On 3 June 2010, the European Commission referred Germany to the European Court of Justice (ECJ) on the grounds of a “perceived discriminatory” withholding tax on dividends paid to pension funds in EU Member States after Germany failed to provide a satisfactory response to the Commission’s reasoned opinion of 31 January 2008.
Under German legislation, a German “Pensionskasse” is usually exempt from corporation tax and is able to reclaim 40% (relating to 2008 and onwards) or 50% (relating to years before 2008) of the withholding tax suffered on German dividends. “Pensionsfonds”, another category of pension institution, are taxed on a net basis after allowable costs have been deducted which, in practice, could mean that they only pay very limited corporation tax (and trade tax) on their profits. A Pensionsfonds is able to credit the withholding tax suffered on German dividends against its corporate tax liability without limitation and thus would even be able to obtain a full refund of withholding tax suffered on German dividends where the taxable income after deducting allowable costs is nil or negative. However, similar pension institutions established in other Member States do not benefit from the partial refund or the possibility to deduct allowable costs and are subject to a final withholding tax of 25% (effectively 26.375%, including the solidarity surcharge) on the gross dividends (unless the rate is reduced under a tax treaty). Where the remainder of tax would exceed the tax burden levied on a comparable German pension institution, the European Commission argues that the higher taxation of foreign pension institutions restricts the free movement of capital.
If the ECJ accepts the reasoning of the European Commission, pension institutions that have filed claims in a correct and timely manner should be granted a refund of withholding tax. Affected taxpayers should review their situations and consider filing protective claims in Germany.
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