Germany Tax Alert - 3 February 2012
Tax authorities issue guidance on amended anti-treaty shopping rule
By Christian Ehlermann,Katja Nakhai and Andreas Maywald
On 24 January 2012, the German Ministry of Finance (BMF) issued guidance on the interpretation of the amended anti-treaty shopping rule that came into effect on 1 January 2012. The guidance aims to clarify relevant terms and address some of the practical questions associated with the amended rule. The guidance also states that the tax authorities will apply the amended rule (and the guidance) to all pre-2012 cases that are not yet finalized if the application of the rule benefits the taxpayer.
The tax authorities’ interpretation of the anti-treaty shopping rule may actually make the requirements for withholding tax relief even more difficult to meet in practice. This will be the case, in particular, for companies that do not qualify as a management holding company. It is likely that the new approach for the determination of withholding tax relief will lead to significant additional documentation obligations for all foreign holding companies, except for those with an ultimate parent company that is listed on a stock exchange or a qualifying investment vehicle.
For foreign holding companies with an ultimate parent company that is listed on a stock exchange (or that is a qualifying investment vehicle), the withholding tax situation should remain unchanged in many cases. Provided all interposed entities are resident in a tax treaty/EU directive country with the same level of withholding tax relief, the new apportionment mechanisms described in the guidance should not be relevant.
For all other taxpayers, it will be important to analyze the gross receipts of the foreign holding company to determine whether “harmful” activities exist when applying for a German withholding tax exemption certificate. In many cases, structuring possibilities should be available to reduce the impact of these activities on the German withholding tax position. However, ongoing monitoring of activities and income streams will be required to ensure that taxpayers will be able to comply with their notification obligations under the guidance.
Although the wording of the amendment to the anti-treaty shopping rule was agreed with the European Commission, it is doubtful that the interpretation of the rule is in line with EU law. Specifically, there is a high likelihood that the new interpretation violates EU law in cases where the German entity is actively managed and German withholding tax relief is denied merely because the foreign holding company – in addition to the German dividend income – earns other income from “harmful” activities that are unrelated to Germany.
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