German court rules on tax refunds for foreign investment funds

At a glance
 

For several years, foreign investment funds faced significant barriers in their attempts to obtain refunds of WHT paid on German dividend income, as their claims were consistently blocked by the German tax authorities. In the two decisions, the BFH ruled that the application of withholding tax to foreign investment funds (in these cases, a Luxembourg SICAV and a French FCP, while exempting domestic funds, violated the principle of free movement of capital under Article 63 of the Treaty on the Functioning of the European Union (TFEU).

Foreign investment funds, which had been subject to a withholding tax of at least 15% on German source dividends before the reform of the German Investment Tax Act in 2018, were discriminated against compared to German domestic funds. This reform, enacted in 2018, addressed and eliminated such discriminatory treatment.

The BFH’s decisions overturn previous lower court rulings that denied refunds to foreign investment funds on the grounds of non-comparability with domestic funds. With potential refunds estimated to exceed several billion euros, this ruling represents a major victory for foreign investment funds.

Additionally, the BFH has ruled that late interest payments of 0.5% per month, from the exact day of payment until its refund is issued, must be paid to the claimant, which will potentially increase the total refund significantly.

A closer look
 

In parallel with the BFH's decisions, the German Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt) has recently issued inquiry letters regarding ECJ claims filed by foreign investment funds. The following points are particularly noteworthy:

• Jurisdiction: With the entry into force of the Tax Relief Modernization Act (AbzStEntModG), the BZSt aims to consolidate all applications submitted at the federal and state levels into one process, ultimately issuing one single notice.
• Comparable situation: If not already provided, the applicant must submit evidence that they are in a comparable situation to a domestic investment fund and meet all the conditions (i.e., except for the domestic seat) for a tax refund under §11 (2) Investment Tax Act (InvStG). Required documents may include the prospectus, the partnership agreement, or articles of association, and a UCITS attestation if applicable. All documents must be submitted in either German or English.
• Additional documents: When a partial refund has already been made (e.g., due to a Double Tax Treaty) the corresponding notice of refund should be provided, along with the following documents if not already submitted:
  • A certificate of tax residency;
  • Proof of the ISIN assigned to the fund;
  • Tax certificates of the dividend income included in the refund application;
  • Proof of the applicant’s existence and, if applicable, a statement and corresponding proof of any name changes or legal successors of the fund;
  • The dividend statement in digital form (Excel table);
  • Currently valid bank account details; and
  • Any powers of attorney granted or received.
• Credit deduction of WHT in the country of residence: When a credit deduction of the withheld German withholding tax is available in the country of residence, evidence should be provided through the tax assessment from the country of residence or other suitable documents. Key sections of the text should be translated.

Those recent inquiries suggests that the BZSt will likely issue further requests for information in the coming weeks or months for all foreign investment funds which have submitted a claim within the four-year period following the date of payment. 

How Deloitte can help
 

Given the BFH's ruling and the recent actions by the BZSt, we anticipate that several refunds will be issued over the next 6 to 12 months.

We strongly recommend that investors who have already filed claims for these payments stay vigilant and proactive in managing these claims and respond promptly to any requests from the German tax authorities.

If you need further clarification or assistance in navigating the impact of these rulings, please do not hesitate to contact our team.