30.04.2025Tax authorities issue updated questionnaire related to the application of anti-treaty shopping rules
Updated questionnaire indicates a more balanced approach by the tax authorities
The German federal tax office on 17 March 2025 published an updated questionnaire (English│German) on its website regarding the application of the anti-treaty shopping rules in section 50d (3) of the Income Tax Code (ITC) when determining eligibility for the benefit of a reduced or 0% dividend withholding tax rate under an applicable tax treaty or the EU parent-subsidiary directive. The updated questionnaire (which was published on the same day as the publication of an updated information leaflet regarding the application of the anti-treaty shopping rules (see GTLN dated 03/31/25)) consists of nine pages (including explanations) and seems to confirm a more balanced approach by the tax authorities when examining whether the conditions of the anti-treaty shopping rules are met.
Notable changes to the questionnaire include the following:
- The updated questionnaire now reflects the updated view of the tax authorities related to the “look-through approach” as described in the updated information leaflet. Based on the information leaflet and questionnaire, it appears that the tax authorities are once again applying the look-through approach applied before 2021, so that where a shareholder does not meet the substance requirements necessary to disapply the anti-treaty shopping rules, it should be possible to look through the shareholder and make use of the substance and activities at the level of a shareholder in the corporate chain above and to rely on the applicable dividend withholding tax rate in the tax treaty between Germany and the jurisdiction of residence of the shareholder that satisfies the necessary conditions for the anti-treaty shopping rules not to apply. The reduced withholding tax rate that applies based on the look-through approach cannot, however, be lower than the withholding tax rate specified in the tax treaty between Germany and the jurisdiction where the direct shareholder is resident.
- In order to demonstrate that the conditions of the substance test are met, the tax authorities so far have been asking for the submission of at least five randomly selected employment agreements/offer letters for employees at the level of the shareholder of the German entity. The updated questionnaire now states that five employment agreements/offer letters must be provided only if there are fewer than 10 employees or if the unconsolidated annual financial statements of the shareholder do not show that the employees are the company's own employees, (e.g., no social security expenses are shown in the financial statements). The questionnaire also provides that the names, street addresses, and any sensitive social security numbers or similar personal identifiable information of the employees may be redacted in the employment agreements/offer letters.
- The updated questionnaire includes additional guidance regarding under what circumstances the conditions of the main purpose exception (or “motive test” as described in the questionnaire) can be met. The tax authorities have now included a paragraph described as “group considerations.” Based on the explanation provided, it might now be possible for purposes of the main purpose exception to rely on substance and activities of a group company that is located in the same jurisdiction where the shareholder is resident. The description provided in the questionnaire states that “if the applicant permanently has an economically active group company that is domiciled in the same country, has an economic-functional connection with the economic activity of the applicant and maintains a business operation suitable for the business purpose” it should be possible to rely on these activities and substance for purposes of the motive test. The questionnaire further states that information must be provided about “what will be done with the applicant's profits and how and where the profits will be used.” This approach by the tax authorities seems to be a shift away from the previous position according to which only substance and activities in the direct corporate chain above the German entity could be used in order to fulfill the substance and activity criteria of the anti-treaty shopping rules, albeit only within the context of the application of the motive test. Based on the explanation provided in the questionnaire, it is unclear whether the required economic-functional connection between the group company that has sufficient substance and activity must be with the applicant entity (which would in most cases not have sufficient substance and activity or no activity at all) as described in the questionnaire or with the German entity (which seems to be more in line with the reasoning of the law). The questionnaire includes conflicting guidance in this regard.
- The updated questionnaire on its last two pages includes a general statement on the conditions of qualifying under the anti-treaty shopping rules where the shareholder exclusively or predominantly generates investment income. The explanation refers to the legislative materials, which provide that “the active investment management of a holding company, in which the company controls the fate of its subsidiaries in a planned manner in a managerial function, is considered to be a sufficient economic activity.” The questionnaire clarifies what information/documentation must be provided when making use of this exception.
Deloitte Germany comments
The updated questionnaire appears to be in line with the updated information leaflet. Both documents seem to provide for a more balanced view and interpretation of the existing anti-treaty shopping rules by the tax authorities and make the motive test more accessible, which is a highly welcome development. In particular, the application of the look-through approach and the potential consideration of substance and activities at the level of related parties to the applicant that are located in the same jurisdiction should provide for opportunities to qualify for a reduced or 0% dividend withholding tax rate in cases where, based on the previous interpretation of the rules, this was not possible or where the application of the motive test was less clear, both for the applicants as well as the tax authorities. It should, however, be emphasized that the requirement of establishing an economic-functional link between the activities of the related party and the applicant/German entity will require additional work. This requirement still seems to be tighter than what is required based on, e.g., article 28 (4) (c) of the Germany-US double tax treaty (active trade or business test) or section XV (4) in the protocol to article 23 of the Germany-Netherlands double tax treaty.
The relaxation with regard to the requirement to provide employment agreements/offer letters for purposes of the substance requirement is a welcome development that confirms the administrative practice already established in certain cases over the last couple of years.
Both the updated information leaflet and the updated questionnaire refer to the application of the anti-treaty shopping rules for dividend withholding tax purposes only. Whether these rules will be applicable for other payments that trigger withholding tax (e.g., royalty payments) remains to be seen. As the anti-treaty shopping rules generally do not distinguish between the form of payment that triggers withholding tax, it seems likely that the approach as described in the updated guidance should be applicable for these payments as well.
Even though the federal tax office seems to apply a more balanced and pragmatic approach related to the conditions of the anti-treaty shopping rules and its administrative practice, tax practitioners should carefully analyze the application of the anti-treaty shopping rules in each case and prepare applications for a withholding tax exemption certificate or a withholding tax refund with the required explanation and documentation. The additional explanations on the application of the motive test provide insights into how the administration applies this test, and applicants should provide the requested information and documentation in line with the updated questionnaire early in the process. Additional information requests from the federal tax office should be avoided, as they will result in delays and extend the overly long processing periods again.
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