On January 25, 2012, the German Federal Ministry of Finance has
published a circular regarding the withholding tax relief of
foreign companies. It replaces the previous circulars of 2007 and
§ 50d para. 3 ITA has been amended as of January 1,
2012 due to the previous potential violation against EU law.
According to § 50d para. 3 ITA, a foreign company shall
only be entitled to (full or partial) relief from withholding tax
under a EU Directive / Double Tax Treaty, to the extent
the company is owned by shareholders that would be entitled to
a corresponding benefit if they earned the income directly
the substance requirements under § 50d para. 3
sent. 1 ITA (factual relief entitlement) are
met (non-harmful income).
Income is "not harmful", if
it consists of gross receipts generated by own business
with respect to income generated by non-business activities,
there are non-tax related reasons for interposing
the foreign company and the company has
adequately equipped business substance.
According to the circular and as before, the lack of an
individual relief entitlement excludes indirect relief of
higher-tier shareholders. Moreover, indirect domestic shareholders
are not entitled to relief.
According to the circular, the tax administration will apply the
new rules to all open cases retroactively, if the
new rules lead to a favorable relief entitlement
compared to the previous rules.
II. New Pro Rata Test
§ 50d para. 3 ITA has new legal consequences. If a
foreign company earns income on which withholding tax is imposed,
this withholding will be reduced – unless there is an
individual relief entitlement applicable – only to the
extent there are non-harmful gross receipts compared to the overall
gross receipts earned (Pro Rata Test). Contrary to
the previous rules, an "all-or-nothing" principle does
not exist and only pro rata relief will be granted insofar as there
is harmful income.
A foreign company with shareholders that are not entitled to
withholding tax relief receives dividends of 1,000 from a German
subsidiary (which is actively managed). In addition, the company
earns passive income of 100. According to tax administration's
view only 91% of the German dividend withholding taxes are to be
refunded (or there is a 91% withholding tax exemption to be
granted). For the remaining 9%, relief depends on the individual
and factual relief entitlement of the shareholders.
According to the circular, earnings that are economically
functionally linked to the own business activities (e.g., interest
income generated by income which was subject to relief) shall
qualify as gross receipts generated by own business activities.
For purposes of the new Pro Rata Test, the gross receipts of the
year in which the income is earned shall generally be decisive
(withholding tax refund) or the gross receipts of the application
year (withholding tax exemption). The tax administration must be
notified about a (partial) loss of the requirements for withholding
tax relief, whereby a de-minimis rule is provided.
III. Recommended Actions
Foreign companies should verify whether the new rules lead to a
partial withholding tax relief in the future only. Consequently,
the income structure may need to be optimized by intra-group
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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