Consultation on introducing a common EU-wide system for withholding tax on dividend or interest paym

Position

on the European Commission’s

Consultation on introducing a common EU-wide system for withholding tax on dividend or interest payments

Federation of German Industries e.V. EU Transparency Register: 17718117758-48

Date: 22 June 2022

Consultation on introducing a common EU-wide system for withholding tax on dividend or interest payments

Contents 1. Introduction ................................................................................. 3 2. Consideration of licences / royalties ......................................... 3 a. Problems related to licences / royalties.......................... 3 b. Additional areas to be addressed when reforming the EU withholding tax system .................................................. 4 3. Final remarks ............................................................................... 5 About BDI......................................................................................... 6 Imprint .............................................................................................. 6

Consultation on introducing a common EU-wide system for withholding tax on dividend or interest payments

1. Introduction BDI, as the voice of German industries, welcomes the opportunity to respond to and provide input on the European Commission’s consultation on introducing a common EU-wide system for withholding tax on dividend or interest payments. According to the European Commission’s 2020 Action Plan for fair and simple taxation supporting the recovery strategy1, the introduction of a common, standardised EU-wide system for withholding tax relief at source should be coupled with a new exchange of information and cooperation mechanism between tax administrations, aiming both at lowering tax compliance costs for cross-border investors and at preventing tax evasion.

2. Consideration of licences / royalties In general, BDI welcomes the European Commission’s intention to reform the EU withholding tax system in order to establish a harmonized EU-wide withholding tax framework. According to our understanding, the initiative as it stands mainly focuses on withholding tax procedures related to the needs of the capital markets (i.e. on simplifying the tax deduction in relation to dividends and interest payments). This is why we advocate for a holistic approach to such a reform. From a brick and mortar or software industry point of view, the greatest need for reform is in the area of licenses/royalties (e.g. software licenses, trademark and manufacturing licenses). Against the background of ever evolving digitalization, the development of digital solutions and new (digital) business models, issues related to licences/royalties will become increasingly important in the future. a. Problems related to licences / royalties From a German industry point of view, especially the German withholding tax procedure represents a competitive disadvantage compared to the procedures of international companies that mainly exploit their licenses in (non-EU) countries.

A fundamental problem within the German withholding tax procedure is the extremely long processing time of the corresponding exemption and reimbursement processes, which can sometimes take over 12 months.

Although Section 50c (2) Sentence 6 of the German Income Tax Act sets a time limit of three months for a decision on the application for exemption,

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COM(2020) 312 final.

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Consultation on introducing a common EU-wide system for withholding tax on dividend or interest payments

this time limit does not take effect until all the necessary evidence has been submitted. As a result, it often takes several months before the foreign applicant even receives a request to submit further, missing evidence, which again takes months to examine.

In particular, the extensive examination of “treaty shopping” in accordance with Section 50d (3) of the German Income Tax Act exacerbates this situation. This is due to the fact that in this context, the taxpayer needs to present a significant amount of evidence and is required to fill out several complex questionnaires. In addition, the examination of “treaty shopping” is sometimes carried out in an inconsistent and disproportionate manner. As a result, some foreign licensors are also requested to submit employment contracts, salary statements, telephone bills or rental agreements, etc. encumbering business relationships.

Furthermore, in the German case foreign licensors are regularly subject to multiple inspections if they conclude license agreements with different German companies of a group. This often results in multiple audits at the federal level for a foreign licensor who enters into contractual relationships with a large number of German companies, thus entailing a disproportionate bureaucratic burden for both the German Federal Central Tax Office and the licensor. As a result, some foreign licensors – especially if they are already familiar with the German procedure – initially pass on the withholding tax to the licensee or, if necessary, refuse to cooperate completely. This leads to considerable liquidity disadvantages and administrative burden for the German (or EU) licensees. b. Additional areas to be addressed when reforming the EU withholding tax system We therefore would like to suggest several solutions when it comes to the reform of the EU withholding tax system and a EU-wide relief at source system. German industry sees great potential for reducing compliance costs on businesses in avoiding multiple audits of a foreign licensor. The best way to achieve this would be a uniform EU-wide system solution in which foreign licensors can register and receive a certificate or unique “WHT ID” upon successful verification of their relief eligibility. This can then be used for every contractual relationship in Germany and the verification could be repeated on a regular basis. The one-time check of the discharge authorization could eliminate the need for individual contract checks and avoid long processing times.

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Consultation on introducing a common EU-wide system for withholding tax on dividend or interest payments

In addition, German industry calls for a simplification and digitalization of the relief procedure. Therefore, a harmonized, EU-wide system should also contain digitalized and standardized forms (in English) for purposes of reimbursement and exemption procedures within the EU. Currently, many foreign licensors are dependent on the support of German companies since correspondence from the tax authorities is regularly in German. Furthermore, there are different requirements within the EU to benefit from a reduced tax rate according to a Double Taxation Agreement (DTA). While in some countries the existence of a residence certificate is sufficient, in Germany a complex exemption procedure is required. This leads to a great deal of incomprehension and confusion on the part of licensors based abroad.

3. Final remarks From a German industry point of view, harmonization and debureaucratization of the process related to licenses/royalties at EU level is of utmost importance for the reasons mentioned above.

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Consultation on introducing a common EU-wide system for withholding tax on dividend or interest payments

About BDI The Federation of German Industries (BDI) communicates German industries’ interests to the political authorities concerned. She offers strong support for companies in global competition. The BDI has access to a widespread network both within Germany and Europe, to all the important markets and to international organizations. The BDI accompanies the capturing of international markets politically. Also, she offers information and politico-economic guidance on all issues relevant to industries. The BDI is the leading organization of German industries and related service providers. She represents 40 inter-trade organizations and more than 100.000 companies with their approximately 8 million employees. Membership is optional. 15 federal representations are advocating industries’ interests on a regional level.

Imprint Federation of German Industries e.V. (BDI) Breite Straße 29, 10178 Berlin, Germany www.bdi.eu T: +49 30 2028-0 German Lobbyregister Number R000534

Contact Dr Monika Wünnemann Head of Department Tax and Financial Policy T: +49 30 2028-1507 m.wuennemann@bdi.eu Philipp Gmoser Senior Manager Tax and Financial Policy T: +32 2 79210-12 p.gmoser@bdi.eu BDI document number: D 1595

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