Good news once again for German corporations whose shareholders are foreign holding companies domiciled in the EU or the EEA: After the European Court of Justice (“ECJ”) had already decided that Section 50d para. 3 German Income Tax Act (Einkommensteuergesetz, "GITA”) in the version of the Annual Tax Act 2007 was not in line with the freedom of establishment (Niederlassungsfreiheit) and the Parent-Subsidiary Directive, the ECJ now has also decided that Section 50d para. 3 GITA in the version of the Annual Tax Act 2012 violates the freedom of establishment and the Parent-Subsidiary Directive.
The ECJ essentially based its decision on the judgment already issued in respect of Section 50d para. 3GITA 2007 and denied its compatibility with the freedom of establishment and the Parent-Subsidiary Directive for corresponding reasons. Accordingly, the provision of Section 50d para. 3GITA 2012 is violates Law of the European Union since a statutory provision which establishes a general irrefutable presumption of abuse is disproportionate and therefore violates the freedom of establishment and the Parent Subsidiary Directive. In order for such a provision to be valid, it would have to provide for an individual case-by-case assessment. Non-resident parent companies would have to be able to prove that their structure is not purely artificial, i.e. was not created solely for the unjustified use of a tax benefit. . In contrast to Section 50d para. 3 GITA 2012, such an examination would have to take into account aspects such as the organizational, economic or otherwise significant characteristics of the group to which the parent company belongs as well as the structures and strategies of that group.
The Federal Ministry of Finance already published a decree in response to the ECJ ruling on Section 50d para. 3GITA 2007 which modified the application of Section 50d para. 3GITA 2012. However, one of the main points of criticism of the ECJ, the lack of a case-by-case examination, has still not been implemented, so that the current practice of the tax authorities is not in line with the ECJ's decision. It remains to be seen to what extent the tax authorities or the legislature will react to the ECJ's decision. Companies which have been denied withholding tax exemption or a refund on the basis of Section 50d para. 3GITA 2012 should be advised to challenge corresponding decisions of the tax authorities.
(ECJ, Order of 14 June 2018, Case C-440/17)
Dr Michael Engel, Attorney at law/Certified tax advisor