Retroactive refund of capital gains taxes in Germany for free-float dividend payments to foreign shareholders

In responses to a decision of the European Court of Justice (ECJ) of 20.10.2011, case number C-284/09, Germany has changed the tax treatments of dividends from investments (§ 20 Subs. 1. Nr. 1 Income Tax Act) of less than 10% (free- float), which are disbursed to corporations. For shareholders, who are subject to corporate taxation in the EU / EEC countries, a refund of German capital gains taxes on free-float dividends that accrued prior to 01.03.2013 was provided for on request. This so called ECJ Dividends Implementation Act came into force on 29.03.2013.

Previously regulation:

The distribution of dividends of a German corporation to its domestic shareholders and shareholders abroad was subject to capital gains taxes at a rate of 25 percent.

For domestic shareholders, up to the 29.03.2013 a refund respectively credit of the capital gains taxes to the income taxes (§ 36 Subsection 2 Nr. 2 ITA) respectively corporate tax (§41 Subsection 1 Sentences 1 CTA in conjunction with § 36 Subsection 2 Nr. 2 ITA) was made in the context of taxation regardless of the amount of shares. Regardless of the amount of shares in the corporation, 5% was deemed as non-deductible business expenses (§ 8b Subsection 3 CTA). Due to the crediting, 95% of the dividends disbursed were corporate tax free.

For the EU / EEC shareholders the non-taxation respectively refund of withheld capital gains taxes of 25 % was only possible, if the amount of the shareholding exceeded a certain minimum amount. In accordance with the provisions of the Parent-Subsidiary-Directive (90/435/EEC), the refund respectively non-taxation of capital gains taxes on request was only possible, if the shareholding amounted to at least 10 percent (§ 43b subsection 1, 2 ITA). For shareholdings of less than 10 percent, a tax exemption was not possible.

Thus free-float shareholdings of EU / EEC corporations in German corporations that did not exceed the limit of 10 percent, were worse off than domestic corporations, for which 95 % of the disbursed dividends were corporate tax free. In accordance with the aforementioned judgment of the ECJ, this unequal treatment violates the free movement of capital.

Legislative changes

To ensure equal treatment, dividends to domestic and EU / EEC shareholders with a share of up to 10 percent of the capital are definitely taxable. A refund respectively credit is no longer possible. The exemption from taxation in accordance with § 8b subsection 1 CTA is applicable only to shareholdings of more than 10 percent on the capital. Capital profits are not covered by the new regulations, so that the tax exemption for those remains. Losses associated with a shareholding of less than 10 percent in turn cannot be invoked since § 8b subsection 3 sentence 3 CTA continues to be applicable.

First time application

The new regulations are applicable first time for free-float dividends, which are received after the 28.02.2013 (§ 34 subsection 7a CTA).

Refund of capital gains taxes (§ 32 subsection 5 CTA)

The unlawful discrimination under the current regulation on the taxation of free-float dividends to German and EU / EEC shareholders is eliminated by a retroactive refund of withheld capital gains taxes to foreign shareholders. The refund of the withheld capital gains taxes is made - at a request - for payments, which were received by an EU / EEC shareholder prior to 01.03.2013 (§32 subsection 5 ITA). Refund for all dividends of an entire calendar year will be made on the basis of a single notice of exemption (§ 155 subsection 1 sentence 3 General Tax Code). This means that a notice of exemption for all capital of the entire year is issued. The refund requires among others:

- The foreign corporation must have its registered office and place of administration within the EU / EEC countries.
- The EU / EEC company must be fully taxable at the place of administration.
- The shareholding must remain under 10 percent.
- The German capital gains taxes may not be taken into account or deducted as business expenses for the directly or indirectly involved EU / EEC company.
- A certificate of residence from the tax authority, in which the EU / EEC company is resident, stating that the company is fully taxable and that the German capital gains taxes are not creditable, deductible or carried on.

For the notices of exemption a period of 4 years is announced (§ 169 subsection 2 sentences 1 number 1 General Tax Code). Up to the 31.12.2013, notices of exemption can be applied for dividends disbursed in 2009 up to the 28.02.2013. Free-float dividends that are received after the 28.02.2013 are treated equally for Germany as well as EU / EEC shareholders, so that an exemption for foreign shareholders is than no longer possible. As of the 01.03.2013, dividends from free-float are subject to a general capital gains tax of 25%.

Recommendation

For EU / EEC shareholders an examination is recommended, if a refund of withhold capital gains taxes for free-float dividends comes into consideration. For all free-float dividends received in a year, a request for exemption must be submitted. Due to the ongoing prescription of possible claims, request for exemption for dividend payments on free-float received in the year 2009 up to 31.12.2013 should be submitted. It is questionable, whether a refund is also possible for shareholders from countries outside the EU / EEC countries, since the free movement of capital also applies to investors from other countries. This question however will have to be litigated. In order not to lose potential claims of investors from third countries due to the ongoing prescription, an application for refund of withheld capital gains taxes should also be submitted.

The clients of our law firm are mainly foreign companies (non-EU and EU-companies) as well as German companies. We serve middle-sized companies (mainly corporations) as well as bigger companies listed on the stock exchange.
In addition to companies of the financial service sector (banks and investment companies), most of our clients belong to the manufacturing trade or the industrial sector. Our client's industrial focus is, among others engineering (mechanical and plant engineering), furniture and food industry and the transportation sector, however we are also experienced in the construction sector. The issues arising with the business activities of those companies with regard to fiscal and business law, under which we also define issues with regard to individual and collective labour law, therefore belong to our consulting spectrum. In case of acquisition of companies, we undertake the transaction advisory and preparation of documentation as well as a legal due diligence. If fiscal or economical issues arise, we have renowned corporation partners at hand.

Due to the international profile of the law firm, a very important field of consultation naturally is cross-border commercial law and the securitisation of receivables by appropriate means of securitisation, as well as the collection of commercial receivables.

As a result of our expertise in national and international insolvencies and restructurings, another important scope of our services is the consultation in reorganization/restructuring and insolvency related matters. With regard to the European insolvency regulation (Counsel Regulation) (E.C.) (No.1346/2000) we possess profound knowledge and experience, which has been maintained after having been tried and tested in practice.

Due to previous activities of the founder of the law-firm as "workout" specialist for large credits in a German financial institution, we are able to advise our clients from the point of view of a potential creditor as well as the debtor company's view. Our founder's strength in mediating between the debtor and financial institutions and negotiate realisable restructuring plans results in acceptable and overall prompt solutions for all participants.

We are members of B.R.S.I (Bundesverband Restrukturierung, Sanierung und Interim Management- Corporate Restructering Associations Germany), BCCG (British Chamber of Commerce in Germany), PZGH (Polskie Zrzeszenie Gospodarzo Handlowe) –Polish Association of Economy and Commerce), GRUR (Deutsche Vereinigung für gewerblichen Rechtsschutz und Urheberrecht e.V. – German Association for the Protection of Intellectual Property) and DAV (Deutscher Anwaltsverein - German Lawyers Association).

Office Worms
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Goethestr. 15
67547 Worms
Germany

This release was published on openPR.