Germany: 120. Pitfalls Of Sec. 8b KStG

Last Updated: 14 April 1998
KPMG Germany Webpage
Click on the above link to visit the KPMG Germany webpage on the Mondaq website
For disclaimer and copyright see end of this article.

Sec. 8b KStG was added to the corporation tax act in 1994 in an effort to make Germany a more attractive location for holding companies. This article summarises the benefits conferred by the statute and points out certain difficulties taxpayers can get themselves into.

1. Sec. 8b (1) KStG: Dividends received exemption

Subject to certain limitations, subsection 1 of the statute permits a German corporation to receive tax free dividends from another German corporation provided these dividends are deemed to be funded out of the distributing corporation's tax free foreign-source retained earnings (dividends, branch business profits, income from rental of foreign real property).


X-GmbH is the 100 % subsidiary of Y-GmbH. X-GmbH earns income from its U.S. branch (operating income) and receives dividends from a U.S. corporation in which it holds a 10 % stake. Under Germany's tax treaty with the United States, X-GmbH's U.S. branch profits are tax exempt in Germany. The same is true of its dividends received from the U.S. corporation.

Dividends and branch business profits are placed in a special retained earning account for tax-free earnings (EK 01). X-GmbH may redistribute these earnings to Y-GmbH without tax cost to itself or to Y-GmbH. The distribution does trigger withholding tax (sec. 43 (1) no. 1 EStG), but this is creditable or refundable to Y-GmbH. A dividend is only deemed paid out of EK 01 if there are no positive amounts in the equity accounts for taxed earnings (see article no. 39 for more details).

The exemption for dividends received by a German corporation out of tax-free retained earnings in effect means that German taxation of such earnings is deferred unless and until they are distributed to a German individual. Distribution to a German corporation triggers no net tax. Distribution to a foreign person, legal or natural, triggers only withholding tax. The withholding tax rate of 25 % is reduced under tax treaties. Distributions to qualifying 25 % EU parent companies are free of withholding tax if a withholding exemption request is filed (sec. 44d EStG).

2. Sec. 8b (2) KStG: Capital gain exemption

This provision exempts from taxation the gain realised by a German corporation on sale of shares in a foreign corporation if dividends received by the German corporation from the foreign corporation would have been exempt from German tax under a tax treaty or if the dividends would have qualified for the indirect tax credits of sec. 26 (2) or (3) KStG. The same exemption applies to gain on the liquidation or reduction in capital of a foreign corporation. Again, certain limitations apply. However, the stake required to qualify for the tax treaty participation exemption on foreign dividends received is reduced to 10 % by sec. 8b (5) KStG with respect to those treaties which require a higher shareholding.

3. Sec.8b (4) KStG: Domestic permanent establishments

Subsection 4 of the statute extends certain benefits to a domestic commercial permanent establishment of a foreign corporation with respect to shares in a second foreign corporation held in the German permanent establishment. Firstly, dividends distributed by the second foreign corporation are exempted from German tax in the hands of the domestic permanent establishment if the dividend would have been received tax free by a German corporation under a tax treaty (taking account of sec. 8b (5) KStG). Secondly, the exemption of sec. 8b (2) on sale of shares in a foreign corporation held by a German corporation is extended to shares held in a foreign corporation's German permanent establishment if dividend distributions on these shares would have been exempt.

The benefits of sec. 8b (1) KStG are not extended to a domestic permanent establishment of a foreign corporation (see, however, article no. 101).

4. Pitfalls of sec. 8b KStG

If the requirements for tax free sale of shares in a foreign corporation are met (see section 2 above), a German holding company can reorganise its holding structure at no tax cost by simply selling participations to group companies. For instance, it can sell its shares in Foreign Sub A to Domestic Sub B if this is desirable. However, sales to related parties present certain pitfalls which taxpayers should be aware of.

These are conveniently summarised by Starke/Zurmuehlen in their recent short article entitled "The Sec. 8b Trap" (Die Par. 8b-Falle - DB 1998, 103).

The source of the problem is the tax authorities' refusal to apply the tax exemption of sec. 8b (2) EStG to constructive dividends or constructive contributions (sec. 41 (5) KStR). Whether this position is legally correct is currently the subject of dispute in the German tax literature. Assuming the courts uphold the tax authorities, the following examples illustrate the risks posed:

Example 1

X-GmbH is the German parent of U.S. Corp. and UK Ltd., both wholly owned subsidiaries As part of a worldwide reorganisation of business operations, UK Ltd. is to become the parent of U.S. Corp. X-GmbH therefore sells its shares in U.S. Corp. to UK Ltd. at book value, DM 1 million. However, the shares are actually worth DM 1.5 million. On audit, the tax authorities therefore revalue the shares and assess tax on the resulting gain to X-GmbH of DM 500,000. They claim that this gain is not tax exempt under sec. 8b KStG, even though they admit it would have been exempt had the sales price been fixed at fair market value. The sale at under fair market value constitutes a constructive contribution by X-GmbH to its subsidiary in the amount of DM 500,000, and the basis of X-GmbH in the shares of UK Ltd. is increased accordingly.

Example 2

Same as Example 1, except the sales price is DM 2 million. The price paid by UK Ltd. for the shares of U.S. Corp. is excessive. The gain on sale of DM 1 million reported by X-GmbH is tax free under sec. 8b (2) KStG only in the amount of DM 500,000, according to the tax authorities. The amount of the excess constitutes in their view a constructive dividend paid by UK Ltd. to its parent, X-GmbH. However, this dividend may be tax exempt under the tax treaty with Great Britain.

Example 3

Same as Example 2, except UK Ltd. is replaced by Y-GmbH, a wholly owned domestic subsidiary of X-GmbH, as the purchaser of the shares in U.S. Corp. The tax treaty participation exemption is no longer available. In the opinion of the tax authorities, the constructive dividend cannot be treated as tax exempt under sec. 8b (2) KStG. X-GmbH therefore derives taxable income in this amount. Y-GmbH is also treated as having paid a constructive dividend. This means that its corporation tax is adjusted to reflect the distribution tax rate. X-GmbH is entitled to the corporation tax credit on the constructive dividend.

The above examples can easily be multiplied. The bottom line is that sales of shares in foreign corporations otherwise exempt under sec. 8b KStG may nevertheless trigger tax if made to related parties at prices above or below the fair market value. While the basic position of the tax authorities may ultimately turn out to be invalid, taxpayers who wish to be on the safe side should follow the recommendation of Starke/Zurmuehlen (see above) and have the shares they wish to sell appraised before the sale to make sure the sale price matches fair market value.

Disclaimer and Copyright

This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions