31.03.2025Tax authorities update guidance on application of anti-treaty shopping rules
Update suggests less stringent interpretation and reintroduces look-through approach for dividend withholding tax purposes
The German Federal Tax Office on 17 March 2025 published an updated information leaflet 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 information leaflet, which is coordinated with the Federal Ministry of Finance, includes an important relaxation by reintroducing the so-called “look-through approach” that may allow the German anti-treaty shopping rules to be applied at the indirect shareholder level if the application of the rules at the direct shareholder level would result in the benefits of a treaty or the directive not being available.
Based on the current anti-treaty shopping provisions of section 50d (3) of the ITC, which were significantly updated in 2021 and apply to withholding tax relief claimed under an applicable tax treaty or an EU directive, a general presumption of treaty abuse exists where a nonresident company receives a payment subject to German withholding tax (and no treaty relief would be available), and the two following requirements are met:
- The shareholders of the foreign recipient would not be entitled to the same benefits claimed by the recipient company had they received the payments directly (the “shareholder test”); and
- There is insufficient business activity and substance at the level of the foreign recipient (the “activity test”).
Even if the two above conditions are fulfilled, and no treaty relief would consequently be available, the receiving entity may rebut the general presumption of treaty abuse where:
- None of the main reasons for the structure is to obtain a tax advantage (the “main purpose exception”); or
- The foreign recipient is a stock exchange listed entity that qualifies for the listed entity exception.
Based on the tax authorities’ interpretation of the updated 2021 anti-treaty shopping rules to date and as provided in the legislative materials, the shareholder test requires an analysis of whether the shareholders of the recipient qualify for the same benefits under the same tax treaty or EU directive; the same benefit (i.e., an equivalent withholding tax rate) under a different tax treaty is not sufficient to pass the shareholder test. Where an equivalent benefit is available under a different tax treaty, this may be of relevance for the rebuttal of the treaty abuse assumption in the second step under the main purpose exception. Following the 2021 update, the tax authorities adopted a more stringent application of the look-through approach to make use of substance and activities in the shareholder chain above the foreign recipient of the payment triggering the withholding tax obligation. The tax authorities have adopted the same stricter approach when applying the listed entity exception, i.e., the listed entity exception has been granted only where the direct shareholder, the listed entity, and all intermediate shareholders in the corporate chain were eligible for the same treaty or directive benefits.
The following diagram illustrates the approach of the tax authorities after the 2021 update of the anti-treaty shopping rules:
Under this approach, it was not possible to look through the EU HoldCo to use the reduced dividend withholding tax rates in the Germany-US tax treaty. The fact that a US HoldCo owning indirectly 100% of German OpCo would be eligible for a reduced withholding tax rate under the Germany-US treaty, equivalent to the 0% rate available under the EU parent-subsidiary directive for dividend payments between German OpCo and EU HoldCo, was relevant only when applying the main purpose exception, in rebutting the general presumption of treaty abuse.
Based on the updated information leaflet, it appears that the German 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 German 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.
The following diagram illustrates the apparent revised approach of the tax authorities based on the updated information leaflet:
The apparent reintroduction of the look-through approach as administrative practice is explicitly mentioned in the updated information leaflet in the context of applying the listed entity exception, i.e., where the top entity is a listed entity. To use the listed entity exception where the German subsidiary is only indirectly held by the listed entity through a chain of interposed companies that do not meet the necessary conditions to disapply the anti-treaty shopping rule, it should be possible to apply the reduced dividend withholding tax rate based on the tax treaty/EU directive applicable for the direct shareholder where all the interposed entities, including the listed entity on top, are resident in jurisdictions with a tax treaty with Germany that provides for the same or a lower dividend withholding tax rate.
It also appears that the German tax authorities are indirectly reintroducing the look-through approach for purposes of the shareholder test, since specific reference is made in the information leaflet to the 2012 Ministry of Finance decree which explains the general look-through approach in more detail in recital 4.2.
Deloitte Germany comments
The updated view and apparent administrative practice of the German tax authorities is a welcome development and reintroduces the look-through principles that were applied pre-2021. Although the information leaflet is not binding on the tax authorities, it provides valuable insight into their interpretation and implementation of the rules. However, the revised approach seems to contradict the original intention of the legislator as stated in the legislative materials when introducing the updated anti-treaty shopping rules in the 2021 “Law on the modernization of withholding tax relief and certification of withholding tax.”
The tax authorities’ updated interpretation and practice seems to be another initiative to make the procedures for issuing withholding tax exemption certificates more efficient. Despite introducing an electronic filing process in 2023, the processing periods for applications for certificates and withholding tax refunds are still long (18-24 months) resulting in frustrations for tax officers, taxpayers, and tax advisors. As a result of legislation enacted in 2024 and applicable as from 1 January 2025, withholding tax exemption certificates (providing advance treaty clearance) are now issued for a maximum period of five years instead of the previous three-year maximum. This is another highly welcome development for taxpayers.
As yet, the information leaflet on the Federal Central Tax Office’s website regarding the application of the anti-treaty shopping rules of section 50d (3) of the ITC for applying a reduced or 0% royalty withholding tax rate based on an applicable tax treaty or the EU interest and royalties directive has not been updated. However, it would be expected that the apparent reintroduction of the look-through approach also applies for royalty withholding tax purposes as the updated interpretation of the anti-treaty shopping rules should be generally applicable for withholding tax purposes, with no distinction between the nature of the underlying payment and withholding tax.
Taxpayers that previously were unable to benefit from a reduced or 0% withholding tax rate because of the lack of substance of the recipient of the payment subject to withholding should revisit their structures to analyze whether a more favorable withholding tax outcome may now be available based on the tax authorities’ updated approach and practice.
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