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
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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