§ 8b (1) KStG of the old corporation tax law permitted foreign source income that was derived by a domestic corporation free of tax under a tax treaty (or under a tax treaty in conjunction with domestic law) to be distributed free of tax to another domestic corporation. The provision thus enabled the exemption enjoyed by the corporation that originally derived the income (dividends or capital gains on the sale of shares in foreign corporations) to be passed on to other domestic corporations. (Distributions to foreign corporations were, in effect, subject to withholding tax only, at a reduced treaty rate where applicable.)
The old version of § 8b (1) KStG last applies to declared dividends paid by calendar-year corporations in 2001 with respect to their 2000 profits and to declared dividends paid by non-calendar-year corporations by the end of their 2001/02 fiscal year out of profits as of the end of their 2000/01 fiscal year.
A directive issued by the Bavarian Ministry of Finance dated 9 May 2000 (DB 2000, 1305) states that the exemption granted by § 8b (1) KStG (old version) is not available where the shareholding in the distributing corporation is not held directly by another corporation. Where the shares in the distributing corporation are held by a partnership, the partners of which are in turn domestic corporations, the directive states that the exemption shall not apply to these corporations' distributive shares of the dividend received by the partnership.
Under the new version of § 8b (1) KStG, which is applicable to dividend distributions not covered by the old version of the statute, a 100 % dividends-received exemption applies to all dividends received by a corporation, including the domestic permanent establishment of a foreign corporation, irrespective of the source of the dividends (though subject to CFC rules). For details see sec. 2.5.4 of article no.209.
Under the new version of § 8b (6) KStG, domestic and foreign corporations are entitled to the dividends-received exemption on their distributive shares of dividends paid to partnerships in which they are partners. However, in such situations the exemption will not be effective for trade tax purposes.
Jonathan Sheehan gives an Irish perspective in the October 2016 edition of The American Lawyer on the European Commission's decision that Ireland granted undue tax benefits of up to EUR13 billion, plus interest, to Apple.
Three of my favourite topics feature in this issue of the Denton Briefing – tax, Bond and beer. But not necessarily in that order and not necessarily for the right reasons.
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