New German rules will challenge Dutch and Luxembourg intermediary holding companies

04 June 2021

Distributing dividend without incurring a dividend withholding tax from Germany to an intermediary holding in Luxembourg or the Netherlands is going to be much more (increasingly) complicated. Until now Germany provided a so-called exemption certificate which allowed the paying group company to distribute dividends without withholding German dividend withholding tax. This certificate was valid for three years. In the meanwhile the Germans have introduced a new system which is expected to be accepted before summer 2021. Consequently, existing valid certificates will lose their value and companies should request a new one based on the new rules. And here lies the main challenge!!

Germany takes the strange perspective that a withholding tax (‘WHT’) on dividends and royalties would need to be withheld even if they were not to be taxed under the parent-subsidiary-directive or a double taxation treaty. Non-German taxpayers can obtain relief from German WHT either through a refund of the tax that has already been withheld or by being issued an exemption certificate before the payments are made. All applications would need to be filed electronically with the Federal Tax Office.

Mainly based on the German interpretation of the Danish cases of the European Court of Justice, Germany applies a so-called two-step approach. It consists of a general presumption of treaty abuse under certain circumstances and the possibility of a rebuttal of the presumption by the taxpayer under specific conditions. This would limit the circumstances in which non-resident companies may qualify for WHT relief since in a lot of situations the Federal Tax Office will suggest that a withholding tax exemption is in conflict with German anti-treaty shopping rules.

The revised anti-treaty shopping rule would also apply in cases where a double tax treaty includes a specific anti-abuse rule. If the revised rule becomes law, it has to be expected that, in many cases in which full WHT relief is available today, relief could be denied under the new anti-treaty shopping rule. For Luxembourg this is possibly already the case since the double tax convention between Germany and Luxembourg is a covered tax agreement under the multilateral instrument.

So what does this all mean? Well, first of all, distributing dividends without an exemption certificate and without withholding dividends could lead to criminal charges against the registered director of the company. It is well known that, like in Italy, the German Tax Authorities do use this threat regularly and therefore an ‘alleingang’ by ignoring withholding tax obligations seem not to be wise.

From a content point of view the German system seems to be in breach of several European rules and court cases of the European Court of Justice. Going into a discussion with the Federal Tax Office on treaty shopping in order to get the exemption certificate is a long and possibly not a very successful way. For these reasons we would strongly recommend to consult us first before you consider a dividend distribution. We can then, depending on the facts of the case, develop a strategy in order to challenge these rules effectively.

Prof. dr. Hans van den Hurk