With the decision of the European Court of Justice (case C-284/09) from October 20, 2011 the court had held that Germany has failed to fulfill its obligations under Article 56 EC and Article 40 of the Agreement on the European Economic Area because dividends distributed to shareholders in other states with a shareholding under 10% were treated differently than dividends distributed to German shareholders. The decision of the ECJ was based on the fact that under the old German tax regime dividends to shareholders holding over 10% were not subject to withholding tax if the shareholder was resident within the EU or were only subject to a reduced withholding tax under the respective tax treaty if the shareholder was resident in a country outside the European Union. Whereas even for German shareholders with participation under 10% there was basically no withholding tax burden, shareholders in other member states were left with the definite withholding tax burden of 15% on dividends received. With the "Act for the implementation of the decision of the European court of justice of October 20, 2011 in the case C-284/09" (Gesetz zur Umsetzung des EuGH-Urteils vom 20.Oktober 2011 in der Rechtssache C-284/09) German legislation followed the order of the court to review the withholding tax regime for minority shareholders. The new law is applicable from March 1, 2013 and has been published in the federal Gazette on March 21, 2013. Originally, the plan for the implementation of the decision was to extend the full participation exemption to foreign entities. Nevertheless the first and second chamber of the parliament came up with a compromise which is basically the opposite way. It abolishes the favorable rules for domestic minority shareholders. The main details of the new law are as follows:
- All dividends paid after the February 28, 2013 to shareholders with a shareholding of up to 10% are subject to withholding tax, regardless of the residency of the shareholder.
- Capital gains from the alienation of shares remain exempt from tax for domestic shareholders.
- For all dividends paid to shareholders before March 1, 2013 a new rule is implemented into § 32 sec. 5 German Corporate Tax Act which entitles foreign entities to reclaim withholding tax which has been paid to the German tax administration under the old regime.
- There is a complex list of conditions foreign shareholders have to comply with and evidence to be provided if they want to successfully reclaim the withholding tax.
- The new law also contains rules under which investment funds under the German Investment Tax Act (Investmentsteuergesetz) can benefit from the new rules for the past and the future. According to these provisions, foreign investment funds which are exempt from tax in their country of residence are not entitled to a refund of withholding tax.
- To solve pending disputes about the competent authority for the reclaiming process a new rule has been implemented to centralize the administration process at the Federal Central Tax Office (Bundeszentralamt für Steuern). Overall the new law brings clarity for the past but has a negative impact on the domestic shareholders for the future.