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”

Mondaq Advice Centre (MACs)
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.