27.05.2026Federal tax court clarifies application of EU parent-subsidiary directive for dividends distributed during liquidation period of subsidiary
Court confirms decision of lower tax court that the EU parent-subsidiary directive is applicable to a liquidation distribution to the extent the profits are generated in pre-liquidation periods
In a decision dated 3 March 2026 (and published on 15 May 2026), Germany’s federal tax court ruled that a 0% dividend withholding tax (WHT) rate under the EU parent-subsidiary directive applied to a German company’s distribution of operating profits that were generated prior to a liquidation period, even though the dividend was resolved and paid during the liquidation period. The federal tax court in its decision sided with the taxpayer and confirmed a decision of the lower tax court of Cologne dated 26 October 2022 (see GTLN dated 04/12/23).
Background
In the case decided by the federal tax court, a German GmbH made two dividend distributions to its Luxembourg parent company while in the process of being liquidated. The first dividend distribution took place after the formal liquidation of the GmbH was resolved but before the company was finally extinguished from the commercial register. The dividend distribution was funded out of operating profits of the GmbH that were generated before the liquidation proceedings were initiated. The second dividend distribution also took place during the liquidation period and included profits generated before the liquidation process was initiated; however, this distribution was explicitly described in the respective shareholder’s resolution as a distribution in relation to the finalization of the liquidation process.
The tax authorities refused to apply a 0% dividend WHT rate based on the EU parent-subsidiary directive and, instead, granted a reduced 10% dividend WHT rate based on the Germany-Luxembourg double tax treaty for both distributions. The tax authorities argued that based on the wording and intent of article 4 (1) of the EU parent-subsidiary directive and section 43b (1) sentence 4 of the German Income Tax Code (ITC), which implements the directive into domestic tax law, dividend distributions that are made “on the occasion of a liquidation of a company” do not benefit from the 0% dividend WHT rate as provided by the directive. The tax authorities reasoned that since the liquidation of a company starts with the resolution to liquidate the company, distributions that are made during the liquidation period are excluded from the benefits of the EU parent-subsidiary directive.
Decision of the lower tax court
The lower tax court disagreed with the tax authorities and confirmed that the applicable dividend WHT rate should be a 0% dividend WHT rate for the first distribution based on the EU parent-subsidiary directive. The court explained that the terminology in article 4 (1) of the EU parent-subsidiary directive and section 43b (1) sentence 4 ITC referring to distributions “on the occasion of a liquidation of a company” must be interpreted in a narrow sense and not be applied to distributions that are funded out of operating profits that were generated before the liquidation period, even if the dividend was resolved and paid during the liquidation period.
The lower tax court, however, rejected the claim of the taxpayer with regard to the second dividend distribution that was paid at the end of the liquidation period of the GmbH. Even though this dividend also was funded out of operating profits that were generated during pre-liquidation periods, the court qualified the dividend as being made “on the occasion” of the liquidation and, therefore, not eligible for a 0% dividend WHT rate under the EU parent-subsidiary directive.
The lower tax court originally did not allow for an appeal to the federal tax court; however, the tax authorities filed a complaint with the federal tax court regarding the non-admission of an appeal against the decision. The federal tax court decided in favor of the tax authorities and allowed for an appeal against the decision of the lower tax court.
Decision of the federal tax court
The federal tax court in its decision mainly followed the arguments of the lower tax court. When analyzing the rules of the EU parent-subsidiary directive, the federal tax court concluded that, instead of relying on article 4 of the directive, article 5 of the directive applies when interpreting the domestic provision of section 43b (1) sententence 4 ITC. However, article 5 of the directive does not include a limitation for liquidation proceeds in the same way as article 4 of the directive. In addition, the federal tax court also rejected the argument that the limitation of article 4 of the directive must be applied on an analogous basis when looking at article 5 of the directive. The federal tax court did not see a need to seek a ruling from the European Court of Justice in regard to this interpretation of article 5 of the directive, as the federal tax court did not see any doubt or possibility for a different interpretation.
The federal tax court explicitly did not decide on the WHT treatment of distributions that are made in order to finalize the liquidation process (which the taxpayer claimed with regard to the second distribution), as the appeal was filed by the tax authorities and did not include the treatment of the second dividend distribution (which was in line with the tax authority’s treatment).
Comments
The decision of the federal tax court confirming the ruling of the lower tax court is the final clarification regarding the application of the EU parent-subsidiary directive during the liquidation period of a German company. Even though the court’s decision allows the application of the EU parent-subsidiary directive for certain distributions during the liquidation period, taxpayers should carefully evaluate a distribution of profits that were generated during the period before the liquidation in order to avoid any discussions with the tax authorities. In order to rely on the decision of the federal tax court, clear documentation should be available to demonstrate that the profits that are distributed were generated before the initiation of the formal liquidation process. Furthermore, careful attention should be paid when drafting the shareholders resolution for a dividend distribution during the liquidation period. The dividend WHT treatment of a distribution of liquidation proceeds itself (i.e., a distribution that takes place in order to finalize the liquidation process) for purposes of the EU parent-subsidiary directive still remains open as the court did not have to decide on this question.
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