Germany: (Limited) Relief For Inbound Investments: Germany Adopts New Anti Treaty/Directive Shopping Rules

Last Updated: 14 November 2011
Article by Götz T. Wiese, Tobias Klass, Henrik Lay and Christian Möller

In the future the German Anti Treaty/ Directive Shopping Rules are likely to be less strict. On 27 October 2011, the German Parliament passed a bill on the implementation of the EU Mutual Assistance Directive (2010/24/LC) and other changes in tax law. Among the amendments, the German Anti Treaty/Directive Shopping Rules will be changed. These changes are of particular interest to investors with German inbound investments. It is to be expected that the Bundesrat, i.e., the second legislative chamber in Germany, which will have to explicitly consent to the bill, will be holding a vote on the bill prior to year-end.

The current Anti Treaty/ Directive Shopping Regime

Dividends of German corporations are generally subject to withholding tax at a rate of 26.375 percent. However, the European Parent Subsidiary Directive or Double Taxation Treaties may provide for a reduced withholding tax rate or an exemption from withholding tax.

Under the current German Anti Treaty/Directive Shopping Rules, these benefits only apply where a number of fairly restrictive conditions are satisfied. Both treaty and directive benefits are denied where the investor holds inbound investments through a foreign corporation and the investor would not be entitled to the tax/ directive benefits if it held its inbound investment directly and not all of the following three conditions are met (three-factors-test):

  • There must be economic or other non-tax-driven reasons for the interposition of the foreign corporation
  • The foreign corporation must generate more than 10 percent of its gross revenues from "own business activities" (including dividends received from an actively managed subsidiary)
  • The foreign corporation must actively engage in commerce with adequate business equipment (e.g., office, staff, communication devices, etc.)

Publicly listed foreign corporations, as well as regulated investment funds, are not subject to these restrictions.

The current German Anti Treaty/ Directive Shopping Rules require a thorough analysis of a foreign corporation with respect to the tax effects of its interposition between a German company and its (indirect) investor. There was uncertainty with regard to "management holdings" domiciled abroad, i.e., a holding that does not just passively hold the shares in the German company, but that actively engages in the management of its subsidiary. The dividends received by a management holding company are viewed as income from "own business activities" for purposes of the 10 percent threshold. In particular, it has always been difficult to draw the line between (active) management and other (passive) holding companies.

Infringement Procedure

On 18 March 2010, the European Commission initiated an infringement procedure against Germany. For obvious reasons, the Commission argued that the current German Anti Treaty/Directive Shopping Rules are in breach with European law since they are a clear override of the EU Parent Subsidiary Directive.

Amendments to the current Regime

The amendments to the German Anti Treaty/Directive Shopping regime adopted by the German Parliament on 27 October 2011 aim at bringing the law in line with EU law requirements.

As before, from 2012 forward, the German Anti Treaty/Directive Shopping regime only applies if and to the extent that indirect shareholders would not be entitled to treaty or directive benefits if they held the inbound investment directly.

Under the new regime, however, income from "own business activities" is generally not excluded from treaty or directive benefits.

As regards other income, an entitlement to treaty or directive benefits is available if a two-factors-test is passed:

  • There must be economic or other non-tax-driven reasons for the interposition of the foreign corporation
  • The foreign corporation must actively engage in general commerce with adequate business equipment (e.g., office, staff, communication devices, etc.)

As regards the first requirement – valid reasons for the interposition of the foreign corporation –, the legislator will add that such valid reasons must exist "with regard to such income", e.g., the dividend paid by the German company. The new rules discussed here should generally (against the EU law background dealt with above) provide for relief from the strictness of the existing Anti Treaty/Directive Shopping Rules. However, the addition "with regard to such income" to the first requirement of the two-factors-test might (partially) also have an opposite effect in certain circumstances in that it might encourage the tax administration to investigate whether there is a specific link between the foreign corporation and the shareholding in the German company or whether the shares were transferred to the foreign corporation arbitrarily. Also, the former 10 percent threshold is measured on the basis of gross revenues from any own business activities whereas under the new rules only income from own business activities as such is not excluded from treaty or directive benefits. As a result, it may turn out to be more difficult under the new rules to claim the status as entitled entity if the active business is somewhat unrelated to the German income


Notwithstanding those contrary effects in particular situations, the amendments outlined above generelly reduce the restrictions applying to inbound investments under the German Anti Treaty/Directive Shopping Rules. While the new law leaves room for interpretation, it does generally leave more room for tax-efficient repatriation of funds from German companies to foreign investors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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