The Court of Justice of the European Union (CJEU), on December 20, concluded that Germany’s anti-treaty shopping laws, which deny withholding tax relief for dividends paid by a German company to parent companies resident in other EU member states in certain instances, are incompatible with the EU Parent-Subsidiary Directive and freedom of establishment.
While the case involves the 2007 version of Germany’s anti-treaty shopping rules, the CJEU is now also considering another case, referred from the same court in Cologne, concerning Germany’s current a anti-treaty shopping provisions, in effect since 2012, notes German tax practitioner Ninja-Antonia Reggelin. The CJEU’s decision is important because it may reveal how the court will rule on the current German rules, Reggelin observed.
Joined cases, Deister Holding AG (C-504/16) and Juhler Holding A/S (C-613/16) v Bundeszentralamt für Steuern, involved a German law that provides that if a non-resident parent company’s shares are held by persons who would not be entitled to a withholding tax exemption if they received dividends directly from a German subsidiary, the Parent-Subsidiary Directive withholding tax exemption will not apply if:
- there are no economic or other substantial reasons for the involvement of the non-resident parent company,
- the non-resident 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 non-resident parent company does not take part in general economic commerce with a business establishment suitably equipped for its business purpose, and the organisational, economic or other substantial features of undertakings that are affiliated with the non-resident parent company are not to be considered.
The court said the Parent-Subsidiary Directive precludes this legislation because the law it is not aimed at wholly artificial arrangements and also introduces a general presumption of fraud or abuse without allowing a nonresident parent to provide evidence of economic reasons.
That court also said the difference in treatment is likely to dissuade a non-resident parent company from exercising economic activity in Germany through a subsidiary established and therefore constitutes an impediment to the freedom of establishment.
Editor Note: This article was updated on 1/4/2018 to add Ms. Reggelin’s comments.
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