Newsletter for Korean Companies
Latest regulatory and tax update in Germany
Vol. 3 | July 2023
Inbound-Structures – Relief from German withholding tax upon request – Substance criteria and electronic submission of applications
At a glance
The new version of the German „Anti-Treaty Shopping Rule“ is complex and subject to discussions and disputes. The provision mainly applies to foreign corporations that receive dividends and royalties from Germany (so-called inbound structures). Under the Anti-Treaty Shopping Rule, the relief from German withholding tax is essentially only possible if the foreign corporation meets certain substance criteria
Further, any refund and exemption applications by foreign corporations must in principle be submitted electronically as of 1 January 2023.
Background
Dividend and royalty payments from a German corporation to a foreign shareholder are subject to withholding tax in Germany even if relief conditions under a Double Tax Treaty (DTT) or a EUDirective are met.
In order to eliminate double taxation under the relevant DTT the foreign corporation may either (1) obtain a refund of the withholding tax based on a refund procedure application Alternatively, the German corporation may before the dividend or license fee payment (2) apply for an exemption certificate Once such exemption certificate is obtained payment can be made without withholding tax obligation. Both the refund procedure and the receipt of an exemption certificate require an application by the foreign corporation with the German Federal Central Tax Office (Bundeszentralamt für Steuern or “BZSt”).
In order to avoid cases of abuse in particular by interposition of shareholding companies (e.g., application by an intermediary EU letterbox company, because the ultimate shareholder is not entitled to apply for Double Tax Treaty or EU-Directive benefits), the application under German Anti-Treaty Shopping Rule requires the fulfilment of certain substance criteria.
Substance criteria
The foreign corporation as shareholder has a claim for relief from German withholding tax if at least the conditions of one of the following four alternatives are met (simplified overview):
5. The source of income from Germany has a significant connection with an economic activity of the foreign company (so-called material entitlement to relief). In addition, the economic activity must be carried out with a business operation appropriately set up for the business purpose. A socalled passive holding company (pure generation of dividend and royalty income, transfer to shareholders) is not considered to carry out an economic activity
6. The shareholders of the foreign corporation would be entitled to relief under the same provision in the case without inter-positioning a intermediate shareholding company (so-called personal entitlement to relief) and carries on own economic activities. The fact that it must be the same provision, follows from the explanatory memorandum to the law. It is also clear from the explanatory memorandum to the law that it is not sufficient if their shareholders are only personally entitled to relief, they must also carry on an own economic activity
7. The foreign corporation itself is listed on the stock exchange (so-called stock exchange clause). According to the explanatory memorandum to the law, the fact that a shareholder of the foreign corporation is listed on the stock exchange is now only sufficient if it would be entitled to relief under the same provision in the event of direct purchase.
8. The foreign corporation succeeds in proving evidence that none of the main purposes of its interposition is to obtain a tax advantage (so-called counter-evidence).
Electronic Submission of applications
As of 1 January 2023, the refund application as well as the application for an exemption certificate must in principle be submitted electronically. For the data’s electronic transmission, registration with the so-called BOP procedure (i.e., the “BZSt”’s online portal) is necessary. According to unofficial information, however, there is an „internal grace period“ until the end of June 2023 (no official letter of the German Federal Ministry of Finance), during which a submission in paper form should still be accepted However, since the text of the law requires electronic submission from 1 January 2023 for risk prevention a paper submission should only be made in exceptional cases and in close consultation with a tax advisor
Outlook & Recommendation
In particular, corporate groups who are still in possession of an ‘old’ exemption certificate obtained before the new regulations came into force should check whether they also meet the substance requirements according to the current ‘new’ regulations for ensuring that dividends / royalty payments from Germany can be made without withholding tax obligation.