In a view of clarifying whether the German legislation with regard to outbound dividend distributions to foreign investment funds is EU Law compliant, KPMG has successfully launched a test case for Luxembourg, Belgian and French funds. The case is now pending before the Frankfurt Tax Court (Az. 4 K 2079/16) the outcome of which may have an impact worth EUR 2 billion.
The current German tax law foresees a withholding tax (“WHT”) of 26.375% on dividend distributions irrespective of the recipient’s place of residence. Whereas resident investment funds can claim a refund of WHT, foreign investors remain burdened with a final WHT.
Nevertheless, no clear rules exist in Germany regarding the competence of tax offices for treating WHT reclaims filed by foreign investment funds on the basis of EU Law. Following this uncertainty, German tax offices refused to issue a decision and all WHT reclaims were put on hold until a court decision clarifies on the competency. In its latest statement the German court of auditory clearly stated that the ministry of finance estimates the refund claims amount to EUR 2 billion (up to 2012) with an accrued late interest of EUR 120 million per year.
Development and news
Initiating the test case KPMG seized the opportunity to file an action against the inactivity of the German tax authorities and push the German authorities to issue a decision on the multiple WHT reclaims filed over the past years.
With the first decision issued in the pending cases, the tax office expectedly states that the German rules (§11German Investment Tax Act) should not constitute a restriction on the free movement of capital (Art.63 Treaty on the Functioning of the European Union), since in the case under review, the discriminatory tax treatment of foreign investment funds in respect of the WHT levied should be justified by the principle of coherence of the tax system (i.e. WHT levied as tax credit available at the level of the investor in the fund).
This decision brings the case to the next level where the Tax Court in Kassel is likely to issue a decision or refer the case to the ECJ for a clarifying judgment.
KPMG has implemented for its clients a multiple-level approach, covering any potentially competent tax office when filing the WHT reclaims: the German Federal Tax Office, the Custodian Tax Office, the Main Local Tax Office and the Distributing Company’s Local Tax Office. Please refer to the E-Alert of October 2011. Given the recent developments, we strongly recommend to:
KPMG can assist you with a compliance check of your WHT reclaims and initiate regularizations accordingly.
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