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Germany: Repayment of nominal capital

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Alexander Linn


Thorsten Braun

For multinationals with profit-making German subsidiaries, withholding tax on dividends can be an issue when repatriating profits from Germany, especially considering Germany's complex anti-treaty shopping rules and this often leads to an investor not receiving full treaty or EU directive benefits. Thus, opportunities to transfer cash from German subsidiaries by other means than dividends have become a consideration. For tax purposes, a distribution would usually be treated as a dividend (triggering withholding tax) and not as a repayment of capital (sourced from the tax equity account) as long as a company has distributable profits (E&P). Broadly speaking, once a company has had a balance sheet profit in one year, it can no longer directly access the tax equity account and would be deemed to pay dividends until the distributable profits have been consumed.

In a recent decision (IR 31/13), Germany's Federal Tax Court confirmed that a repayment of nominal capital would be treated as a repayment of capital for tax purposes, regardless of the amount of distributable profits. The decision confirms that a repayment of nominal capital allows taxpayers to directly access the tax equity account, meaning that the distribution will be treated as a repayment of capital for tax purposes. In that respect, the court even confirmed that a reduction and repayment of nominal capital do not necessarily have to take place within the same year and do not necessarily have to be included in the same shareholder resolution; this is legally required only for German stock corporations (AG), but not for German limited companies (GmbH). If a reduction and repayment of nominal capital are sufficiently closely linked and it is possible to demonstrate that the distribution was sourced from the reduction of nominal capital (and not from other capital or profit reserves), it would not be considered a dividend for tax purposes.

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.com/de

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