German law, dividends received by German companies from their German and foreign subsidiaries generally benefit from a 95% tax exemption if certain holding and substance requirements are met. As such, only 5% of the dividends are deemed non-deductible business expenses subject to taxation for corporate income tax and trade tax purposes.

Under the tax group rules, the income of the controlled entity is attributed to the controlling entity: for corporate income tax purposes, the 95% exemption for dividends is applied at the level of the controlling entity, but for trade tax purposes, a different rule provides for a full exemption at the level of the controlled entity. Since the trade tax income attributed to the controlled entity does not include any dividend income, there is no basis for applying the provision that adds back 5% of the dividend income as deemed nondeductible business expenses at the level of the controlling entity. According to the BFH, adding back 5% of the dividends at the level of the controlling entity would contradict the language of the statute.

The decision may seem surprising because it treats dividends distributed to a controlled entity within a German group differently from dividends distributed directly to the controlling entity in the group without an adequate reason. It should be noted that on May 8 2015, the upper house of the German parliament launched an initiative to codify the position of the tax authorities on the trade tax treatment of dividends distributed by a non-resident subsidiary to its German parent company that is a controlled company in a German tax group so that such dividends would only be 95% exempt. If this initiative becomes legislation, the favourable taxation of dividends in tax groups would come to an end.

Alexander Linn ( and Thorsten Braun (


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