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  • Service: Tax, Financial Services
  • Industry: Financial Services, Banking
  • Type: Newsletters
  • Date: 3/11/2013

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Olivier Schneider

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Michèle Kimmel

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Aberdeen e-alert - Issue 2013-02 

March 2013

New German legislation regarding taxation of portfolio investments

 

On 20 October 2011, the European Court of Justice decided in the Commission vs. Germany Case (C-284/09) that in case of portfolio investments (i.e. in case of investment below 10%), the German legislation regarding the taxation of outbound dividends to foreign taxable companies constituted (and still constitutes) an unjustified restriction to the free movement of capital.

 

As a consequence, Germany will have to change its legislation, in order to eliminate the current discriminatory tax treatment of dividends from portfolio investments distributed to foreign companies. On 26 February 2013, a legislative Conciliation Committee has issued recommendations for a draft law, in order to comply with the ECJ decision.

 

The Committee has thus agreed on a full taxation of dividends for corporate investors for shareholdings of less than 10%, independently of the domicile of the shareholder. The according rules are to come in force retroactively as of 1 March 2013.

 

In case this draft act should be adopted by the German Parliaments, the new taxation regime should not only have an impact on direct investments in German shares, but should also affect investors via investment funds. In the first step, the calculation of the so called equity gain (“Aktiengewinn”) will receive some significant changes.

 

Impacts on foreign investors in German stocks

 

If the draft act would come into force, the possibility to claim a refund of dividend withholding tax (hereafter WHT) would have to be assessed depending on the type of investor involved:

 

  • For foreign corporate investors which are comparable with a German corporation and resident in the European Union / the European Economic Area (hereafter EU/EEA), and for which dividend income used to be tax exempt at the level of the German recipient, a refund of WHT suffered on German source dividends should be possible for the past, i.e. dividends received until 28 February 2013. The claims would then have to be addressed to the German central tax office. In contrast, for dividends received from 1 March 2013 onwards, a refund of WHT would be possible under the net taxation principles, but the claims would still have to be addressed to all central and local tax offices, due to legal uncertainties regarding tax offices responsibilities.
  • For foreign corporate investors which are comparable with a German corporation and resident outside the EU/EEA, and for which dividend income used to be tax exempt at the level of the German recipient, a refund of WHT suffered on German source dividends should still be possible, based on EU law, for dividends received until 28 February 2013. For dividends received as of 1 March 2013, a potential refund of WHT would be possible under net taxation principles. In all cases, the claims have to be addressed to all central and local tax offices.
  • For foreign corporate investors which are comparable with a German corporation but for which dividend income used to be non-tax exempt at the level of the German recipient (e.g. banks with stocks in trading book, health or life insurance companies) a refund of WHT suffered on German source dividends would be possible under the net taxation principles and claims would have to be addressed to all central and local tax offices.
  • This new legislative amendment does not address the situation of other types of foreign investors, i.e. pension funds, investment funds, charities, foreign public entities and state funds, or individuals and private investors. For the latter, a claim based on EU law (e.g. under the net taxation principles, and/or based on the ECJ decisions in the Fokus, Aberdeen and FIM Santander cases) should in principle be viable. In such cases, claims would have to be addressed to all central and local tax offices.

 

Implications of the draft act:

 

For all foreign corporate investors, which are comparable with a German corporation and for which dividend income used to be tax exempt at the level of the German recipient, changes would occur due to the potential implementation of the draft act. For this reason it would have to be checked, for dividends received until 28 February 2013, whether the filing requirements of the new provision are met. For dividends received as of 1 March 2013 it would have to be checked whether discrimination exists (e.g. net-taxation-principles).

 

There should be no implication for all other investor types (e.g. banks, life- or health insurance companies, pension funds, investment funds, charities, public entities, state funds, individuals), i.e. claims still viable whenever a discrimination can be argued. Claims should still be addressed to all central and local tax offices, due to legal uncertainties regarding tax offices competency.

 

For more information, please revert to the enclosed Tax News Flash from KPMG Germany or contact us.

 

 

 

 

 

 

 

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 

 

 

 

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