New Legislation

Germany’s second legislative chamber, the Bundesrat, has today approved the compromise issued by the joint committee of both houses, under which dividends paid to corporations will in future be fully taxable, if the recipient corporation holds less than 10% of the shares in the paying entity. Until now, such dividends were effectively 95% tax exempt. Under the wording of the law, the participation exemption can be obtained by purchasing at least 10% of the shares in the paying entity during the year, otherwise, the 10% threshold needs to be met at the beginning of the calendar year.

The new law applies to all dividends that are paid to the shareholder on or after March 1, 2013. Capital gains of corporations remain effectively 95% tax exempt, even if the shareholder corporation owned less than 10% in the company whose shares it sold.

The new legislation aims at ensuring compliance with EU law, after the European Court of Justice had attacked German laws on dividends paid to minority shareholders. Until now, the wording of the law provided for a full credit of withholding taxes for German taxpayers, while minority shareholders outside of Germany faced a definitive withholding tax charge. Initial plans to grant a tax exemption for both German and foreign corporate shareholders were dropped in the joint committee.

Potential Refund Claim

Where corporate shareholders resident in the EU or the EEA have, in the past, not obtained full exemption from dividend withholding tax, legislation has been introduced formalising a refund claim for such withholding tax. There are some formal requirements such as a certificate of residency and of liability to corporate income tax in the EU or EEA country of residence. Retroactive applications should be considered relating to withholding tax returns filed in 2009 and onwards.