03.06.2026Federal tax court confirms that dividends paid to US S corporation qualify for 0% WHT under the Germany-US DTT
Federal tax court decision confirms 2013 decision and rejects tax authorities’ view that law change has affected the treatment of S corporations
On 28 May 2026, Germany’s federal tax court published its long-awaited decision confirming the lower tax court of Cologne’s 2022 decision (GTLN dated 03/16/23) ruling that a US “S corporation,” which is a transparent entity for US federal income tax purposes, was entitled to a 0% withholding tax (WHT) rate pursuant to article 10 (3) (a) (bb) of the Germany-US double tax treaty (DTT). The federal tax court also ruled that, pursuant to section 50d (1) sentence 11 of the German income tax code (ITC) at that time, the shareholders of the S corporation were generally required to file for the dividend WHT refund and not the S corporation itself, and that such provision is merely procedural and does not govern whether a particular treaty provision applies in determining the dividend WHT rate.
Case background
In the case at hand, a German GmbH in 2013 paid a dividend to its 100% shareholder, a US corporation that elected to be treated as a transparent entity for US federal income tax purposes under subchapter S of the US Internal Revenue Code (i.e., S corporation). The income of the S corporation was taxed for US federal income tax purposes only at the level of the shareholders. The shareholders were US tax resident individuals and US trusts with US tax resident individuals as beneficiaries.
The German GmbH withheld tax at a rate of 26.375% on the dividend payment to the S corporation. In 2014, the S corporation applied to the German tax authorities for a 0% WHT rate based on article 10 (3) (a) (bb) of the DTT (for certain companies holding at least an 80% interest in the company paying the dividends) and requested a refund of the tax withheld. The tax authorities denied the request but granted a rate reduction to 15% pursuant to article 10 (2) (b) of the DTT, which was based on the eligibility of the individual shareholders of the S corporation receiving the dividends. The tax authorities argued that section 50d (1) sentence 11 ITC (which states that only the person to whom the tax law of its country of residence allocates the income is entitled to claim a refund of WHT) overrides the DTT and requires the tax authorities to determine treaty eligibility for a transparent entity at the level of the shareholders that are ultimately subject to tax for local country tax purposes.
After an unsuccessful appeal to the federal tax office and certain procedural discussions, the case was brought to the lower tax court of Cologne, which decided in favor of the taxpayer. The tax authorities, however, appealed the decision of the lower tax court to the federal tax court.
Decision of the federal tax court
The federal tax court ruled that the dividends paid to the S corporation by the German GmbH were subject to WHT at a 0% rate based on articles 1(7) and 10 (3) (a) (bb) of the DTT. The lower tax court’s ruling followed and confirmed a 2013 federal tax court decision that the WHT provisions of the DTT applied to a US S corporation even though it was transparent for US federal income tax purposes.
The federal tax court rejected the argument that section 50d (1) sentence 11 ITC (in the version applicable at that time) overrides the provisions in the DTT. The federal tax court provided a detailed analysis and came to the conclusion that section 50d (1) sentence 11 ITC must be seen as a mere procedural provision not having an impact on the treaty analysis. In providing its opinion, the federal tax court took into consideration the rationale of the law introducing the provision in 2013, as well as the original legislative materials. The federal tax court concluded that the wording of the provision, the original intent of the legislator, and the position of the provision in the ITC indicate a mere procedural character of section 50d (1) sentence 11 ITC.
The federal tax court indicated that the repositioning of the provision of section 50d (1) sentence 11 ITC as section 50d sentence 11a ITC that took place in 2021, together with several other changes in sections 50c and 50d ITC that govern WHT issues, should not have an impact on the analysis and qualification of the provision as a mere procedural provision for the year 2014.
The federal tax court further concluded that pursuant to section 50d (1) sentence 11 ITC, the WHT refund claim must be filed by the shareholders of the S corporation rather than the S corporation itself. The federal tax court, however, highlighted that it might be possible to interpret an application filed by the S corporation itself as an application that was filed on behalf of its shareholders, provided the application includes the correct wording.
Comments
The decision of the federal tax court has been eagerly awaited by taxpayers and comes almost 13 years after the original 2013 S corporation decision of the federal tax court. The tax authorities have been arguing that the 2013 federal tax court decision no longer applied, because section 50d (1) sentence 11 ITC (today section 50d sentence 11a ITC) became effective after such decision. As such, this issue had to be brought to court again.
The decision of the federal tax court does not come as a total surprise, as already during the oral arguments before the court in March 2026, the court intensely questioned the position of the tax authorities. The decision of the federal tax court includes several referrals to the arguments provided by the tax authorities during the oral presentation and explicitly rejects those arguments.
The case decided by the federal tax court should not only be of relevance for US S corporations receiving dividends from its German subsidiaries but also for US limited liability companies that are treated as either partnerships or disregarded entities for US federal income tax purposes and that receive dividends from their German subsidiaries.
It remains to be seen how the tax authorities will apply the decision, in particular after section 50d (1) sentence 11 ITC has been repositioned and moved into section 50d sentence 11a ITC. The tax authorities already indicated that the 2021 law change might limit or eliminate the applicability of the decision of the federal tax court to post-2021 cases but that further analysis of the ruling is required before a more definitive statement can be made.
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