11.12.2025Federal tax authorities update view on reduced WHT rates under Germany-US tax treaty for certain dividend payments
Disregarded payments made by a German subsidiary likely no longer qualify for a reduced withholding tax rate
The German federal tax authorities have recently introduced an updated view on determining the applicable dividend withholding tax (WHT) rate under the provisions of the Germany-US double tax treaty (DTT) for dividend payments from a German subsidiary to its US parent entity, where the German subsidiary is treated as a disregarded entity (DRE) for US tax purposes (i.e., where a “check-the-box” election is made for US tax purposes to treat the subsidiary as a branch of its US parent entity).
Although there has been no official announcement or publication, the German tax authorities have issued information request letters asking applicants that are seeking dividend WHT exemption certificates for information about the tax classification of the German subsidiary for US tax purposes and documentation of such status (e.g., by showing the dividend income on the US shareholder’s US Form 1120). This is based on the German tax authorities’ view that, under article 1(7) of the DTT, a reduced WHT rate should only be available provided that the underlying payment qualifies as income from the perspective of the US recipient, which (according to the tax authorities) would not be the case for a disregarded payment between a branch (the German subsidiary treated as a DRE for US tax purposes) and its head office (the US parent entity).
Background
Germany applies a domestic 26.375% dividend WHT on distributions from a German subsidiary to its non-German shareholders. Based on the provisions of the Germany-US DTT, a US shareholder may be entitled to a reduced dividend WHT (0%, 5%, or 15%) provided that (i) the conditions as described in the DTT are met, (ii) the conditions of the German domestic anti-treaty shopping rules and the limitation on benefits provisions of article 28 of the DTT are met, and (iii) a dividend WHT exemption certificate issued by the German tax authorities is available at the time of the distribution (“advance treaty clearance”). If advance treaty clearance is not available at the time of the distribution, the German subsidiary has the legal obligation to withhold and remit the dividend WHT to the German tax authorities at the domestic 26.375% rate; the US shareholder then must claim a reduced dividend WHT under the DTT in a refund procedure with the German federal tax office. The processing of applications for dividend WHT exemption certificates and WHT refunds currently takes 12-24 months (with refund applications taking longer than applications for exemption certificates).
New development
The German tax authorities have adopted an updated view on how to interpret the provisions of the Germany-US DTT and certain provisions under German domestic tax law where the German subsidiary is treated as a DRE for US tax purposes and “checked” into its US parent entity. The argument of the German tax authorities is that, based on their interpretation of article 1(7) of the DTT, treaty protection (and therefore a reduced WHT rate) should only be available provided that the underlying payment qualifies as income from the perspective of the US recipient. This, however, should not be the case where there is a dividend payment by a German DRE to its US parent entity.
The same argument has been applied to provisions under German domestic tax law and the Income Tax Code relating to the election for a partnership to be taxed like a corporate entity. As a result, a reduced dividend WHT rate should not be applicable in such a situation, and the German domestic 26.375% dividend WHT would become final, or possibly reduced to 15.825% in a refund procedure under German domestic tax law. The same argument could theoretically also be applied where, for example, a German DRE pays a royalty to its US parent entity (and in several other situations). It is unclear at this stage whether the updated view will also be applied in a situation where the German subsidiary is “checked” into a controlled foreign corporation of the group, but where (based on the German domestic anti-treaty shopping rules) a look-through approach to another US entity is applied.
Comments
The updated view of the German tax authorities comes without any previous indication or announcement, surprising many tax practitioners, and could have a wide-ranging effect on US investors with subsidiaries in Germany. It seems doubtful whether this view reflects the original intention of the treaty parties. However, as advance treaty clearance is required to rely on a reduced WHT rate, such clearance cannot be expected to be granted in the structures discussed above, and the interpretation of the German tax authorities would need to be contested in court.
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