Germany – updated procedure for withholding tax (“WHT”) reclaims on portfolio dividends by non-residents
As of 1 January 2017, creditors of income from free-float shares and participation certificates must comply with a number of special conditions if the German source dividends distributed are subject to a tax rate of lower than 15% under a double tax agreement (DTA) or another bilateral agreement.
In the light of the OECD BEPS initiative, German legislators have introduced Section 50j of the Income Tax Act (“ITA”) to strengthen transparency when claiming for treaty benefits. The article aims to tackle so-called cum/cum treaty shopping scenarios where the creditor of the dividend (either resident or non-resident) obtains treaty benefits via an artificial structure, without which no benefit would have been granted.
This amendment should be seen in line with a decree from the German Minister of Finance published in July outlining the tax treatment of cum/cum transactions of German stocks. Accordingly, all cum/cum structures after February 2013 should be considered abusive structures under German tax law. As a result, reimbursements to the tax authorities of the amount saved due to the cum/cum transaction should be likely.
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Section 50j of the ITA should only apply if the following conditions are met in respect of the creditor:
In the light of the consequences resulting from the general nature of cum/cum transactions as mentioned above, the following three cumulative conditions should be fulfilled to qualify for the treaty benefit:
The applicant must hand in the relevant application forms in hard copy only for income from capital received on 1 January 2017 or later, stating that the legally required conditions from Section 50j subsection (1) of the ITA are fulfilled and confirming the correctness of all information by signature. Irrespective of this section, the Federal Central Tax Office reserves the right to check the applicant’s eligibility and to request relevant proof if necessary.
Due to the requirements of a DTA rate lower than 15% in case of a portfolio investment, the practical relevance of the new Section 50j ITA should be rather low.
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