Germany signed bilateral tax treaties (the "New Treaties") with Luxembourg and the Netherlands on April 12 and April 23, 2012, respectively; the New Treaties replace former treaties (1958/73/09 and 1953/80/91/04, respectively). The most salient new features of the New Treaties are the provisions dealing with capital gains derived from the disposal of shares (and other equity instruments) in real property–owning companies ("Real Estate Companies"). Both New Treaties are expected to enter into force on January 1, 2013, subject to notification by the contracting states of the treaties' ratification by their respective legislatures. The New Treaty with Luxembourg comprises a protocol consisting of five sections, while the New Treaty with the Netherlands comprises a protocol with 19 sections.
Income and Capital Gains from German Real Estate
German Domestic Law
German domestic tax law provides that nonresident shareholders
of a German resident company are subject to German capital gains
taxation upon the disposal (or deemed disposal) of the
company's shares, but only if their shareholding amounts to at
least 1 percent of the company's outstanding shares. German
domestic law does not differentiate between Real Estate Companies
and other companies.
Conversely, when German real estate is held by a foreign Real
Estate Company—i.e., one that is not resident in Germany
by virtue of its statutory seat or principal place of
management—Germany does not impose any capital gains tax
when shares of the Real Estate Company are disposed of by
nonresident shareholders.
Existing (Old) Bilateral Treaties
Under the existing treaties with Luxembourg and the Netherlands,
Germany's right to tax capital gains derived from the disposal
of shares in German corporate entities (including Real Estate
Companies) is restricted irrespective of the holding percentage:
only the jurisdiction where the disposing interest holder is
resident for tax purposes—say, Luxembourg or the
Netherlands—may tax a capital gain from the alienation of
shares in a German company. Hence, under current law, capital gains
derived by shareholders resident in Luxembourg or the Netherlands
cannot be taxed in Germany. In most instances, such capital gains
will also remain tax-exempt in the Netherlands and Luxembourg by
virtue of the participation exemption
(Schachtelprivileg).
New Bilateral Treaties
Deviating from the current treaty provisions, the New Treaties
stipulate that in certain instances where interest in Real Estate
Companies is sold or otherwise disposed of, the resulting capital
gain can be taxed in the country where the property is
located.1 (The New Treaties define the term "Real
Estate Company.")
Since Germany does not impose tax on capital gains from the
disposal of shares in nonresident foreign Real Estate Companies (or
other corporate entities, for that matter) under its domestic tax
law, the New Treaties will result in a charge for German capital
gains tax only when the Real Estate Company is tax-resident in
Germany by virtue of either its statutory seat or its principal
place of management and control. Capital gains resulting from the
disposal of shares in SPVs that are tax-resident abroad (e.g., in
Luxembourg or the Netherlands) still would not be subject to tax in
Germany when the disposing shareholder is not resident in
Germany.
Who Is Affected?
The amendments of the New Treaties will therefore be relevant only
to those structures or transactions in which German real estate is
held by a German Real Estate Company and the disposing shareholder
is tax-resident in Luxembourg or the Netherlands. The New Treaties
can also affect structures that involve: (i) corporate entities
established in different jurisdictions whose principal places of
management are in Germany (e.g., through the appointment of asset
managers, property managers, or other advisors with excessive
functions), or (ii) entities that immigrated to Germany by creating
German statutory seats:
- For a Luxembourg shareholder of a German Real Estate Company, the New Treaty provides that Germany has the right to tax a capital gain when more than 50 percent of the value of the corporate entity directly or indirectly consists of German real estate.
- For a Dutch shareholder, the capital gain would be taxable if more than 75 percent of the assets of the German Real Estate Company directly or indirectly consist of German real estate (excluding real estate assets used: (i) for the business operations of the company, or (ii) by the company's shareholders for their business purposes in Germany). However, capital gains will be taxed in Germany only when the disposing shareholder held more than 50 percent of the shares prior to the disposal. Capital gains resulting from a reorganization, merger, demerger, or similar transaction can be taxed only in the jurisdiction in which the shareholder is resident (say, the Netherlands).
What Are the Consequences?
If a capital gain is subject to taxation in Germany according to
German domestic law and the New Treaties, it is, in principle,
(partially) tax-exempt.
- German domestic tax law provides that 95 percent of the capital gain realized by a corporate shareholder from the disposal of shares in a corporate subsidiary is tax-exempt (resulting in an effective tax charge of approximately 0.79 percent).
- If the shares are held by a private individual, 40 percent of the capital gain would be exempt, and the remaining part of the gain would be subject to tax at ordinary rates.
However, the (partial) tax exemption for capital gains will not
apply if the foreign shareholder qualifies as a financial
undertaking (Finanzunternehmen) that realizes the capital
gain in a short-term proprietary trading transaction
(kurzfristiger Eigenhandelserfolg). According to the case
law of the German Federal Fiscal Court, a company holding an SPV
(in which a real property project is developed or held) that
subsequently disposes of the SPV shares may qualify as a financial
undertaking, and the capital gain resulting from the disposal of
the SPV shares might therefore be taxable at standard rates (15.83
percent corporate income tax, including solidarity surtax).
Currently the German federal government has not published plans to
extend the domestic tax rules to include capital gains from the
disposal of foreign entities owning German real estate.
Other Capital Gains on Provisions
Under the New Treaty with Luxembourg (Article 13(6)), capital gains
on shares realized by an individual taxpayer formerly resident in
one contracting state who emigrated to the other contracting state
may be taxed by the first-mentioned state to the extent the gains
relate to the period during which the taxpayer was a resident of
the first-mentioned state, provided he had resided in that state
for a period of at least five years. The other state (the location
of the taxpayer's current residence) must grant a step-up in
basis to prevent double taxation with respect to those gains.
The same rule applies under the New Treaty with the Netherlands,
except that there is no reference to a five-year period during
which the taxpayer must have resided in the first-mentioned
state.
Collective Investment Funds, Investment Companies, and Pension Funds
Under the protocol to the New Treaty with Luxembourg (Section
1), it is explicitly confirmed that the New Treaty applies to
collective investment funds and investment companies. In practice,
this provision will benefit Luxembourg UCITs (SICAR, SICAV, SICAF,
and FCP) when they are derived from German-source dividends.
The protocol to the New Treaty with the Netherlands provides in
Section XIX that collective investment schemes may claim treaty
protection to the extent their investors would be entitled to such
protection without the interposition of the investment
scheme.
By virtue of Section VIII of the New Treaty with the Netherlands, a
Dutch pension fund is entitled to the reduced withholding tax rates
for dividends, provided that more than 75 percent of the
beneficiaries, partners, or participants of the pension fund are
individuals resident in the Netherlands or Germany who are entitled
to benefits from the pension fund pursuant to services rendered to
a Dutch employer.
Interaction With EU Directives
Section 3 of the protocol to the New Treaty with Luxembourg
provides that the EU direct tax directives (the Parent-Subsidiary
Directive, the Interest and Royalties Directive, and the Merger
Directive) override the provisions contained in Articles 10, 11,
12, 13, and 22 of the New Treaty. No such provision is in the Dutch
treaty.
Footnotes
1. Similar provisions can be found in other recent double-taxation treaties signed by Germany, e.g., treaties with Cyprus and Spain (both of which entered into force on January 1, 2012).
Similar provisions can be found in other recent double-taxation treaties signed by Germany, e.g., treaties with Cyprus and Spain (both of which entered into force on January 1, 2012).
