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Germany: Inter-corporate dividend withholding tax hinders free movement of capital

In a case brought by the European Commission (EC) (C-284/09 Commission v. Germany, judgment of October 20 2011), the European Court of Justice (ECJ) held that Germany’s withholding tax on dividends to other corporations is in breach of community law in that it discourages persons from abroad from investing in Germany.

Dividends paid by a German corporation are subject to a 26.375% withholding tax. On application, this can be reduced to the lower treaty level, or, as applicable, waived under the provisions transposing the EU parent/subsidiary directive. German resident corporations are exempt from corporation tax on their dividend income, but can claim, in their corporation tax returns, a full offset of the withholding tax deducted at source. If an excess remains, they receive a cash refund. A German company receiving a dividend from another German company is therefore never faced with a tax burden, whereas a foreign company receiving the same dividend would be if it does not qualify for parent/subsidiary directive or treaty exemption.

The EC sees this difference in treatment as a discriminatory restriction on the free movement of capital. The ECJ has now agreed, rejecting German government arguments in support of the discrimination (domestic and foreign investors are in different positions – the distinction is to maintain the coherence of the tax system – the credit of withholding tax is a matter for the state of residence) as unfounded. Given that the free movement of capital is the one EU fundamental freedom that does not generally stop at the outside border, it would seem at least possible that the judgment applies to corporate dividend income universally. Certainly, foreign companies that have suffered dividend withholding tax in the past, for which they did not receive a full home country credit, may now be able apply to Germany for a refund – at least within the statutory limitation period of usually four years.

The government has not yet commented on this decision in public. It will have to end the discrimination, but one possible way of doing this would be to abolish the corporation tax exemption for dividend income, at least from portfolio investments.

Dieter Endres (


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