According to a press release issued on 18 March 2010, the European Commission has formally requested that Germany amend its anti-abuse provision on withholding tax relief. The Commission emphasized that it is not challenging the objective of the anti-abuse measure, but merely the disproportionate requirements imposed on foreign companies to prove the existence of a "genuine economic activity" (gross receipts test).
Under the German anti-treaty/anti-directive shopping rules, a foreign company that receives a payment subject to German withholding tax and that is owned by shareholders who would not be entitled to a corresponding benefit under a tax treaty or an EC directive had they received the payment directly will not be entitled to a reduced or zero rate withholding tax if one of the following three tests applies:
- Business purpose test: There are no economic or other relevant (i.e. nontax) reasons for the interposition of the foreign company;
- Gross receipts test: The foreign company does not generate more than 10% of its income from its own business activities; or
- Substance test: The foreign company does not have adequate business substance to engage in its trade or business and does not participate in general commerce.
The European Commission stated that the contested measure is disproportionate in particular as regards the gross receipts test, where the ability to produce evidence to the contrary does not exist. Therefore, the Commission held that the German measure goes beyond what is necessary to attain the objective of preventing tax evasion.
Cases where the withholding tax relief was denied under the German anti-treaty/anti-directive shopping rules, particularly based on the gross receipts test, should be kept open and further developments following the EC initiative should be closely monitored.
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