The European Court of Justice has published a reference for a preliminary ruling in a case challenging a German law that denies relief from withholding tax on some distributions of profits made to a nonresident parent companies.
The case, Juhler Holding A/S v Bundeszentralamt für Steuern (Case C-613/16), concerns whether EU freedom of establishment principles or the EU Parent-Subsidiary directive precludes the German tax legislation.
Under the German rules, a withholding tax refund or exemption is denied when distributions of profits are made to a nonresident parent company which, within a group of undertakings actively trading in the Member State in which the parent company is established, is permanently spun off as a holding company and persons that have holdings in it would not be entitled to the refund or exemption if they earned the income directly.
The German law applies to the extent that there are no economic or other substantial reasons for the involvement of the nonresident parent company, the nonresident parent company does not earn more than 10% of its entire gross income for the financial year in question from its own economic activity, or the nonresident parent company does not take part in general economic commerce with a business establishment suitably equipped for its business purpose.
Under the German scheme, resident holding companies are granted relief from capital gains tax without regard to these requirements.