In a landmark-ruling, the ECJ has held that Germany's system
of dividend withholding taxation infringes the right to free
movement of capital as guaranteed by Art. 56 of the EC Treaty.
Germany levies a withholding tax on dividends of 25%. Under
Germany's treaty network, the withholding rate can be reduced
to between 5 and 15% for foreign shareholders. Where the stake in
the German entity paying the dividend has been 10% or more for at
least a year, a further exemption from withholding is available
under the EU parent-subsidiary directive (90/435/EC). This leaves
shareholders with a smaller stake and shareholders who only acceded
a company recently with a substantial withholding tax burden.
German taxpayers, on the other hand, receive a full credit for their German withholding taxes, while foreign taxpayers do not receive a tax credit for this in Germany. For these shareholders, the German withholding tax settles their German taxes and they do not receive a refund of potentially overpaid German taxes and have no right to claim so in a German tax return.
This economic differentiation, it was ruled, violates the Right to Free Movement of Capital under Art. 56 of the Treaty. Germany is now left with two possible ways of tackling the issue. As in any discrimination case, the discrimination can be removed either by treating both parties more preferential or by treating both parties less preferential. The beneficial treatment for taxpayers would be to allow foreign taxpayers to file German tax returns and to refund overpaid taxes following such tax return. Instead, one could also consider denying German taxpayers the currently available credit for withholding taxes in the same manner as it applies to foreign taxpayers. While it is being estimated that allowing for a refund would result in a substantial loss of tax revenue for Germany, the denial of tax credits for local taxpayers may well breach constitutional rights, as it discriminates smaller stake shareholders against larger stake shareholders without substantial reason.
For all taxpayers concerned, it is highly recommended to claim full relief for any such withholding taxes and, should this be denied, to litigate cases and keep them open, while Germany comes up with its answer to the infringement decision.
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