Federal Tax Court rules on procedural aspects of EU withholding tax reclaims

The Federal Tax Court has ruled on withholding tax reclaims by nonresident investors in Germany based on the freedoms of the EU treaty, but the decision leaves practical questions unanswered.

The Federal Tax Court (BFH) recently published a decision (case reference: I R 25/10) on withholding tax on German dividends paid to a French SAS. Following the European Court of Justice (ECJ) ruling in the Gaz de France case, it was clear that the French SAS was not a legal entity covered by the old version of the EU Parent-Subsidiary Directive and could thus not benefit from a 0 % withholding tax rate on German dividends even though the SAS wholly owned a German corporation. Nevertheless, the taxpayer argued that it still was entitled to receive the German dividends free of withholding tax based on primary EU law because a German resident corporate taxpayer would be entitled to the benefits of the participation exemption and ultimately could have received the dividends free of tax.

In line with the ECJ decision in Commission vs Germany (C-284/09, see GTLN), and implicitly reversing its decision in a similar case involving a Swiss parent company (case reference: I R 53/07), the BFH held that the French SAS (that suffered a definitive German withholding tax on dividends received from its German subsidiary) is entitled to a refund of almost the full amount of German withholding tax (because 5 % of dividends are taxable as nondeductible expenses, the BFH held that foreign corporate shareholders have to accept an effective tax on dividends of about 0.75 %). However, the SAS cannot claim relief from withholding tax at source (as would be possible under the directive), but instead must request a refund.

The BFH confirmed the view that the Federal Tax Office, which is the single point of contact for withholding tax reclaims based on tax treaties and the Parent-Subsidiary Directive, is not competent to decide on refunds claimed under primary EU law, so the taxpayer lost the case on procedural grounds. The BFH confirmed that the local tax office (i.e. the tax office in whose district assets or the most valuable part of the assets of the taxpayer are located) is the competent agency to decide on the refund request.

Since the case involved a single (100 %) shareholding held by the French SAS, it was easy to determine the competent local tax office. However, in most cases, there is usually a foreign portfolio shareholder with multiple German shareholdings. Given that it is unclear which types of assets must be taken into account, where shareholdings are deemed to be located for purposes of the rule and how to determine which shareholding (or other asset) constitutes the most valuable part of the assets of the foreign investor, practical experience shows that it is impossible to safely identify a single local tax office competent for the EU withholding tax reclaims of a foreign portfolio investor. Thus, the decision demonstrates that filing refund requests at the federal level likely will not be considered sufficient, but the court’s decision does not clarify where the request should be filed. The German tax authorities are gathering information on reclaims filed throughout the country, but have not issued any guidance in this context.

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