Fund Taxation Alert 2017-12 | KPMG | LU

Fund Taxation Alert 2017-12

Fund Taxation Alert 2017-12

Germany – updated procedure for withholding tax (“WHT”) reclaims on portfolio dividends by non-residents

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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.


Background

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.


Developments and news

Section 50j of the ITA should only apply if the following conditions are met in respect of the creditor:

  • a DTA or other bilateral agreement stipulates that the income from capital distributed on 1 January 2017 and later is subject to a tax rate of under 15%;
  • the creditor has a holding of less than 10% in the nominal capital of the companies distributing the income from capital (free-float); and
  • the creditor of the income from capital has not been the beneficial owner of the shares for a year or more without interruption.


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 creditor should hold the shares uninterrupted for a minimum of 45 days within a period of 45 days before and 45 days after the due date for distribution of the income from capital; and
  • bear a risk of a change in value of at least 70%, without interruption, during the minimum holding period; and
  • have no obligation to pay the income from capital to anyone else in full or in part, directly or indirectly.


KPMG comment

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.
 

Any tax advice in this communication is not intended or written by KPMG to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein.

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 endeavour 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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